Bear of the Day: Fred's (FRED)

There are a few companies I would never want to try to compete with. Pretty much everybody’s worst nightmare in retail is Amazon. You can count the dead among several one-time giants which have been reduced to piles of rubble. One of the worst places to be is a retail shop where there’s no differentiation of products or service. The ones who just try and beat Amazon on price and convenience. That could be the case with Fred’s (FRED).

Fred's, Inc., together with its subsidiaries, sells general merchandise through its retail discount stores and full-service pharmacies. The company, through its stores, offers household cleaning supplies, health products, beauty and personal care products, disposable diapers, pet foods, paper products, various food and beverage products, and pharmaceuticals to low, middle, and fixed income families in small- to medium- sized towns. It also sells general merchandise to franchised Fred's stores. As of January 28, 2017, the company operated 628 retail stores, including 55 express stores and 3 specialty pharmacy-only locations; 362 pharmacies; 3 specialty pharmacy facilities; and 16 franchised stores in 15 states of the southeastern United States.

Last quarter the company delivered a stinker. After closing 39 underperforming outlets earlier this year, gross profit declined 14.9% year-over-year to $94.6 million. Gross margins contracted 230 basis points. This prompted analysts to drop their earnings estimates across the board. Now, the Zacks Consensus Estimate for the current year is down to a 55-cent loss while next year the company is forecast to lose 24 cents. These bearish downside estimate revisions have helped put this down at a Zacks Rank #5 (Strong Sell),

Beware of the value trap being set up here my friends. Seeing a stock come down from over $21 in December of last year to under $4 today can tempt a few investors out there. The stock has disappointed those coming in on the cheap as well. Look at the broad based the start started putting in during July and August around $6. That level broke and new lows followed. While a floor under $4 seems to be forming I’d be carefully about playing the oversold move here.

Investors looking for other ideas in the same industry should take a look at Zacks Rank #2 (Buy) stocks Burlington Stores (BURL) and Dollar Tree (DLTR).

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