October 7, 2008 / 4:31 PM / 10 years ago

UPDATE 2-Fred's cuts Q3 profit outlook on US economic woes

(Recasts; adds background, analyst comments, stock activity)

By Nivedita Bhattacharjee

BANGALORE, Oct 7 (Reuters) - Discount store operator Fred’s Inc (FRED.O) trimmed its third-quarter profit outlook as U.S. economic woes continue to force cash-strapped shoppers to cut back on spending, sending its shares down as much as 10 percent.

Analyst David Magee of Suntrust Robinson Humphrey said the discount chain’s woes were common to all retailers and expects the company’s performance to bounce back once the market stabilizes.

Last month, Fred’s larger rival Target Corp (TGT.N) had raised concerns about its ability to meet analysts’ estimates for the third quarter, saying the current economic environment was the harshest it had seen in many years.

U.S. retailers have been hurt by sluggish sales as consumers curtail their spending on discretionary items in the face of rising food and fuel costs, falling home values and tighter lending conditions.

Suntrust’s Magee said he sees softer sales trends spilling over to October as well as the fourth quarter, as more U.S. consumers prefer to stay home than shop for non-essentials. He has a “neutral” rating on the stock.

The company, which sells household cleaning supplies, health and beauty aids, paper products and beverages among other items, cut its profit outlook range by 2 cents to 14 cents to 16 cents a share.

Analysts were expecting Fred’s to earn 17 cents a share, before items, according to Reuters Estimates.

The company is being cautious after seeing a slowdown in its business in the last two weeks of September, analyst John Lawrence of Morgan Keegan told Reuters.

The analyst said traffic at Fred’s stores had fallen almost 2 percent in the period. He has an “outperform” rating on the stock.

Fred’s, which reported a 1.1 percent rise in comparable-store sales in September, said it expects to see increased transaction growth near term in lower-margin departments as consumers search harder for better bargains.

The company, which operates 658 discount merchandise stores, had closed 7 underperforming stores in September.

Shares of the company fell to a low of $11.20, before recouping some losses to trade down $1.00 at $11.39 Tuesday midday on Nasdaq. (Editing by Amitha Rajan)

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