x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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TENNESSEE
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62-0634010
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification Number)
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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Smaller
reporting company ¨
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Page No.
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Part I - Financial
Information
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Item
1 - Financial Statements:
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Condensed
Consolidated Balance Sheets as of October 31, 2009 (unaudited) and January
31, 2009
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3
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Condensed
Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks
Ended
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October
31, 2009 (unaudited) and November 1, 2008 (unaudited)
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4
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Condensed
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks
Ended
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October
31, 2009 (unaudited) and November 1, 2008 (unaudited)
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5
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Notes
to Condensed Consolidated Financial Statements (unaudited)
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6-13
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Item
2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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14-18
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Item
3 – Quantitative and Qualitative Disclosure about Market
Risk
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19
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Item
4 – Controls and Procedures
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19
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Part II - Other Information
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19-20
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Item
1. Legal Proceedings
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19
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Item
1A. Risk Factors
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19
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Item
4. Submission of Matters to a Vote of Security Holders
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Item
6. Exhibits
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20
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Signatures
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20
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Ex-31.1
Section 302 Certification of the CEO
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Ex-31.2
Section 302 Certification of the CFO
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Ex-32.
Section 906 Certification of the CEO and CFO
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October 31, 2009
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January 31,
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|||||||
(unaudited)
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2009
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|||||||
ASSETS
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||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 38,555 | $ | 35,128 | ||||
Receivables,
less allowance for doubtful accounts of $701 and $885,
respectively
|
31,723 | 28,857 | ||||||
Inventories
|
344,252 | 301,537 | ||||||
Other
non-trade receivables
|
20,153 | 15,782 | ||||||
Prepaid
expenses and other current assets
|
12,097 | 11,912 | ||||||
Total
current assets
|
446,780 | 393,216 | ||||||
Property
and equipment, at depreciated cost
|
139,247 | 138,036 | ||||||
Equipment
under capital leases, less accumulated amortization of $4,967 and
$4,928
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||||||||
respectively
|
- | 39 | ||||||
Other
noncurrent assets, net
|
17,652 | 13,484 | ||||||
Total
assets
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$ | 603,679 | $ | 544,775 | ||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 119,965 | $ | 69,955 | ||||
Current
portion of indebtedness
|
753 | 243 | ||||||
Accrued
expenses and other
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40,815 | 45,467 | ||||||
Deferred
income taxes
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14,569 | 13,061 | ||||||
Income
taxes payable
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- | 8,941 | ||||||
Total
current liabilities
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176,102 | 137,667 | ||||||
Long-term
portion of indebtedness
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4,197 | 4,866 | ||||||
Deferred
income taxes
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1,750 | 1,328 | ||||||
Other
noncurrent liabilities
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18,235 | 13,833 | ||||||
