FRED
#Thanks, Craig.
I believe that the front store and pharmacy teams are poised to accelerate our turnaround efforts and drive increased sales, profit, and shareholder value.
Our go-forward mantra is to optimize, focus, and grow with discipline.
I look forward to seeing you later this year at our Analyst Day as we lay out our long-term roadmap.
Thank you for your time today.
And now I will turn the call back to the operator for Q&A.
<UNK>, it's Rick.
We do see a little difference in the cadence.
We did mention that we thought the third quarter would be a little worse than the fourth quarter.
However, I think you are aware of the fact that the environment has changed for us.
There is a lot more competition in our category.
And even though it looks like the comps may be all right ---+ certainly better than they have been on the incoming trend ---+ I think, with the investment in price, we don't expect any big improvement in the bottom line.
Yes; and I would also add, <UNK>, as it relates to the back half, our non-consumables business is actually doing fairly well.
We are seeing low-single-digit-comps in our non-consumables business.
And so coming into the back half with the heavy seasonal period ---+ holiday, Halloween ---+ we are encouraged by the back half.
Thank you, <UNK>.
<UNK>, it's Rick.
As we mentioned, in the quarter, the benefit from the front end was basically offset by the decreases in the pharmacy.
And I think that, over time, we are seeing severe reimbursement pressure in Medicaid, Medicare Part D, including those clawbacks.
That is not going to change overnight.
I think, over time, we will develop some better strategies to hold our ground.
And I think that as specialty begins to grow again, we should get some relief there just on the margin dollars.
But, in the front end ---+ and I think Mike will jump in here in a second ---+ we would expect that we have ways to go there, and we expect to get further benefits on the cost side of goods.
And then, again, I am probably jumping on Mike here, but he has some pricing models that are rolling out that should help us also on the margin.
Yes.
So I guess a couple of things, <UNK>.
As it relates to the front store, you heard Craig talk about a lot of the initiatives, whether it is Hallmark, McLane; we talked about promotional activity.
Our e-auctions will continue; private brand penetration improvements; import direct overseas to manufacturers will continue.
So we will continue to see expansion in front store margin ---+ unfortunately, as Rick just mentioned, offset by the continued pressures in pharmacy.
Sure, <UNK>.
It is Mike.
And Craig and Mary Lou can jump in, as well.
So it is not our strategy.
We have talked on previous calls about some of those categories that we have struggled in, we have pulled back promotionally.
We are excited about the upcoming activity for those ---+ all of those categories that we have talked about will be reset in the third quarter.
And if you remember what I said on a couple of calls ago, <UNK>, we actually had to stop our category resets because of our JDA implementation.
So we have had no planogram activity in our stores until, I believe it was, late July ---+ mid to late July.
So we are just now ramping up on food, which is a 97-foot reset in our stores.
Candy just got completed.
We exist in our markets for value-based general merchandise and consumables.
I will tell you that our pricing strategy, we are going to stick to it.
We are a value retailer.
We will invest where we need to invest.
And we will make up for it in other areas, like some of our margin expansion initiatives and some of the second-tier and tertiary type items, where we might be able to raise a little bit.
So we will continue to invest.
You know, the market's heating up.
Everyone is reading the same information I am reading about 450 items being invested in by one retailer and Walmart.
And we are on top of that.
We started this price strategy ---+ I don't know, 12 to 14 months ago.
We watch our pricing quarterly through comp shops, which is fairly new for Fred's, and we make adjustments where necessary.
And we have made adjustments this year.
We will continue to make adjustments where we need to to remain competitive and make sure that we are there for our consumers.
We know what they want; we know what they need.
And we will be there for them.
Sure.
It is a great question, we spent a lot of time; and, I think, as proven by our recent hire with Kris McDonald, we have taken ---+ we are taking a different look at real estate.
Here is what I know, <UNK>: we need to win in the markets where we can win.
And we will focus on core markets where we will defend our turf.
