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The Fresh Market, Inc. (TFM - Snapshot Report) announced soft second-quarter fiscal 2013 results, wherein it managed to meet the earnings estimate but missed on revenues as the improving trends seen in the first quarter could not be sustained. Further, the company lowered its earnings guidance for the year due to higher store opening costs.

The Fresh Market’s second-quarter adjusted earnings of 32 cents were in line with the Zacks Consensus Estimate. Earnings improved 17.0% from the prior-year quarter as soft revenues and gross margins were offset by a lower tax rate and selling, administrative and general (SG&A) ratio.

Quarter in Detail

Total revenue of this specialty grocery retailer increased 13.3 % to $354.8 million due to comp growth. However, revenues declined sequentially and missed the Zacks Consensus Estimate of $356 million by 0.3%.

Comparable sales growth was 3.4%, modestly better than the 3.0% growth reported in the first quarter and 1.9% in the fourth quarter of fiscal 2012, due to an improvement in consumer traffic.

The Fresh Market’s gross profit expanded 13.6% to $121.3 million in the quarter. Gross margins improved only 10 basis points (bps) to 34.2% as headwinds from rising product costs (most notably seafood) were offset by leverage on occupancy and other fixed costs. Gross margins declined 90 bps sequentially.

SG&A expenses increased 11.5% to $82.5 million in the quarter. As a percentage of revenues, SG&A expenses declined 40 bps to 23.3% due to easy year-ago comparisons which included certain transactions and legal expenses that were not present in the second quarter of 2013. However, SG&A ratio increased 110 bps sequentially due to higher-than-normal employee healthcare claim costs and increased share-based compensation costs.

Operating margins increased 40 bps in the quarter to 7.3% as soft gross margins were somewhat offset by lower SG&A costs. However, operating margins also declined sequentially.

The Fresh Market opened five stores in the quarter bringing the store count to 136 stores in 26 states as on Jul 28, 2013.

2013 Earnings Guidance Lowered

The Fresh Market lowered its earnings outlook for 2013 from its previously provided expectations. Earnings are now expected to range between $1.50 and $1.55, lower than the prior expectation of $1.51 to $1.58, due to higher costs related to accelerated store openings in the second half. Also, the company has some store construction planned for fiscal 2014, which are expected to increase new store opening costs in fiscal 2013.

However, Fresh Market slightly increased its previously provided 2013 comparable store sales guidance from a range of 2.5%–4.5% to a range of 3.0%–4.5%. Comps are expected to accelerate slightly in the back half of the year as comparisons become easier.

Operating margins are expected to either remain flat or grow modestly (maintained) in fiscal 2013 as the company ramps up its store openings and invests in other growth plans.

Fresh Market plans to open 21 to 22 stores in 2013, up from prior guidance of 19 to 22 stores. Of these, 10 to 11 stores are expected to be opened in the third quarter and four in the fourth quarter. The company expects to remodel three stores in the year but re-locate none. Capital expenditure is expected to range between $120 million–$140 million (previously $130 million–$150 million).

Other Stocks to Consider

TFM carries a Zacks Rank #4 (Sell). Other companies in the retail/supermarket segment that are currently doing well are Etablissements Delhaize Fr (DEG - Snapshot Report), Koninklijke Ahold N.V. (AHONY) and The Kroger Co. (KR - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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