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 30, 2010 (unaudited) and January
30, 2010
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3
|
||
Condensed
Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks
Ended October 30, 2010 (unaudited) and October 31, 2009
(unaudited)
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4
|
||
Condensed
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
October 30, 2010 (unaudited) and October 31, 2009
(unaudited)
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5
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||
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
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17
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||
Item
1. Legal Proceedings
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17-18
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Item
1A. Risk Factors
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18
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||
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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18
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Item
6. Exhibits
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18
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||
Signatures
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19
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||
Ex-10.23
Tenth Modification Agreement
|
|||
Ex-31.1
Section 302 Certification of the CEO
|
|||
Ex-31.2
Section 302 Certification of the CFO
|
|||
Ex-32.
Section 906 Certification of the CEO and CFO
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October 30, 2010
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January 30,
|
|||||||
(unaudited)
|
2010
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 37,462 | $ | 54,742 | ||||
Receivables,
less allowance for doubtful accounts of $1,039 and $764,
respectively
|
29,444 | 28,893 | ||||||
Inventories
|
360,300 | 294,024 | ||||||
Other
non-trade receivables
|
23,891 | 25,193 | ||||||
Prepaid
expenses and other current assets
|
16,376 | 10,945 | ||||||
Total
current assets
|
467,473 | 413,797 | ||||||
Property
and equipment, at depreciated cost
|
139,122 | 137,569 | ||||||
Equipment
under capital leases, less accumulated amortization of $4,967 and $4,928
respectively
|
- | - | ||||||
Intangibles
|
22,569 | 16,146 | ||||||
Other
noncurrent assets, net
|
3,699 | 3,929 | ||||||
Total
assets
|
$ | 632,863 | $ | 571,441 | ||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 128,320 | $ | 87,393 | ||||
Current
portion of indebtedness
|
228 | 718 | ||||||
Accrued
expenses and other
|
44,305 | 39,621 | ||||||
Deferred
income taxes
|
19,238 | 19,373 | ||||||
Total
current liabilities
|
192,091 | 147,105 | ||||||
Long-term
portion of indebtedness
|
3,998 | 4,179 | ||||||
Deferred
income taxes
|
1,791 | 2,009 | ||||||
Other
noncurrent liabilities
|
18,877 | 17,209 | ||||||
Total
liabilities
|
216,757 | 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,
39,274,469 and 39,363,462 shares issued and outstanding,
respectively
|
130,602 | 131,685 | ||||||
Common
stock, Class B nonvoting, no par value, 11,500,000 shares authorized,
none outstanding
|
- | - | ||||||
Retained
earnings
|
284,600 | 268,350 | ||||||
Accumulated
other comprehensive income
|
904 | 904 | ||||||
Total
shareholders’ equity
|
416,106 | 400,939 | ||||||
Total
liabilities and shareholders’ equity
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$ | 632,863 | $ | 571,441 |
Thirteen Weeks Ended
|
Thirty-Nine Weeks Ended
|
|||||||||||||||
October 30,
|
October 31,
|
October 30,
|
October 31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$ | 435,008 | $ | 422,438 | $ | 1,356,122 | $ | 1,315,032 | ||||||||
Cost
of goods sold
|
305,261 | 299,569 | 963,490 | 942,444 | ||||||||||||
Gross
profit
|
129,747 | 122,869 | 392,632 | 372,588 | ||||||||||||
Depreciation
and amortization
|
7,502 | 6,530 | 21,692 | 19,457 | ||||||||||||
Selling,
general and administrative expenses
|
110,588 | 108,678 | 337,865 | 323,633 | ||||||||||||
Operating
income
|