We will continue to grow in those markets and win in those markets.
We will, in fact, ---+ and we talked about ---+ I mentioned growing with discipline.
We have got a lot of stores ---+ we have got several hundred stores in this Company that are extremely profitable.
Unfortunately, we have got some stores that are holding us back.
We will review those stores.
We will understand what markets those stores are in, and how to address those stores.
And we will talk more about that at our Analyst Day later this year.
But we talk about optimizing, then we are also are talking about growing with discipline.
So I think you can sort of see between that that we have got some stores that are underperforming we need to address.
And, in the same respect, we have got some markets we know ---+ we know the characteristics of a successful store.
And so we know, going forward, where to build stores and where to open stores that will give us the highest likelihood for success.
And that is what we will do.
Hi, <UNK>.
It's Mike.
A couple of things.
One is, in addition to the pricing environment, you need to understand our consumers going through some challenges as well.
Everybody has mentioned it; we are feeling it.
There is price deflation on ---+ for us, specifically, milk and eggs is a big impact on our business.
So that is one.
Two is the SNAP benefit.
When a customer loses, I don't know, $100-and-some a month in SNAP benefits, that is our consumer.
That is going to have an impact on us.
And, as you know, the competitive environment ---+ I think, when I look back at it, when I saw the biggest change, it was around the end of June, July 4 time frame, moving into July.
It certainly has kept pace in August, and we anticipate that is going to happen throughout the end of the year.
And that is what we are gearing up for and hunkering down for.
And, like I said, the most important thing to remember here is we will compete in our markets.
We will be priced appropriately for our consumers, and continue to promote and compete with the best of them.
This is not new.
I have been through this throughout my career.
It is cyclical.
And, like I said, we are here to defend our turf in those markets where we can win.
It is, <UNK>.
Again, I hate to keep sounding repetitive.
It is those four or five categories, especially in the front store, that is the anchor.
And, in August, in non-consumables, I think we had a low- to mid-single-digit comp in non-consumables.
So that is not our challenge right now.
We need to exploit that and have that grow even faster.
But we need to fix these businesses.
And that is why we hired Kimberley Felice-Dooley with a lot of experience.
We have got Mary Lou, who has run some of these businesses at CVS as well.
And, quite frankly, we have got to get back into the planograms and execution at store level and promoting where appropriate.
And that is what is in front of us.
Yes, <UNK>, we do.
We do think that is the right prototype.
Of course, we continue to refine.
Prototypes, you always refine prototypes; they are never complete.
We keep learning.
Right now, we really only look at the stores that we completed in February, March, and April.
The rest of them are still fairly new.
You have got to give the stores a few months to come out of the remodel and the assortment.
And remember what I said on the previous calls, and that is that while we have gone in and remodeled these stores, and we have changed the adjacencies and the layout and the checkout and all of those physical plant structures, we are just now in the process of going back and adding the assortment.
And we are pretty excited about that.
That is where we are seeing the biggest win.
I know I have said this on previous calls, and I know it is only a couple of stores, but in the couple of stores where we have our assortment, the results are pretty spectacular.
Unfortunately, we made a decision not to add that assortment to put the inventory in our DC ---+ in both DCs ---+ for 25, 30, 40, 50 stores, until we had critical mass.
And I would tell you today, that was a mistake.
If we could roll back time, we would go back and move that assortment in when we started.
Thank you, <UNK>.
I appreciate the kind words, and I will be around.
If you have any questions, let me know.
But I greatly appreciate all the support that I have received from you.
Yes.
Stores with pharmacies tend to perform better than stores without pharmacies because of the relational purchases with scripts in healthcare, and et cetera.
And just traffic; when you have more script traffic, you get more traffic in the front store.
And I would tell ---+ and I think we've mentioned this on previous calls, as well ---+ our go-forward strategy is to do everything we can to provide pharmacy service in stores that currently don't have pharmacies that, again, as we define these core markets, how do we go back and backfill or provide pharmacy service in these stores.
