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The next Wal-Mart is Fred's

This post is part of my series featuring established companies and the smaller, more aggressive or innovative rivals that may eventually succeed them.

With over 4,000 stores in the United States ranging from warehouse-concept Sam's Club to discount retail stores to supercenters, Wal-Mart (NYSE: WMT) is by far the largest retailer in the U.S. -- and the world. So where does Wal-Mart go from here? International expansion has become the true growth engine for Wal-Mart as it dots the landscapes of other nations. The company has embarked on a series of initiatives these past 15 months to spruce up the stores, install better lighting and offer a more competitive brand of consumer goods. Recent same-store sales have validated these improvements.

Wal-Mart has been the beneficiary of a more cost-conscious consumer in this economic slowdown. Yet it can only squeeze so much growth out of its existing locations. And if it opens more stores, it risks cannibalizing the revenues of its existing stores.

Enter Fred's (NASDAQ: FRED). This quiet, regional concept has been around since 1947. Fred's is headquartered in Memphis, Tennessee, and has its base in 15 Southeastern states. Fred's has 659 discount stores and 280 pharmacies in its system -- with room to grow. Fred's has 24 franchisees, which is a quicker way to expand the concept while not draining the corporate coffers.

Fred's offers a full range of apparel, food, sporting goods and other general merchandise in its system. The company's philosophy is: quality merchandise at a discount price. The stores are well lit, organized and make for a pleasant shopping experience.

Recently, the company embarked on a "clean-up" strategy of closing unproductive stores and pharmacies. Currently, the company has shut down or is in the midst of shutting down 75 such facilities with the idea of replacing them with newer and better located stores. Recent same-store sales for May were up 3.4%, while total sales were up 8%, bearing out the strategy.

Fred's has the "room to grow" quite substantially over the next decade. With units only in 15 states, the discount concept can triple its store base and still not encounter any saturation issues. Not ready to knock Wal-Mart off of its perch just yet, Fred's is emerging as a retailer with a national vision.

Georges Yared is the editor of GameOnInvesting, a free service devoted to helping investors spot game-changing stocks before they breakout.

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Last updated: October 14, 2008: 08:06 AM

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