Fred’s is a general merchandiser that operates 683 stores and 283 pharmacies in 15 states throughout the Southeast. Pharmacy is about one-third of its $1.8 billion in revenues. Why should you care about Fred’s?
Because Fred’s included the following statement in its 2007 earnings guidance: “The impact from the federally approved Average Manufacturer's Price (AMP) program is expected to become effective on June 1, reducing Fred's 2007 gross profit by approximately $4.0 million.”
As far as I know, this is the first hard dollar estimate of AMP's profit impact. (Cool!) I did a few quick calculations based on their overall earnings estimates and FY2006 results. I won’t bore you with the math, but the company is forecasting that the first 8 months of AMP will:
- Reduce pharmacy gross profit dollars by 3.6 percent
- Reduce pharmacy gross margin by one percentage point, i.e., 100 basis points
Ouch! While Fred’s faces some unique challenges (Katrina, TennCare cuts, etc.), we have a credible estimate of AMP’s potential profit impact on a publicly traded retail pharmacy. Neither CVS nor Walgreens have provided a similar level of precision to date.
Now you know why the AMP Battle Rages On. But unlike Mountain Dew's AMP, I somehow doubt that pharmacies will feel a boost of energy on June 1 from CMS' AMP.