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On Dec 7, Zacks Investment Research downgraded The Fresh Market, Inc. (TFM - Snapshot Report) to a Zacks Rank #5 (Strong Sell) as estimates dropped sharply after the specialty grocery retailer announced dismal third-quarter results on Nov 21. Moreover, the company lowered its earnings guidance for the fiscal year.

Why the Downgrade?

The Fresh Market’s poor run in the second quarter of 2013 continued well into the third quarter. The company missed the Zacks Consensus Estimate for both earnings and revenues owing to difficult retail sales environment, largely the result of reduced consumer spending.

The Fresh Market’s third-quarter earnings of 23 cents were flat year over year but missed the Zacks Consensus Estimate of 26 cents by 11.5% due to lower-than-expected sales.

Total revenue increased 13.4% year over year to $364.5 million but 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. Mixed response from the new markets added to the woes.

Comparable sales increased 3.1% in the third quarter, falling short of 3.4% in the second quarter owing to an unfavorable retail sales environment.

Though gross margin improved 40 basis points (bps) year over year, it declined 70 bps sequentially. Operating margin declined 40 bps to 5.2% in the quarter due to higher selling general and administrative, and depreciation costs. Operating margin also declined 210 bps sequentially.

Moreover, The Fresh Market lowered its earnings outlook for fiscal 2013. Earnings are now expected in the $1.42 to $1.47 range, lower than $1.50–$1.55 as the company expects the 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 3.0%–4.5% range. The company expects operating margin to be flat year over year due to increased expenses associated with the accelerated store opening plans.

Estimates declined sharply in response to the poor third-quarter results and the dampened outlook for the next quarter. The Zacks Consensus Estimate declined almost 6% for fiscal 2014 and 5.4% for fiscal 2015. In fact, The Fresh Market has missed the Zacks Consensus Estimate for earnings in two out of the past four quarters, delivering an average negative earnings surprise of 3.81%.

Other Stocks to Consider

Other better-ranked companies in the retail/supermarket segment include Marks & Spencer Group plc (MAKSY), J. Sainsbury plc (JSAIY) and Harris Teeter Supermarkets Inc. . While Marks & Spencer and J. Sainsbury carry a Zacks Rank #1 (Strong Buy), Harris Teeter carries a Zacks Rank #2 (Buy).

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