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The Fresh Market, Inc.’s (TFM - Snapshot Report) poor run in the second quarter of 2013 continued well into the third quarter as well. This specialty grocery retailer missed both its earnings and revenue estimates owing to difficult retail sales environment, largely the result of reduced consumer spending. Further, the company lowered its earnings guidance for the fiscal year.

The Fresh Market’s third-quarter earnings of 23 cents were flat year over year. Higher tax rates and lower operating margin were offset by improved comparable store sales (comps). Earnings missed the Zacks Consensus Estimate of 26 cents by 11.5% due to lower-than-expected sales.

Quarter in Detail

Total revenue increased 13.4% to $364.5 million due to growth in comps. However, revenues missed the Zacks Consensus Estimate of $375 million by 2.8%. The company stated that restricted consumer spending significantly impacted sales across its store base in the latter half of the quarter. In addition, response from the new markets was mixed. Very well written

Comparable sales increased 3.1%, owing to increased customer traffic. However, comps growth was lower than a 3.4% increase recorded in the second quarter owing to an unfavorable retail sales environment.

The Fresh Market’s gross profit expanded 14.8% to $122.1 million in the quarter. Gross margin improved 40 basis points (bps) to 33.5% as headwinds from rising occupancy costs were offset by improvement in merchandise margin rate. Gross margin declined 70 bps sequentially.

SG&A expenses increased 16.1% to $88.9 million in the quarter due to increase in new store openings and higher labor costs. As a percentage of revenues, SG&A expenses increased 60 bps to 24.4%. SG&A ratio also increased 110 bps sequentially.

Despite the gross margin improvement, operating margin declined 40 bps to 5.2% in the quarter due to higher SG&A and depreciation costs. Operating margin declined 210 bps sequentially.

The Fresh Market opened 10 stores in the quarter bringing the store count to 146 stores in 26 states as of Oct 27, 2013.

Fiscal 2013 Guidance

The Fresh Market lowered its earnings outlook for fiscal 2013 from its previously provided range. Earnings are now expected in the $1.42 and $1.47 range, lower than the prior expectation of $1.50 and $1.55 as the company expects muted consumer spending trend to continue. The company also lowered the higher end of the comp sales growth range.  Comps are expected to increase in the band of 3.0%-3.5% for 2013, compared with the prior range of 3.0%–4.5%. The company expects operating margin to be flat year over year due to increased expenses associated with the accelerated store opening plans.

Fresh Market plans to open 22 stores in 2013 higher than its prior guidance of 21 to 22 stores. Capital expenditure is expected to range between $115 million–$125 million (previously $120 million–$140 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 Harris Teeter Supermarkets Inc. , Best Buy Inc. (BBY - Analyst Report) and The Kroger Co. (KR - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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