11,657 | 7,661 | 33,075 | 29,498 | ||||||||||||
Interest
income
|
(58 | ) | (59 | ) | (178 | ) | (137 | ) | ||||||||
Interest
expense
|
106 | 118 | 333 | 383 | ||||||||||||
Income
before income taxes
|
11,609 | 7,602 | 32,920 | 29,252 | ||||||||||||
Provision
for income taxes
|
3,791 | 2,570 | 11,953 | 11,430 | ||||||||||||
Net
income
|
$ | 7,818 | $ | 5,032 | $ | 20,967 | $ | 17,822 | ||||||||
Net
income per share
|
||||||||||||||||
Basic
|
$ | 0.20 | $ | 0.13 | $ | 0.54 | $ | 0.45 | ||||||||
Diluted
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$ | 0.20 | $ | 0.13 | $ | 0.54 | $ | 0.45 | ||||||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
39,061 | 39,914 | 39,129 | 39,901 | ||||||||||||
Effect
of dilutive stock options
|
53 | 68 | 52 | 88 | ||||||||||||
Diluted
|
39,114 | 39,982 | 39,181 | 39,989 | ||||||||||||
Dividends
per common share
|
$ | 0.04 | $ | 0.03 | $ | 0.12 | $ | 0.08 | ||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
$ | 7,818 | $ | 5,032 | $ | 20,967 | $ | 17,822 | ||||||||
Other
comprehensive income, net of tax postretirement plan
adjustment
|
- | - | - | - | ||||||||||||
Comprehensive
income
|
$ | 7,818 | $ | 5,032 | $ | 20,967 | $ | 17,822 |
Thirty-Nine Weeks Ended
|
||||||||
October 30, 2010
|
October 31, 2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 20,967 | $ | 17,822 | ||||
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
||||||||
Depreciation
and amortization
|
21,692 | 19,457 | ||||||
Net
loss on asset disposition
|
574 | 156 | ||||||
Provision
for store closures and asset impairment
|
300 | - | ||||||
Stock-based
compensation
|
1,544 | 1,417 | ||||||
Provision
(recovery) for uncollectible receivables
|
275 | (184 | ) | |||||
LIFO
reserve increase
|
2,220 | 1,424 | ||||||
Deferred
income tax (benefit) expense
|
(438 | ) | 1,945 | |||||
Income
tax benefit upon exercise of stock options
|
4 | 23 | ||||||
(Increase)
decrease in operating assets:
|
||||||||
Trade
and non-trade receivables
|
(7,554 | ) | (4,570 | ) | ||||
Insurance
receivables
|
1,208 | - | ||||||
Inventories
|
(68,796 | ) | (44,139 | ) | ||||
Other
assets
|
(3,608 | ) | (185 | ) | ||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
45,611 | 45,359 | ||||||
Income
taxes payable
|
5,123 | (3,697 | ) | |||||
Other
noncurrent liabilities
|
1,767 | (3,362 | ) | |||||
Net
cash provided by operating activities
|
20,889 | 31,466 | ||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(20,123 | ) | (18,368 | ) | ||||
Proceeds
from asset dispositions
|
161 | 106 | ||||||
Insurance
recoveries for replacement assets
|
88 | - | ||||||
Asset
acquisition, net (primarily intangibles)
|
(10,279 | ) | (6,692 | ) | ||||
Net
cash used in investing activities
|
(30,153 | ) | (24,954 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
of indebtedness and capital lease obligations
|
(671 | ) | (159 | ) | ||||
Excess
tax charges from stock-based compensation
|
(4 | ) | (23 | ) | ||||
Proceeds
from exercise of stock options and employee stock purchase
plan
|
366 | 301 | ||||||
Repurchase
of shares
|
(2,989 | ) | - | |||||
Cash
dividends paid
|
(4,718 | ) | (3,204 | ) | ||||
Net
cash used in financing activities
|
(8,016 | ) | (3,085 | ) | ||||
(Decrease)
increase in cash and cash equivalents
|
(17,280 | ) | 3,427 | |||||
Cash
and cash equivalents:
|
||||||||
Beginning
of year
|
54,742 | 35,128 | ||||||
End
of year
|
$ | 37,462 | $ | 38,555 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | 155 | $ | 246 | ||||
Income
taxes paid
|
$ | 6,953 | $ | 20,265 |
Thirteen Weeks Ended
|
Thirty-Nine Weeks Ended
|
|||||||||||||||
October 30,
2010
|
October 31,
2009
|
October 30,
2010
|
October 31,
2009
|
|||||||||||||
Stock
option expense
|
$ | 111 | $ | 235 | $ | 435 | $ | 775 | ||||||||
Restricted
stock expense
|
301 | 133 | 803 | 482 | ||||||||||||
ESPP
expense
|
36 | 53 | 106 | 160 | ||||||||||||
Total
stock-based compensation
|
$ | 448 | $ | 421 | $ | 1,344 | $ | 1,417 | ||||||||
Income
tax benefit on stock-based compensation
|
$ | 126 | $ | 83 | $ | 361 | $ | 298 |
Thirteen Weeks Ended
|
Thirty-Nine Weeks Ended
|
|||||||||||||||
October 30,
2010
|
October 31,
2009
|
October 30,
