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
|
(I.R.S.
Employer
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Incorporation
or Organization)
|
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:
|
||
Condensed
Consolidated Balance Sheets as of July 31, 2010 (unaudited) and January
30, 2010
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3
|
|
Condensed
Consolidated Statements of Income for the Thirteen and Twenty-Six Weeks
Ended July 31, 2010 (unaudited) and August 1, 2009
(unaudited)
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4
|
|
Condensed
Consolidated Statements of Cash Flows for the Twenty-Six Weeks
Ended July 31, 2010 (unaudited) and August 1, 2009
(unaudited)
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5
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
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6-11
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|
Item
2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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12-16
|
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Item
3 – Quantitative and Qualitative Disclosure about Market
Risk
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17
|
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Item
4 – Controls and Procedures
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17
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Part II - Other Information
|
17-18
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|
Item
1. Legal Proceedings
|
||
Item
1A. Risk Factors
|
||
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
||
Item
6. Exhibits
|
||
Signatures
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19-22
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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
|
||
Ex-32. Section
906 Certification of the CEO and CFO
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July 31, 2010
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January 30,
|
|||||||
(unaudited)
|
2010
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 46,872 | $ | 54,742 | ||||
Receivables,
less allowance for doubtful accounts of $976 and $764,
respectively
|
28,758 | 28,893 | ||||||
Inventories
|
314,802 | 294,024 | ||||||
Other
non-trade receivables
|
22,237 | 25,193 | ||||||
Prepaid
expenses and other current assets
|
11,880 | 10,945 | ||||||
Total
current assets
|
424,549 | 413,797 | ||||||
Property
and equipment, at depreciated cost
|
138,662 | 137,569 | ||||||
Equipment
under capital leases, less accumulated amortization of $4,967 and $4,928
respectively
|
- | - | ||||||
Intangibles
|
18,006 | 16,035 | ||||||
Other
noncurrent assets, net
|
3,808 | 4,040 | ||||||
Total
assets
|
$ | 585,025 | $ | 571,441 | ||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 89,858 | $ | 87,393 | ||||
Current
portion of indebtedness
|
174 | 718 | ||||||
Accrued
expenses and other
|
43,989 | 39,621 | ||||||
Deferred
income taxes
|
19,733 | 19,373 | ||||||
Total
current liabilities
|
153,754 | 147,105 | ||||||
Long-term
portion of indebtedness
|
4,114 | 4,179 | ||||||
Deferred
income taxes
|
987 | 2,009 | ||||||
Other
noncurrent liabilities
|
17,057 | 17,209 | ||||||
Total
liabilities
|
175,912 | 170,502 | ||||||
Commitments
and Contingencies
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, nonvoting, no par value, 10,000,000 shares authorized, none
outstanding
