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Michael Hayes, CEO of Fred's

This is a partial transcript from Your World with Neil Cavuto, May 28, 2002, that was edited for clarity. Click here for complete access to all of Neil Cavuto's CEO interviews.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

BRENDA BUTTNER, GUEST HOST: You may never heard of discount retailer Fred's (FRED). But the company is getting a lot of attention thanks to a loyal following of deep discount fans. With only 379 stores, Fred's is tiny compared with the likes of Wal-Mart and Family Dollar. Discount stores have been the real champions this year though, outperforming other retail sectors on Wall Street.

And Fred's announcing record earnings in its latest quarter. Joining me now from Memphis, the company's CEO, Michael Hayes. Thanks so much, Mr. Hayes, for joining us.

MICHAEL HAYES, CEO, FRED'S: You're welcome.

BUTTNER: And congratulations on your quarter. What were the highlights, would you say?

HAYES: Clearly being up 51 percent and that income was our No. 1 highlight. Sales growing a little faster than we had anticipated with comp stores of 14 and a half percent for the whole quarter, on top of last year's 10 and a half percent comp got us quite excited.

BUTTNER: Well, discounters have really been the only ones who have been doing really well in this economy. People are all out there looking for a bargain, aren't they?

HAYES: Yes, that's absolutely true. Ever since Wal-Mart restructured the market, I think they have made it clear that if you are not value driven, you are going to have a tough time out there.

BUTTNER: Were you cutting prices all along? Was that part of the reason for the net income up?

HAYES: No, not necessarily cutting prices, but being value driven and staying on a competitive basis with, you know, the primary driver of the market, which is Wal-Mart. And always making sure that we are at or below our competition is really our strategy. It's not that unique, but it's difficult to continue to do it and maintain an operating performance the way we have.

BUTTNER: It is difficult to do. Wal-Mart just gets bigger and bigger, more and more stores. The brand name is a killer in the category. How do you go up against somebody like that that is so much bigger? It's the whole David and Goliath story?

HAYES: Actually, Wal-Mart is our friend. Wal-Mart is clearly our friend. You have to operate underneath the Wal-Mart pricing umbrella when you're in the value side of the business. But when you look at the way the market is really structured, the market is driven into two pieces. There's the $20 and up shop and the $20 and under shopper.

So when you're going out to spend $15, $17, $20 like that, you are not really thinking in terms of going to the Wal-Mart store. You are looking for a convenient, price driven, value driven operation. And that is the market we service. So, as Wal-Mart continues to expand the market, drive it with the big boxes, they're exposing, you know, more and more opportunities for us that are out there to service that shopping trip that is under $20.

So as long as you are willing to remember that if you are going to operate and service that customer, you have to operate underneath the umbrella that Wal-Mart puts out there, it is a tremendous niche and they're the one that creates it for you.

BUTTNER: Of course, the niche is a little bit smaller these days with Kmart declaring bankruptcy. A lot of stores and malls that you might be interested in? Are you interested in using some of your cash to buy some of those?

HAYES: Well, there is a lot more retail space available and it is a little bit easier to negotiate today than it was two and a half, three years ago. You're right. The space is available, and of course we look for the opportunity. Right now, we are focused on building our new distribution center in Dublin, Georgia, and the fact that we will be expanding into the northern Florida, South Carolina, Alabama, Georgia markets. So, that is where our focus and our cashflow are really intended to head.

BUTTNER: Now, you recently replaced your auditors. You replaced Pricewaterhouse. Was there any reason for that, in this environment, a lot of people firing their auditors?

HAYES: Oh, no, quite the contrary. Pricewaterhouse and we have had a wonderful relationship over the last 12 years. What happened with the Andersen issue, a lot of the auditing firms are really having pressure as they get all this additional business.

And what Pricewaterhouse had to do was they had to split their senior partner and move them to Birmingham and one to Dallas. And we were able to get the senior partner at Ernst & Young, who is a terrific guy, to be available to us. And when are you here in Memphis, you really want that guy next door. You don't want him getting on a plane and flying in when you're growing at our rate. You want that guy right next to you to talk to you.

BUTTNER: OK. Much continued success to you. Michael Hayes, CEO of Fred's.

HAYES: Thank you.

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