2010
|
October 31,
2009
|
|||||||||||||
Stock Options
|
||||||||||||||||
Expected
volatility
|
42.4 | % | 41.8 | % | 42.1 | % | 42.6 | % | ||||||||
Risk-free
interest rate
|
2.7 | % | 2.7 | % | 3.0 | % | 2.6 | % | ||||||||
Expected
option life (in years)
|
5.84 | 5.84 | 5.84 | 5.84 | ||||||||||||
Expected
dividend yield
|
0.71 | % | 0.55 | % | 0.65 | % | 0.55 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 5.34 | $ | 5.11 | $ | 4.96 | $ | 4.63 | ||||||||
Employee Stock Purchase
Plan
|
||||||||||||||||
Expected
volatility
|
32.0 | % | 64.9 | %1 | 31.9 | % | 77.6 | %1 | ||||||||
Risk-free
interest rate
|
0.6 | % | 0.1 | % | 0.6 | % | 0.1 | % | ||||||||
Expected
option life (in years)
|
0.75 | 0.75 | 0.5 | 0.5 | ||||||||||||
Expected
dividend yield
|
0.69 | % | 0.51 | % | 0.46 | % | 0.34 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 2.64 | $ | 3.94 | $ | 2.42 | $ | 3.77 |
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
|
33,250 | $ | 11.52 | |||||||||||||
Forfeited
/ Cancelled
|
(378,900 | ) | $ | 17.94 | ||||||||||||
Exercised
|
(2,400 | ) | $ | 11.69 | ||||||||||||
Outstanding
at October 30, 2010
|
913,280 | $ | 12.17 | 3.3 | $ | 804 | ||||||||||
Exercisable
at October 30, 2010
|
577,686 | $ | 12.92 | 2.5 | $ | 324 |
Number of Shares
|
Weighted Average
Grant Date Fair
Value
|
|||||||
Non-vested
Restricted Stock at January 30, 2010
|
346,510 | $ | 12.01 | |||||
Granted
|
157,628 | $ | 13.39 | |||||
Forfeited
/ Cancelled
|
(13,925 | ) | $ | 10.46 | ||||
Vested
|
(14,257 | ) | $ | 12.25 | ||||
Non-vested
Restricted Stock at October 30, 2010
|
475,956 | $ | 12.47 |
October 30, 2010
|
||||||||
(unaudited)
|
January 30, 2010
|
|||||||
Property
and equipment, at cost:
|
||||||||
Buildings
and building improvements
|
$ | 96,528 | $ | 95,844 | ||||
Leasehold
improvements
|
60,500 | 55,078 | ||||||
Automobiles
and vehicles
|
5,196 | 5,273 | ||||||
Airplane
|
4,697 | 4,697 | ||||||
Furniture,
fixtures and equipment
|
240,948 | 240,883 | ||||||
|
407,869 | 401,775 | ||||||
Less:
Accumulated depreciation and amortization
|
(275,715 | ) | (271,185 | ) | ||||
132,154 | 130,590 | |||||||
Construction
in progress
|
138 | 446 | ||||||
Land
|
6,830 | 6,533 | ||||||
Total
Property and equipment, at depreciated cost
|
$ | 139,122 | $ | 137,569 |
Balance at
January 30,
2010
|
Additions
|
Utilization
|
Ending Balance
October 30,
2010
|
|||||||||||||
Lease
contract termination liability
|
$ | 1.1 | $ | 0.6 | $ | 0.9 | $ | 0.8 |
Thirty-nine Weeks Ended
|
Year Ended
|
|||||||||||
(in thousands)
|
October 30, 2010
|
October 31, 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
|
||||||||
October 30, 2010
|
October 31, 2009
|
|||||||
Pharmaceuticals
|
36.2 | % | 35.1 | % | ||||
Household
Goods
|
20.5 | % | 20.8 | % | ||||
Food
and Tobacco
|
17.2 | % | 16.5 | % | ||||
Paper
and Cleaning Supplies
|
9.4 | % | 9.8 | % | ||||
Health
and Beauty Aids
|
7.5 | % | 7.9 | % | ||||
Apparel
and Linens
|
7.0 | % | 7.4 | % | ||||
Franchise
|
2.2 | % | 2.5 | % | ||||
100.0 | % | 100.0 | % |
Thirty-Nine Weeks Ended
|
||||||||
October 30, 2010
|
October 31, 2009
|
|||||||
Pharmaceuticals
|
34.5 | % | 33.7 | % | ||||
Household
Goods
|
22.9 | % | 22.7 | % | ||||
Food
and Tobacco
|
16.8 | % | 16.4 | % | ||||
Paper
and Cleaning Supplies
|
8.9 | % | 9.5 | % | ||||
Apparel
and Linens
|
7.5 | % | 7.7 | % | ||||
Health
and Beauty Aids
|
7.3 | % | 7.7 | % | ||||
Franchise
|
2.1 | % | 2.3 | % | ||||
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 | |||||||||||
August
1, - August 28, 2010
|
1.0 | $ | 10.50 | 1.1 | 2,537.8 | |||||||||||
August
29, - October 2, 2010
|
- | $ | - | - | 2,537.8 | |||||||||||
October
3, - October 30, 2010
|
- | $ | - | - | 2,537.8 |
10.23
|
Tenth
Modification Agreement of the Revolving Loan and Credit Agreement dated
September 27, 2010 (modifies the Revolving Loan and Credit Agreement dated
April 3, 2000).
|
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 9, 2010
|
/s/ Bruce A. Efird
|
Bruce
A. Efird
|
|
Chief
Executive Officer and President
|
|
Date: December 9, 2010
|
/s/ Jerry A. Shore
|
Jerry
A. Shore
|
|
Executive
Vice President and
|
|
Chief
Financial
Officer
|