|
- | - | ||||||
Preferred
stock, Series A junior participating nonvoting, no par value, 224,594
shares authorized, none outstanding
|
- | - | ||||||
Common
stock, Class A voting, no par value, 60,000,000 shares authorized,
39,214,341 and 39,363,462 shares issued and outstanding,
respectively
|
129,854 | 131,685 | ||||||
Common
stock, Class B nonvoting, no par value, 11,500,000 shares authorized,
none outstanding
|
- | - | ||||||
Retained
earnings
|
278,355 | 268,350 | ||||||
Accumulated
other comprehensive income
|
904 | 904 | ||||||
Total
shareholders’ equity
|
409,113 | 400,939 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 585,025 | $ | 571,441 |
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
July 31,
|
August 1,
|
July 31,
|
August 1,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$ | 449,467 | $ | 434,214 | $ | 921,114 | $ | 892,594 | ||||||||
Cost
of goods sold
|
323,531 | 313,472 | 658,229 | 642,875 | ||||||||||||
Gross
profit
|
125,936 | 120,742 | 262,885 | 249,719 | ||||||||||||
Depreciation
and amortization
|
7,227 | 6,489 | 14,190 | 12,927 | ||||||||||||
Selling,
general and administrative expenses
|
110,473 | 106,097 | 227,277 | 214,955 | ||||||||||||
Operating
income
|
8,236 | 8,156 | 21,418 | 21,837 | ||||||||||||
Interest
income
|
(60 | ) | (55 | ) | (120 | ) | (78 | ) | ||||||||
Interest
expense
|
117 | 133 | 227 | 265 | ||||||||||||
Income
before income taxes
|
8,179 | 8,078 | 21,311 | 21,650 | ||||||||||||
Provision
for income taxes
|
3,221 | 3,838 | 8,162 | 8,860 | ||||||||||||
Net
income
|
$ | 4,958 | $ | 4,240 | $ | 13,149 | $ | 12,790 | ||||||||
Net
income per share
|
||||||||||||||||
Basic
|
$ | 0.13 | $ | 0.11 | $ | 0.34 | $ | 0.32 | ||||||||
Diluted
|
$ | 0.13 | $ | 0.11 | $ | 0.34 | $ | 0.32 | ||||||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
39,179 | 39,914 | 39,164 | 39,904 | ||||||||||||
Effect
of dilutive stock options
|
61 | 72 | 53 | 97 | ||||||||||||
Diluted
|
39,240 | 39,986 | 39,217 | 40,001 | ||||||||||||
Dividends
per common share
|
$ | 0.04 | $ | 0.03 | $ | 0.08 | $ | 0.05 | ||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
$ | 4,958 | $ | 4,240 | $ | 13,149 | $ | 12,790 | ||||||||
Other
comprehensive income (expense), net of tax postretirement plan
adjustment
|
- | - | - | - | ||||||||||||
Comprehensive
income
|
$ | 4,958 | $ | 4,240 | $ | 13,149 | $ | 12,790 |
Twenty-Six Weeks Ended
|
||||||||
July 31, 2010
|
August 1, 2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 13,149 | $ | 12,790 | ||||
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
||||||||
Depreciation
and amortization
|
14,190 | 12,927 | ||||||
Net
loss (gain) on asset disposition
|
258 | (19 | ) | |||||
Stock-based
compensation
|
896 | 996 | ||||||
Provision
(recovery) for uncollectible receivables
|
212 | (84 | ) | |||||
LIFO
reserve increase
|
944 | 591 | ||||||
Deferred
income tax (benefit) expense
|
(833 | ) | 509 | |||||
Income
tax benefit upon exercise of stock options
|
6 | 26 | ||||||
(Increase)
decrease in operating assets:
|
||||||||
Trade
and non-trade receivables
|
(3,913 | ) | 39 | |||||
Insurance
receivables
|
13 | - | ||||||
Inventories
|
(21,722 | ) | (7,971 | ) | ||||
Other
assets
|
545 | 1,450 | ||||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
6,833 | 17,994 | ||||||
Income
taxes payable
|
5,507 | 84 | ||||||
Other
noncurrent liabilities
|
(13 | ) | (5,722 | ) | ||||
Net
cash provided by operating activities
