2017 Is a Year Discount Retailer Fred's Would Like to Forget

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Well, this year didn't go as planned for discount retailer Fred's (NASDAQ: FRED). The general merchandise and pharmacy chain entered 2017 riding high as it was poised to become the third largest pharmacy retailer in the U.S., but it will exit the year badly battered, reporting lower sales, net losses, and being forced to cancel its dividend.

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All in all, 2017 was a year to forget for Fred's.

An elixir for what ails you

When Walgreens Boots Alliance (NASDAQ: WBA) announced in 2015 it wanted to buy rival Rite Aid (NYSE: RAD) for $9.4 billion, it was speculated that Fred's would be cut in on the deal to help offset antitrust concerns regulators might have harbored, and during its third-quarter earnings conference call with analysts, the retailer fueled the rumors further by refusing to take any questions "due to a pending transaction."

That December, the speculation proved true as it was announced the discount store operator would acquire 865 Rite Aid stores for $950 million cash, and in the process, would position Fred's as the third largest pharmacy chain behind Walgreens and CVS Health (NYSE: CVS).

The announcement caused Fred's stock to skyrocket 80% on the news, a development Fred's CEO called "a transformative event" for the company since the new stores would more than double the company's store count.

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Fred who?

But things began to go off the rails pretty quickly. The FTC rejected Walgreens' bid for Rite-Aid in January precisely because of antitrust concerns, and the two pharmacies cut the price of their merger and set a July 31 deadline to complete the transaction. If they couldn't work out an agreement, Fred's part of the arrangement would evaporate.

And as it increasingly became apparent that regulators would not sign off on the deal, Walgreens decided to buy just a piece of Rite-Aid, namely some 2,186 stores, and Fred's was cut out of the deal.

Under the deal the FTC ultimately agreed to, Walgreens Boots Alliance acquired 1,932 Rite-Aid stores for $4.4 billion, which will give it around 10,000 stores, pushing the pharmacy chain ahead of CVS with 9,700 stores as the biggest in the country. Rite-Aid will keep about 2,600 stores and remain the third largest pharmacy chain while Fred's continues to limp far behind.

What else can go wrong?

After such a bruising year, what else could go wrong for the discount retailer? Turns out, a lot. Earlier this month, Fred's released its third-quarter earnings report showing net sales fell 4% from 2016 while losses widened to $51 million from $38 million last year as comparable-store sales fell yet again. (Though, at a decline of 0.8%, it was better than the 3.8% drop-off in the year-ago period.)

Worse still, in a bid to conserve cash, Fred's also canceled its dividend and said it was considering "strategic alternatives" for non-core assets, including real estate and its specialty pharmacy business. With all of the money it will be saving, it believes buying back its stock, which has lost 80% of its value in 2017, will be a great use of its cash. In September, the company extended a shareholder rights plan, often called a poison pill defense to prevent a takeover of the company, while it also lowered the trigger to 4.9% from 10% ownership, meaning it feared someone would try to move in while it was down.

It's been almost exactly one year since Fred's was riding high on thoughts that it would be a major pharmacy player. Now with those plans in shambles, its primary business reeling, and having canceled its dividend, investors might actually hope someone would try to acquire the company to give them some relief.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.