FRED
#Thank you, <UNK>, and good morning, everyone.
Last week, I was named interim CEO of Fred's, in addition to my role as CFO.
I'm excited to lead the company during this new chapter and execute the turnaround plan we've developed.
When I originally took the job as CFO, I did it knowing full well the magnitude of the challenges and opportunities at Fred's, and I'm happy to say that I've never been more enthusiastic about the prospects for this company.
I've been in situations like this before, where the results have been disappointing for too long and a significant reset is needed to get the business back on track.
That is exactly where we are today here at Fred's.
Let me be clear.
We are entirely dissatisfied with the results of the company over the last 2 years.
However, we have a turnaround plan that is underway, and it has 2 main goals: eliminating our debt balance and generating significant positive EBITDA and free cash flow on a run rate basis by Q4 of fiscal '18.
Here's how we plan on getting there.
We are focused on 5 key areas: strategic transactions, optimizing cost structure and capital allocation, talent acquisition, revenue and margin initiatives and assortment optimization.
On the strategic transactions side, we are well underway in various processes to monetize noncore assets, including significant pieces of our real estate portfolio as well as our Specialty Pharmacy business.
These potential transactions are expected to provide significant cash proceeds that we expect to use to reduce our debt balance.
We are also evaluating various options for our Retail Pharmacy portfolio.
Our operational turnaround is well underway, and we have made significant progress on the expense side of the business with more to come.
We've executed on $30 million to $40 million of expense reduction opportunities for the fiscal year 2018 and are evaluating more opportunities for reductions every day.
I personally approve every invoice here over $5,000, and that has given me tremendous insight into the vast majority of our expenses.
We are going to continue to be maniacal about reducing expenses and capital expenditures in every part of our business, which we expect will help us achieve significant positive EBITDA and free cash flow on a run rate basis by Q4 of 2018.
From a talent perspective, we recently brought in great people in store operations, supply chain, private brands, finance and real estate.
We will continue to focus on talent acquisition in all areas as a key priority of the business.
Overall, we've reduced corporate headcount significantly over the last 6 months, and we expect this trend to continue as we reset the size of the organization, its culture and the type of people we need to accomplish our objectives.
Additionally, we have a plan for how to address the issues we are seeing in revenue and gross margin within our Front Store.
The plan focuses on 4 key initiatives: private brand penetration, closeouts, increased direct importing and optimizing our SKU count.
We plan to increase private brand penetration from current levels of 12% to over 40% over the next 2 years, which will drive both sales and gross margin.
To help achieve this goal, we recently hired Brent Tininenko as Vice President of Private Brands.
Brent spent 14 years at Walmart, with his last 12 being that of Senior Director of International Private Brands.
We also want to become a much bigger player in closeouts, which will create a treasure hunt environment in our stores, driving traffic, basket and gross margin.
We are working with multiple partners to rapidly develop this program and roll it out to our stores.
Additionally, we want to significantly increase our direct importing from overseas partners.
The closer we can get to the factory, the more impact we can have on our cost of goods and overall gross margins.
And finally, we want to continue to optimize and reduce our current SKU count while evaluating and testing new categories.
Beer and wine is an example of a new category where we've seen some encouraging results.
We are currently selling beer in 240 stores and wine in 70 stores, and we expect to be in 428 stores for beer and 279 stores for wine by the end of fiscal 2018.
We are encouraged by our initial results as we are seeing that when customers purchase beer and wine, the average basket is approximately 40% higher than a basket without beer and wine.
Moving fast is the key to any successful turnaround, and we are confident that we can do just that to make the changes needed to reset this business, which should result providing a better experience for our customers and improved operating results for our shareholders.
I will now turn to the numbers and will address the fourth quarter results and trends on a year-over-year basis.
And as a reminder, all of them reflect the fact that our Specialty Pharmacy business has been classified as a discontinued operation.
For the fourth quarter of 2017, net sales increased 2% to $477.3 million from $467.6 million for the fourth quarter of 2016.
There were 14 weeks in the fiscal fourth quarter of 2017 compared to 13 weeks in the fourth quarter of last year.
Comparable store sales for the quarter decreased 0.9% compared to a 4.8% decrease in comparable store sales in the fourth quarter of last year.
Gross profit in the fourth quarter decreased 8% to $115.1 million from $125.7 million in the prior year period.
Gross margin decreased 280 basis points to 24.1% from 26.9% in the same quarter last year.
Most of that decrease came from the Front Store, and that's exactly where we are focused to see the biggest opportunity in 2018.
Gross margin for the quarter was negatively impacted in the Front Store by the mix of sales and by markdowns on clearance inventory; and in the pharmacy, by pressure on reimbursement rates and higher-than-expected DIR fees, which are fees we are required to pay PBMs after the point of sale.
We reduced our inventory levels throughout 2017, which was one initiative that helped improve our free cash flow.
One of the biggest drags on gross margin in both the quarter and the full year was our decision to discontinue more poor-performing and stale merchandise through clearance sale events.
In the fourth quarter, we stepped up this clearance activity, which resulted in a reduction in inventory of $48 million year-over-year.
There will likely be additional inventory reduction and clearance activity in 2018 as we continue to refine our assortment, although we do not anticipate clearance events to be at the levels we have seen over the last 2 years.
Our mix of sales had a negative impact on gross margin as we sold more beer, wine and tobacco.
While these are great items from a traffic-driving perspective, we are working to optimize our assortments so that we can increase gross margins.
We are continuing to work on reducing SG&A.
And in the fourth quarter, SG&A, including depreciation and amortization, improved year-over-year by 350 basis points to 28.4% of sales from 31.9% last year.
Much of the improvement in expenses was attributable to a reduction in professional, legal and banking fees related to the attempt to acquire Rite Aid stores in the fourth quarter of 2016 that obviously did not repeat in the fourth quarter of 2017.
We are also starting to realize the benefits of our various cost-saving initiatives.
And excluding expenses related to the Rite Aid deal, we saw a year-over-year improvement in SG&A of 230 basis points to 28.4% from 30.7%.
Net loss for the fourth quarter totaled approximately $22.6 million or $0.62 per share compared to a net loss of $21.7 million or $0.58 per share in the fourth quarter of 2016.
For the fourth quarter of 2017, adjusted EBITDA, which further excludes items management does not consider to be indicative of our core operating performance, was negative $18.9 million compared to $13 million in 2016.
Turning to our balance sheet.
We ended the year with approximately $6.6 million in cash compared to $5.8 million at the end of fiscal 2016.
Inventory at year-end was $279 million, down from $327 million last year, a $48 million reduction, with day sales of inventory declining 11 days to 76 from 87 days a year ago.
Total debt stood at $167.2 million compared to $128.4 million at the end of last year.
In terms of capital deployment.
In the fourth quarter, our CapEx was $2.9 million compared to $3.6 million a year ago.
And we repurchased approximately 1.2 million shares in the quarter for a total of $5 million, leaving 2.6 million shares remaining on the share buyback program.
Before I end the call, I'd like to reiterate a couple of things.
We are moving with speed and urgency to eliminate debt and return to significant positive EBITDA and free cash flow.
We are confident in our plan and look forward to updating folks as we have new developments to share.
If you have any questions, please coordinate with <UNK> <UNK> to set up a time to speak with me directly.
Thank you for participating today, and we look forward to addressing you when we report our first quarter results in June.