|
16,072 | 33,610 | ||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(13,245 | ) | (11,920 | ) | ||||
Proceeds
from asset dispositions
|
140 | 15 | ||||||
Insurance
recoveries for replacement assets
|
47 | - | ||||||
Asset
acquisition, net (primarily intangibles)
|
(4,405 | ) | (3,555 | ) | ||||
Net
cash used in investing activities
|
(17,463 | ) | (15,460 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
of indebtedness and capital lease obligations
|
(609 | ) | (105 | ) | ||||
Excess
tax charges from stock-based compensation
|
(6 | ) | (26 | ) | ||||
Proceeds
from exercise of stock options and employee stock purchase
plan
|
257 | 205 | ||||||
Repurchase
of shares
|
(2,977 | ) | - | |||||
Cash
dividends paid
|
(3,144 | ) | (2,002 | ) | ||||
Net
cash used in financing activities
|
(6,479 | ) | (1,928 | ) | ||||
(Decrease)
increase in cash and cash equivalents
|
(7,870 | ) | 16,222 | |||||
Cash
and cash equivalents:
|
||||||||
Beginning
of year
|
54,742 | 35,128 | ||||||
End
of year
|
$ | 46,872 | $ | 51,350 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | 57 | $ | 184 | ||||
Income
taxes paid
|
$ | 2,419 | $ | 14,360 |
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
July 31, 2010
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August 1, 2009
|
July 31, 2010
|
August 1, 2009
|
|||||||||||||
Stock
option expense
|
$ | 152 | $ | 280 | $ | 323 | $ | 540 | ||||||||
Restricted
stock expense
|
333 | 176 | 503 | 350 | ||||||||||||
ESPP
expense
|
35 | 53 | 70 | 106 | ||||||||||||
Total
stock-based compensation
|
$ | 520 | $ | 509 | $ | 896 | $ | 996 | ||||||||
Income
tax benefit on stock-based compensation
|
$ | 139 | $ | 101 | $ | 235 | $ | 216 |
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
July 31, 2010
|
August 1, 2009
|
July 31, 2010
|
August 1, 2009
|
|||||||||||||
Stock Options
|
||||||||||||||||
Expected
volatility
|
41.7 | % | 42.6 | % | 42.0 | % | 42.6 | % | ||||||||
Risk-free
interest rate
|
3.1 | % | 2.6 | % | 3.1 | % | 2.6 | % | ||||||||
Expected
option life (in years)
|
5.84 | 5.84 | 5.84 | 5.84 | ||||||||||||
Expected
dividend yield
|
0.61 | % | 0.55 | % | 0.63 | % | 0.55 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 4.84 | $ | 4.58 | $ | 4.86 | $ | 4.58 | ||||||||
Employee Stock Purchase
Plan
|
||||||||||||||||
Expected
volatility
|
31.5 | % | 73.5 | %1 | 31.9 | % | 83.9 | %1 | ||||||||
Risk-free
interest rate
|
0.6 | % | 0.1 | % | 0.6 | % | 0.1 | % | ||||||||
Expected
option life (in years)
|
0.50 | 0.50 | 0.38 | 0.38 | ||||||||||||
Expected
dividend yield
|
0.46 | % | 0.34 | % | 0.35 | % | 0.26 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 2.43 | $ | 3.78 | $ | 2.31 | $ | 3.68 |
1.
|
The
increase in expected volatility in 2009 is due to the fluctuation of the
stock price during the first and second quarter of
2009.
|
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Aggregate
Intrinsic
Value
(Thousands)
|
|||||||||||||
Outstanding
at January 30, 2010
|
1,261,330 | $ | 13.91 | 3.1 | $ | 73 | ||||||||||
Granted
|
26,250 | $ | 11.13 | |||||||||||||
Forfeited
/ Cancelled
|
(51,650 | ) | $ | 15.81 | ||||||||||||
Exercised
|
(1,400 | ) | $ | 13.25 | ||||||||||||
Outstanding
at July 31, 2010
|
1,234,530 | $ | 13.78 | 2.7 | $ | 293 | ||||||||||
Exercisable
at July 31, 2010
|
835,788 | $ | 15.17 | 1.7 | $ | 80 |
Number
of Shares
|
Weighted
Average
Grant
Date Fair
Value
|
|||||||
Non-vested
