Fred's Q3 Profits Fall 15%

Officials with the Memphis-based company, which operates 642 discount stores primarily in the Southeastern United States, said the numbers were also affected by the early renewal of a contract with AmerisourceBergen Corp., Fred's primary pharmaceutical wholesaler, to take advantage of new prices, which required a $2.2 million adjustment in pre-tax deferred income and an earnings reduction of 3 cents per share. Despite the upfront expense, company officials said the new contract should positively impact future sales and help offset losses from benefits cut from Tennessee's extended Medicaid program, TennCare, which have cut into Fred's pharmacy sales.

Hurricanes Katrina and Rita also impacted the bottom line, costing the company a 1 cent to 2 cents per share reductions in earnings for the quarter ending Oct. 29 due to clean up and repair expenses associated with the Gulf Coast storms.

"The third quarter was unusual for Fred's by any standard," chief executive officer Michael J. Hayes said in a statement.

While profits were down, total sales for the company rose 8% to a record high of $376.8 million in the quarter, up from $349.1 million for the same three months of 2004. Sales for stores open at least a year declined 1% during the quarter compared to the same time last year when comparable store sales showed a 3.6% increase. Operating income, also dropped 10.8% from $11.1 million last year to $9.9 million in the current quarter.

For the year to date, Fred's posted a net income of $16.5 million, or 42 cents per share, compared to $17.5 million, or 44 cents per share for the same period of 2004. Total sales for the period set a record when they jumped 10% from $1.03 billion to $1.13 billion over the same period, the company said.