Discount chain

Fred's

(FRED)

posted a slight drop in first-quarter profit Thursday as a result of lower same-store sales, rising gas prices and merchandise delivery delays. The results matched analysts' consensus estimate.

Earnings fell to $7.4 million, or 19 cents a share, in the period ended May 1, from $7.9 million, or 20 cents a share, a year earlier. (Earnings in 2003 have been adjusted for a 3-for-2 stock split; prior to the stock split, the company had earnings of $7.9 million, or 30 cents a share, in the 2003 first quarter.)

Sales rose 10% to $341.5 million with same-store sales up 2.7%. Same-store sales in the year-earlier quarter rose 6.8%.

"As the earnings comparison for the period suggests, the first quarter was challenging for us due to lower-than-expected comparable store sales growth, which adversely affected our store expense leverage, and as we faced the impact of rising fuel, utilities, and other costs," the company said in a statement.

Fred's also cited internal issues for the profit decline such as delays in merchandise deliveries from vendors, out-of-stock merchandise conditions on promotional items, and a late reinstatement of its Saturday double coupon program.

Gross margin in the quarter was flat at 28.3% as a percent of sales. General expenses, however, increased 25% due to an increase in store labor and utilities costs.

However, the company said pharmacy sales and margins helped offset other weakness in the quarter, while in-stock positions have recovered for its May and June circulars and vendor backlogs have been cleared.

As a result, Fred's sees full-year earnings of 97 cents to $1 a share, compared with the consensus estimate for 97 cents a share. Fred's earned 85 cents a share in 2003.

Shares of the Memphis, Tenn.-based company were up 13 cents, or 0.7%, at $18.84 in Thursday morning trading.