Restricted Stock at January 30, 2010
|
346,510 | $ | 12.01 | |||||
Granted
|
124,494 | $ | 13.83 | |||||
Forfeited
/ Cancelled
|
(11,207 | ) | $ | 10.21 | ||||
Vested
|
(5,658 | ) | $ | 13.34 | ||||
Non-vested
Restricted Stock at July 31, 2010
|
454,139 | $ | 12.50 |
July 31, 2010
|
||||||||
(unaudited)
|
January 30, 2010
|
|||||||
Property
and equipment, at cost:
|
||||||||
Buildings
and building improvements
|
$ | 96,588 | $ | 95,844 | ||||
Leasehold
improvements
|
58,909 | 55,078 | ||||||
Automobiles
and vehicles
|
5,172 | 5,273 | ||||||
Airplane
|
4,697 | 4,697 | ||||||
Furniture,
fixtures and equipment
|
237,731 | 240,883 | ||||||
403,097 | 401,775 | |||||||
Less:
Accumulated depreciation and amortization
|
(271,357 | ) | (271,185 | ) | ||||
131,740 | 130,590 | |||||||
Construction
in progress
|
172 | 446 | ||||||
Land
|
6,750 | 6,533 | ||||||
Total
Property and equipment, at depreciated cost
|
$ | 138,662 | $ | 137,569 |
Balance at
January 30,
2010
|
Additions
|
Utilization
|
Ending Balance
July 31, 2010
|
|||||||||||||
Lease
contract termination liability
|
$ | 1.1 | $ | 0.5 | $ | 0.7 | $ | 0.9 |
Twenty-Six Weeks Ended
|
Year Ended
|
|||||||||||
(in thousands)
|
July 31, 2010
|
August 1, 2009
|
January 30, 2010
|
|||||||||
Accumulated
other comprehensive income
|
$ | 904 | $ | 1,063 | $ | 904 | ||||||
Amortization
of postretirement benefit
|
- | - | - | |||||||||
Ending
balance
|
$ | 904 | $ | 1,063 | $ | 904 |
Thirteen Weeks Ended
|
||||||||
July 31, 2010
|
August 1, 2009
|
|||||||
Pharmaceuticals
|
33.6 | % | 32.8 | % | ||||
Household
Goods
|
23.9 | % | 23.6 | % | ||||
Food
and Tobacco
|
17.0 | % | 16.7 | % | ||||
Paper
and Cleaning Supplies
|
8.6 | % | 9.5 | % | ||||
Health
and Beauty Aids
|
7.7 | % | 7.5 | % | ||||
Apparel
and Linens
|
7.2 | % | 7.8 | % | ||||
Franchise
|
2.0 | % | 2.1 | % | ||||
100.0 | % | 100.0 | % |
Twenty-Six Weeks Ended
|
||||||||
July 31, 2010
|
August 1, 2009
|
|||||||
Pharmaceuticals
|
33.8 | % | 33.1 | % | ||||
Household
Goods
|
24.0 | % | 23.5 | % | ||||
Food
and Tobacco
|
16.7 | % | 16.4 | % | ||||
Paper
and Cleaning Supplies
|
8.6 | % | 9.3 | % | ||||
Apparel
and Linens
|
7.5 | % | 7.8 | % | ||||
Health
and Beauty Aids
|
7.4 | % | 7.7 | % | ||||
Franchise
|
2.0 | % | 2.2 | % | ||||
100.0 | % | 100.0 | % |
|
·
|
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 litigation described under Legal Proceedings on
page 17.
|
|
·
|
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 30,
2010.
|
Total Number of
Shares Purchased
|
Average Price Paid
Per Share
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Program
|
Maximum Number of
Shares That May Yet Be
Purchased Under the
Plans or Program
|
|||||||||||||
Balance at January 30, 2010
|
2,830.8 | |||||||||||||||
January
31 - February 27, 2010
|
69.3 | $ | 9.41 | 69.3 | 2,761.5 | |||||||||||
February
28 - April 3, 2010
|
- | $ | - | - | 2,761.5 | |||||||||||
April
4, - May 1, 2010
|
- | $ | - | - | 2,761.5 | |||||||||||
May
2, - May 29, 2010
|
- | $ | - | - | 2,761.5 | |||||||||||
May
30, - July 3, 2010
|
- | $ | - | - | 2,761.5 | |||||||||||
July
4, - July 31, 2010
|
222.6 | $ | 10.43 | 222.6 | 2,538.9 |
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: September 9, 2010
|
/s/ Bruce A. Efird
|
Bruce
A. Efird
|
|
Chief
Executive Officer and President
|
|
Date: September 9, 2010
|
/s/ Jerry A. Shore
|
Jerry
A. Shore
|
|
Executive
Vice President and
|
|
Chief
Financial
Officer
|