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Fresh Market Misses Overall

Zacks Equity Research

The Fresh Market, Inc.’s (TFM) fourth-quarter adjusted earnings of 43 cents missed the Zacks Consensus Estimate of 45 cents by 4.5% due to slower comparable sales growth and high operating expenses. Earnings, however, improved 12.7% from the prior-year quarter.

Quarter in Detail

Total revenue of this specialty grocery retailer increased 15.3% to $369.9 million. Comparable sales growth was 1.9%, much lower than 5.6% in the third quarter, 8% in the second quarter and 8.2% in the first quarter.

A slowdown in consumer traffic and tough year-ago comparisons hurt comps in the quarter.  Fresh Market believes that a tremendous change in consumer behavior in the winter holiday season significantly hurt sales in the quarter. Revenue missed the Zacks Consensus Estimate of $382 million.

Fresh Market’s gross profit expanded 16.5% to $125.9 million in the quarter, while gross margins improved 30 basis points to 34.0% due to expansion of merchandise margins, leverage of occupancy costs and decrease in LIFO expenses.

Selling, general, and administrative expenses (SG&A) increased 19.4% to $82.4 million. As a percentage of revenue, SG&A expenses increased 80 basis points to 22.3% due to a decline in comp sales and increased compensation costs.

Operating margins decreased 80 basis points in the quarter to 8.3% as a tailwind from solid gross margins was offset by higher SG&A and depreciation expenses.

Fresh Market opened 2 new stores in the quarter (one each in Ala. and Fla.), lower than 6 in the prior-year quarter. For the full year, Fresh Market opened a total of 16 new stores. As on Jan 27, 2013, the company operated 129 stores in 25 states.

Annual Results

In fiscal 2012, Fresh Market witnessed a 20.0% increase in revenues to $1.329 billion, missing the Zacks Consensus Estimate of $1.339 billion. Comparable store sales increased 5.7% in the year, near the bottom end of the guidance range of 5.5%–6.5%.

Adjusted earnings were $1.33 per share, which missed Zacks Consensus Estimate of $1.36 by 2.2%. Adjusted earnings increased 24.4% from the prior year. Earnings were also at the bottom end of the guidance range of $1.33–$1.38.

Weak Outlook for 2013

Fresh Market expects comparable store sales to grow in the range of 2%–4% for 2013, much lower than 2012 levels as the company remains apprehensive about consumer trends and overall macroeconomic uncertainty. Moreover, fiscal 2013 will have fewer average weeks of revenue per new store (despite significant store openings expected in the year) as the new store openings will be concentrated toward the second half of the year.

Operating margins are expected to improve by just 10 bps to 7.7% in fiscal 2013 as the company ramps up its store openings and invests in other growth plans. Cost inflation is expected to moderate in fiscal 2013.

Earnings are expected to range between $1.51 and $1.58, representing an increase of 14% to 19% over fiscal 2012 earnings per share of $1.33. Second-half earnings growth is expected to be higher than the first half.

Fresh Market plans to open 19 to 22 new stores in 2012 with a majority of the store openings to occur in the latter half of the year. The company expects to remodel approximately 3–5 stores in the year and re-locate none. Capital expenditure is expected to range between $130 million–$150 million.

Other Stocks to Consider

TFM carries a Zacks Rank #4 (Sell), following a dismal fourth-quarter performance and a weak outlook for 2013. Another company in the retail/supermarket segment that is currently doing well is Safeway Inc. (SWY) - Zacks Rank #2 (Buy). Some other retail/restaurant stocks worth considering include Red Robin Gourmet Burgers Inc. (RRGB) – Zacks Rank #1 (Strong Buy) and Dunkin' Brands Group, Inc. (DNKN) - Zacks Rank #2 (Buy).

Read the Full Research Report on SWY

Read the Full Research Report on RRGB

Read the Full Research Report on DNKN

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