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INVESTMENT
POINTS
Differentiated Position
By providing exceptional value on more than 12,000 items customers
need every day in an easy, in-and-out store footprint, and with 40%
of its stores incorporating full-service pharmacies, Fred's occupies
a unique niche in the discount retail industry. Spanning a 15-state
market across the Southeast and Southwest, Fred's represents an attractive
alternative to the big-box retailers for shoppers in terms of value,
selection and convenience.
Top-Line Growth
Although higher energy costs have created a significant drag on the
economy – and consumer spending – Fred's unique market position in
the discount sector, along with newly implemented performance initiatives,
enabled the Company to post solid sales gains again in 2006. Net sales
increased 11% (8% adjusting for a 53rd week in fiscal 2006) to $1.767
billion in 2006 as comparable stores sales increased 2.4%.
Performance Initiatives
In 2006, Fred's confronted a challenging retail environment, one affected
by spikes in gas and energy prices and sweeping regulatory changes
to the Medicaid and Medicare programs. To address these challenges,
Fred's developed several initiatives, including a new branding campaign,
with expanded television and radio advertising, a store refresher
program, to improve the look and feel of Fred's stores, and the "Service
with a New Shine" (SWANS) program, which focuses on how customers
are treated. When married to an Everyday Low Pricing strategy, these
represent key strategies to build traffic and expand operating margins.
Expanding Presence
Fred's opened 59 new stores in 2006, increasing its selling space
9% during the year to 9.9 million square feet. Fred's plans to open
35-40 new stores and 15-25 new pharmacies in 2006 and close 20 stores
and three pharmacies, resulting in net growth in selling square footage
of 1%-3%.
Product and Merchandising
With larger stores compared with its major competitors, Fred's can
offer a broader product selection. The company's merchandising philosophy
is to focus on basic household items at everyday low prices. In 2006,
hardlines represented about 53% of the Company's total sales mix and
included household goods, health and beauty aids, food and beverages,
and tobacco. Pharmacy sales made up approximately 32% of the mix.
Softlines, including women's and men's clothing, produced 13% of total
sales. Franchise sales accounted for approximately 2% of total sales.
Investments in Infrastructure
Fred's Store and Merchandising Refresher Program was started in 2006
to update the look and feel of its stores with new paint and flooring,
updated signage and the expansion of several merchandise departments.
In 2007, the Company will refresh over 500 stores during the period
of March through September. Fred's pets, electronics, stationery,
and the front-end checkout departments will be expanded this year.
As a means of exposing shoppers to our refreshed stores and merchandise,
Fred's has expanded its branding campaign with additional television
and radio advertising. With the updated look and feel of the stores,
the Company believes it is poised to increase customer traffic, gross
margins, and overall profitability.
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