Wedbush Downgrades Fred’s (FRED) to Underperform; Increasingly Tough Competition

November 6, 2009 9:34 AM EST

Wedbush downgrades Fred’s (Nasdaq: FRED) from Neutral to Underperform. Price target lowered from $14 to $11.

Wedbush analyst says, "Downgrading to Underperform given our expectations for increasingly tough competition in front end and pharmacy categories for holiday and into Q1, which has tough comparisons. We had been somewhat concerned about slower topline the last couple of months given a more competitive environment, and October’s sales results confirmed that the company is not immune to pressures from mass merchants as well as larger drug store chains. Although the pharmacy had been doing well due to heightened flu activity, the vaccine ran out in October and is not rescheduled to be back in stock until mid-November. In addition, despite the company preparing for increased promotions and advertising for the front end, we are concerned about their ability to execute these strategies during holiday season and into Q1 given recent performance and tough comparisons. As such, we believe it is appropriate to incorporate increased risk to our rating and price target. However, longer-term, we remain positive that Fred’s is moving in the right direction towards improving margins...Reducing our forecast for Q3 EPS to $0.13 (from $0.20). We also reduce our forecast for full-year EPS of $0.73 (from $0.80) and for 2010 EPS to $0.82 (from $0.92)."

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