Total
liabilities
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200,284 | 157,694 | ||||||
Commitments
and Contingencies
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, nonvoting, no par value, 10,000,000 shares authorized, none
outstanding
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- | - | ||||||
Preferred
stock, Series A junior participating nonvoting, no par
value,
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||||||||
224,594
shares authorized, none outstanding
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- | - | ||||||
Common
stock, Class A voting, no par value, 60,000,000 shares
authorized,
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||||||||
40,088,028
and 39,940,148 shares issued and outstanding, respectively
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138,573 | 136,877 | ||||||
Common
stock, Class B nonvoting, no par value, 11,500,000 shares
authorized,
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||||||||
none
outstanding
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- | - | ||||||
Retained
earnings
|
263,759 | 249,141 | ||||||
Accumulated
other comprehensive income
|
1,063 | 1,063 | ||||||
Total
shareholders’ equity
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403,395 | 387,081 | ||||||
Total
liabilities and shareholders’ equity
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$ | 603,679 | $ | 544,775 |
Thirteen Weeks Ended
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Thirty-nine Weeks Ended
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|||||||||||||||
October 31,
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November 1,
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October 31,
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November 1,
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|||||||||||||
2009
|
2008
|
2009
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2008
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|||||||||||||
Net
sales
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$ | 422,438 | $ | 418,036 | $ | 1,315,032 | $ | 1,329,455 | ||||||||
Cost
of goods sold
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299,569 | 293,850 | 942,444 | 948,937 | ||||||||||||
Gross
profit
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122,869 | 124,186 | 372,588 | 380,518 | ||||||||||||
Depreciation
and amortization
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6,530 | 6,367 | 19,457 | 20,229 | ||||||||||||
Selling,
general and administrative expenses
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108,678 | 108,416 | 323,633 | 337,202 | ||||||||||||
Operating
income
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7,661 | 9,403 | 29,498 | 23,087 | ||||||||||||
Interest
income
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(59 | ) | (35 | ) | (137 | ) | (237 | ) | ||||||||
Interest
expense
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118 | 94 | 383 | 546 | ||||||||||||
Income
before income taxes
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7,602 | 9,344 | 29,252 | 22,778 | ||||||||||||
Provision
for income taxes
|
2,570 | 3,255 | 11,430 | 8,406 | ||||||||||||
Net
income
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$ | 5,032 | $ | 6,089 | $ | 17,822 | $ | 14,372 | ||||||||
Net
income per share
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||||||||||||||||
Basic
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$ | 0.13 | $ | 0.15 | $ | 0.45 | $ | 0.36 | ||||||||
Diluted
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$ | 0.13 | $ | 0.15 | $ | 0.45 | $ | 0.36 | ||||||||
Weighted
average shares outstanding
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||||||||||||||||
Basic
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39,914 | 39,830 | 39,901 | 39,801 | ||||||||||||
Effect
of dilutive stock options
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68 | 40 | 88 | 23 | ||||||||||||
Diluted
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39,982 | 39,870 | 39,989 | 39,824 | ||||||||||||
Dividends
per common share
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$ | 0.03 | $ | 0.02 | $ | 0.08 | $ | 0.06 | ||||||||
Comprehensive
income:
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||||||||||||||||
Net
income
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$ | 5,032 | $ | 6,089 | $ | 17,822 | $ | 14,372 | ||||||||
Other
comprehensive income (expense), net of tax
|
||||||||||||||||
postretirement
plan adjustment
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- | (10 | ) | - | (32 | ) | ||||||||||
Comprehensive
income
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$ | 5,032 | $ | 6,079 | $ | 17,822 | $ | 14,340 |
For the Thirty-Nine Weeks Ended
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||||||||
October 31, 2009
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November 1, 2008
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|||||||
Cash
flows from operating activities:
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||||||||
Net
income
