Fred's to buy Rose's - Fred's Super Dollar Store, Rose's Stores - Cover Story

Discount Store News, March 18, 1996 by Dawn Wilensky

MEMPHIS, TENN. -- Can the union of two struggling low-price retailers result in a solidly positioned alliance able to prosper in today's competitive retail environment?

This question looms large as the news that Memphis, Tenn.-based Fred's Super Dollar Store has agreed in principle to acquire Rose's Stores, the ailing Henderson, N.C.-based discounter. Fred's will pay $18.5 million in stock and assume approximately $60 million in debt from Rose's, which emerged from Chapter 11 last May and turned over 100% of its equity to its shareholders.

As part of the deal, Rose's shareholders would receive approximately three-tenths of a share of Fred's Class A common stock for each share of Rose's stock. The exchange would be subject to adjustment for certain changes in the price of Fred's common stock during a specified period preceding the mailing of definitive proxy material to shareholders.

If everything proceeds as planned, the merger should be complete by mid-June, according to Fred's chief financial officer Bruce Smith. No determination has been made as to personnel changes, store closings or layoffs, said Ed Anderson, chairman, ceo and president of Rose's. Anderson has agreed to stay on at least until the merger goes through. After that, his role is "yet to be determined," but at the very least he will serve as a consultant.

Smith was also unclear about the details going forward, but said that "the merger is beneficial for both parties since it gives us combined sales of $1.1 billion. In addition, it gives us the opportunity to build our purchasing power without opening new stores and further saturating an already saturated market." It also positions the chain to better compete with Family Dollar and Dollar General, which recorded 1995 sales of $1.5 billion and $1.4 billion, respectively.

Securing strong financial footing is key for both chains. Each has had its ups and downs over the past few years, especially Rose's, which for the fiscal year ended Jan. 27, 1996, reported a 7.4% decline in sales (to $700.3 million from $756.3 million) and a 1.5% drop in same store sales.

The news was better for Fred's, which reported a 5.5% increase in sales (to $410.2 million from $388.9 million) in the 53-week period ended Feb. 4, 1996. On a comp store basis, January sales declined 0.9% while, for the full year, sales increased 1.3%.

"I'm going to take a wait and see attitude before deciding if Fred's is biting off more than it can chew," said an apparel manufacturer. "Over the past several months, Fred's credit has gone up and down. But last week we weren't even shipping Rose's, so this deal opens the potential for shipping to Rose's since we have confidence in Fred's credit."

While details of the merger are still sketchy, Smith indicated that Fred's plans to operate both chains independently, paying special attention to synergies like product selection, geographical congruences and the similar profile of both chain's core customer: a woman with a household income a $25,000 or less who lives in a rural community.

"It's a good deal--one, because geographically it makes sense, and two, because the product selection is very similar," said an H&BC manufacturer who sells to both chains. "Rose's made several very serious mistakes, the largest of which was taking Wal-Mart head on and losing. The other was that Rose's didn't really know who they were. In retailing, the people who can define who they are are successful. Often, chains try to be all things to all people and this will ultimately lead to disaster."

According to another vendor, "Rose's had many inherent weaknesses, but the most glaring were poorly maintained stores in undesirable locations. These factors alone can slowly chip away at a chain's viability and profitability."

Addressing these problems should be the first order of business for Fred's, which last year made a renewed commitment to the dollar segment, first by adding "Super Dollar Store" to its name, and then by instituting an everyday low price policy. Sixty percent to 70% of its merchandise is priced in even dollar amounts, as is the case at Dollar General. Fred's also last year hired Michael Spear, Wal-Mart veteran of 21 years as its executive vice president of merchandising.

"Over the years, Fred's wandered away from [the value chain] niche and tried to be a mini-Wal-Mart," said Craig Weichmann, an analyst with Morgan Keegan. "Now Fred's offers more than a typical dollar store, like pharmacies and more selection. But even-dollar pricing makes it easier to shop and it has a psychological effect."

Part of Rose's attractiveness to Fred's is probably the former's larger store environments. Rose's stores are about three times as large as a typical 14,000-sq.-ft. Fred's and can provide a depth of selection heretofore not available in a Fred's. In addition, only three of their markets overlap (and those are contiguous). These factors combined will likely give both chains a stronger arsenal with which to battle the Big Three, regional chains and, more importantly, other dollar chains like Family Dollar and Dollar General.