And I think, <UNK>, I would also add that we have specifically added resources in this area to help support Tim's efforts.
And, in addition, the sales reps we have added, the four sales reps, are now starting to ramp up as well.
So that takes a little bit of time to take hold.
You have known me for a long time, <UNK>; and, yes, I am.
Sure.
<UNK>, let me start with McLane, and others can jump in.
So the businesses that we will be moving to McLane will specifically be refrigerated and frozen, tobacco, candy; and then phase 2 of this will be cookies and crackers, and potentially some snacks.
The reason we are moving to McLane is ---+ there is several factors.
One is assortment.
We will improve our assortment by moving to McLane.
We will have a more consistent assortment, and the assortment that our customers are looking for, versus the local wholesalers that don't always have the right items for our consumers.
It is more based on what is right for their financial model versus what is right for the consumer.
Second, service: we will now get weekly service in every one of our stores.
And this is something I have experienced in the past at my previous retailer that I was ---+ where I was at.
You leverage your higher-volume stores to support your lower-volume stores, which creates the weekly service availability that some of our stores are not getting today.
And so that helps.
The third is ---+ so service, assortment ---+ oh, and freshness.
We will have more current ---+ I think you have heard me talk about this in the past.
We have had trouble shipping candy through our distribution centers during the summertime.
McLane has refrigerated and frozen trucks.
So we will now be more consistent with deliveries through the warm months ---+ and I don't have to remind you, we are in the South.
Second is, from an inventory perspective and cash flow perspective, this is also a win for Fred's.
We will be moving these categories out of our DCs ---+ candy, cookies, crackers, snacks ---+ out of our DCs.
We will no longer warehouse inventory for that.
So by default, we will see a reduced inventory and improved cash flow on that front.
Yes.
I mean, clearly, it is margin accretive, which is ---+ in our pro forma.
It is margin accretive, but we are not going to break that out separately.
Yes.
I will start.
Look, our core customer continues to be challenged.
Yes, there is puts and takes.
And there is fuel, and then they take money away from her in SNAP and then, yes, but there is food deflation.
Look, she is challenged.
And it is our responsibility, as her go-to store in these small real markets where we operate, to continue to provide value for her.
And we take that very seriously, here at Fred's, to be able to reduce costs.
It is exactly why we go direct to manufacturer for imports.
It is exactly why we moved to e-auctions and reduced our cost of goods.
But she continues to be challenged.
Now, the other piece of this that I would bring up is that the piece of this model that keeps me getting up every morning and excites me is the fact that we have got the healthcare component in these markets, and for our consumer.
And we have got that, and others in our markets don't.
But she is challenged.
Price competition, sure; I mean, look, I don't think we necessarily expected the price competition to be as hot and heavy as it is.
But, like I mentioned earlier, we are going to continue to hunker down and make sure that we are right.
And we are going to stay on our strategy and continue to provide value.
The one thing that we can't let happen is to lose our value perception with our consumer.
(multiple speakers).
Yes, John is probably closer to that.
I know we had to stores close completely.
And, at one point, we had how many stores impacted.
We had five that were impacted.
We had five that were impacted; two stores that are completely closed.
So, yes, we had an impact in those markets.
Yes.
So I think as COO, the initiatives that were getting executed were actually fairly tactical on the front store side.
This was about ---+ these were margin initiatives.
These were lowering our cost of goods, and e-auctions, and importing and all of those.
As CEO, the initiatives I've mentioned on the call are actually broader and more strategic in nature, where you start looking at, again, optimizing fleet and defining our core markets, the markets where we can win; network optimization in our supply chain.
So much broader, more strategic initiatives to sort of help us through this turnaround and help us generate more profit.
Yes.
Without a question.
Folks, thanks for joining us today.
We look forward to speaking to you again soon.
And, as Mike stated earlier, we also look forward to seeing you later this year at our Analyst Day, as we lay out our long-term roadmap.
Have a great day.