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$ | 17,822 | $ | 14,372 | ||||
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
||||||||
Depreciation
and amortization
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19,457 | 20,229 | ||||||
Net
gain (loss) on asset disposition
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156 | (850 | ) | |||||
Provision
for store closures and asset impairment
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- | 419 | ||||||
Stock-based
compensation
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1,417 | 1,249 | ||||||
Recovery
of uncollectible receivables
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(184 | ) | (143 | ) | ||||
LIFO
reserve increase
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1,424 | 2,738 | ||||||
Deferred
income tax expense
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1,945 | 6,421 | ||||||
Income
tax benefit upon exercise of stock options
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23 | 14 | ||||||
Provision
for post retirement medical
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- | (32 | ) | |||||
(Increase)
decrease in operating assets:
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||||||||
Trade
receivables
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(4,570 | ) | 2,451 | |||||
Insurance
receivables
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- | 834 | ||||||
Inventories
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(44,139 | ) | (55,563 | ) | ||||
Other
assets
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(185 | ) | (1,644 | ) | ||||
Increase
(decrease) in operating liabilities:
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||||||||
Accounts
payable and accrued expenses
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45,359 | 53,967 | ||||||
Income
taxes payable
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(3,697 | ) | - | |||||
Other
noncurrent liabilities
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(3,362 | ) | 1,374 | |||||
Net
cash provided by operating activities
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31,466 | 45,836 | ||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
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(18,368 | ) | (14,386 | ) | ||||
Proceeds
from asset dispositions
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106 | 2,163 | ||||||
Insurance
recoveries for replacement assets
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- | 384 | ||||||
Asset
acquisition, net (primarily intangibles)
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(6,692 | ) | (2,713 | ) | ||||
Net
cash used in investing activities
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(24,954 | ) | (14,552 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
of indebtedness and capital lease obligations
|
(159 | ) | (418 | ) | ||||
Proceeds
from revolving line of credit
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- | 215,213 | ||||||
Payments
on revolving line of credit
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- | (245,848 | ) | |||||
Excess
tax charges from stock-based compensation
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(23 | ) | (14 | ) | ||||
Proceeds
from exercise of stock options and employee stock purchase
plan
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301 | 421 | ||||||
Cash
dividends paid
|
(3,204 | ) | (2,396 | ) | ||||
Net
cash used in financing activities
|
(3,085 | ) | (33,042 | ) | ||||
Increase
(decrease) in cash and cash equivalents
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3,427 | (1,758 | ) | |||||
Cash
and cash equivalents:
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||||||||
Beginning
of year
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35,128 | 10,266 | ||||||
End
of year
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$ | 38,555 | $ | 8,508 | ||||
Supplemental
disclosures of cash flow information:
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||||||||
Interest
paid
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$ | 246 | $ | 364 | ||||
Income
taxes paid
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$ | 20,265 | $ | 1,377 | ||||
Non-cash
investing and financial activities:
|
||||||||
Assets
acquired through term loan
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$ | - | $ | 274 | ||||
Common
stock issued for purchase of capital assets
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$ | - | $ | - |
Thirteen Weeks Ended
|
Thirty-nine Weeks Ended
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|||||||||||||||
October 31,
2009
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November 1,
2008
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October 31,
2009
|
November 1,
2008
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|||||||||||||
Stock
option expense
|
$ | 235 | $ | (85 | ) | $ | 775 | $ | 564 | |||||||
Restricted
stock expense
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133 | 197 | 482 | 552 | ||||||||||||
ESPP
expense
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53 | 44 | 160 | 133 | ||||||||||||
Total
stock-based compensation
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$ | 421 | $ | 156 | $ | 1,417 | $ | 1,249 | ||||||||
Income
tax benefit on stock-based compensation
|
$ | 83 | $ | 79 | $ | 298 | $ | 305 |
Thirteen Weeks Ended
|
Thirty-nine Weeks Ended
|
|||||||||||||||
October 31,
2009
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November 1,
2008
|
October 31,
2009
|
November 1,
2008 |
|||||||||||||
Stock Options
|
||||||||||||||||
Expected
volatility
|
41.8 | % | 39.0 | % | 42.6 | % | 40.2 | % | ||||||||
Risk-free
interest rate
|
2.7 | % | 3.4 | % | 2.6 | % | 3.4 | % | ||||||||
Expected
option life (in years)
|
5.84 | 5.84 | 5.84 | 5.84 | ||||||||||||
Expected
dividend yield
|
0.55 | % | 0.50 | % | 0.55 | % | 0.45 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 5.11 | $ | 5.87 | $ | 4.63 | $ | 4.66 | ||||||||
Employee Stock Purchase
Plan
|
||||||||||||||||
Expected
volatility
|
64.9 | % 1 | 33.5 | % | 77.6 | % 1 | 37.4 | % | ||||||||
Risk-free
interest rate
|
0.1 | % | 3.1 | % | 0.1 | % | 3.1 | % | ||||||||
Expected
option life (in years)
|
0.75 | 0.75 | 0.5 | 0.5 | ||||||||||||
Expected
dividend yield
|
0.51 | % | 0.51 | % | 0.34 | % | 0.34 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 3.94 | $ | 2.54 | $ | 3.77 | $ | 2.39 |
Options
|
Weighted
Average
Exercise Price
|
Weighted Average
Remaining
Contractual Life
(Years)
|
Aggregate
Intrinsic
Value
(Thousands)
|
|||||||||||||
Outstanding
at January 31, 2009
|
1,138,111 | $ | 15.13 | 3.9 | $ | 11 | ||||||||||
Granted
|
361,891 | $ | 11.20 | |||||||||||||
Forfeited
/ Cancelled
|
(102,853 | ) | $ | 18.90 | ||||||||||||
Exercised
|
(600 | ) | $ | 13.25 | ||||||||||||
Outstanding
at October 31, 2009
|
1,396,549 | $ | 13.84 | 3.6 | $ | 699 | ||||||||||
Exercisable
at October 31, 2009
|
784,442 | $ | 15.60 | 2.1 | $ | 163 |
Number of Shares
|
Weighted Average
Grant Date Fair
Value
|
|||||||
Non-vested
Restricted Stock at January 31, 2009
|
352,784 | $ | 12.39 | |||||
Granted
|
52,843 | $ | 12.62 | |||||
Forfeited
/ Cancelled
|
(29,071 | ) | $ | 13.99 | ||||
Vested
|
(23,530 | ) | $ | 15.11 | ||||
Non-vested
Restricted Stock at October 31, 2009
|
353,026 | $ | 12.12 |
October 31, 2009
|
January 31,
|
|||||||
(unaudited)
|
2009
|
|||||||
Property
and equipment, at cost:
|
||||||||
Buildings
and building improvements
|
$ | 94,752 | $ | 91,826 | ||||
Leasehold
improvements
|
54,204 | 49,775 | ||||||
Automobiles
and vehicles
|
5,543 | 5,223 | ||||||
Airplane
|
4,697 | 4,697 | ||||||
Furniture,
fixtures and equipment
|
238,942 | 230,272 | ||||||
398,138 | 381,793 | |||||||
Less:
Accumulated depreciation and amortization
|
(265,719 | ) | (251,002 | ) | ||||
132,419 | 130,791 | |||||||
Construction
in progress
|
295 | 912 | ||||||
Land
|
6,533 | 6,333 | ||||||
Total
Property and equipment, at depreciated cost
|
$ | 139,247 | $ | 138,036 |
Balance at
January 31,
2009
|
Additions
FY09
|
Utilized
FY09
|
Balance at
October 31,
2009
|
|||||||||||||
Lease
contract termination liability
|
3.5 | 0.1 | 2.1 | 1.5 | ||||||||||||
$ | 3.5 | $ | 0.1 | $ | 2.1 | $ | 1.5 |
Thirty-nine Weeks Ended
|
Year Ended
|
|||||||||||
(in thousands)
|
October 31,
2009
|
November 1,
2008
|
January 31,
2009
|
|||||||||
Accumulated
other comprehensive income
|
$ | 1,063 | $ | 1,040 | $ | 1,040 | ||||||
Amortization
of postretirement benefit
|
- | (32 | ) | 23 | ||||||||
Ending
balance
|
$ | 1,063 | $ | 1,008 | $ | 1,063 |
|
·
|
The
third year incremental raising of the federal minimum wage which will
negatively impact our labor expense by approximately $2.3 million,
effective July 24, 2009.
|
|
·
|
The
continued product mix shift to basic and consumable items, coupled with
intense pharmacy competition, will continue to negatively affect gross
margin.
|
|
·
|
The
positive margin impact of our Own Brand initiatives as mentioned in
previous paragraphs.
|
|
·
|
Economic
and weather conditions which affect buying patterns of our customers and
supply chain efficiency.
|
|
·
|
Changes
in consumer spending and our ability to anticipate buying patterns and
implement appropriate inventory
strategies.
|
|
·
|
Continued
availability of capital and
financing.
|
|
·
|
Competitive
factors.
|
|
·
|
Changes
in reimbursement practices for
pharmaceuticals.
|
|
·
|
Governmental
regulation.
|
|
·
|
Increases
in fuel and utility rates.
|
|
·
|
Potential
adverse results in the Fair Labor Standards Act (“FSLA”) litigation
described under Legal Proceedings on page
20.
|
|
·
|
Other
factors affecting business beyond our control, including (but not limited
to) those discussed under Part 1, ITEM 1A “Risk Factors” of the Company’s
Annual Report on Form 10-K for the fiscal year ended January 31,
2009.
|
|
31.1
|
Certification
of Chief Executive Officer.
|
|
31.2
|
Certification
of Chief Financial Officer.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to rule
13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
|
FRED'S,
INC.
|
|
Date: December 10, 2009
|
/s/ Bruce A. Efird
|
Bruce
A. Efird
|
|
Chief
Executive Officer and President
|
|
Date: December 10, 2009
|
/s/ Jerry A. Shore
|
Jerry
A. Shore
|
|
Chief
Financial
Officer
|