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The Fresh Market, Inc.’s (TFM - Snapshot Report) poor run in the second and third quarters of 2013 continued well into the fourth. This specialty grocery retailer missed both its earnings and revenue estimates for the fourth quarter owing to adverse weather conditions and higher costs.

Moreover, the company provided a dampened outlook for the upcoming quarter. Also, management announced a restructuring plan for 2014 to improve its profits.

The Fresh Market’s fourth-quarter earnings of 39 cents declined 9% year over year and missed the Zacks Consensus Estimate of 42 cents by 7.1%. Weaker sales and margins led to the earnings shortfall. Especially, weak profitability at stores in California and Texas hurt earnings in the quarter.

Adjusted earnings excluded impairment charges of certain real estate and store-related assets.

Quarter in Detail

Total revenue increased 15.1% to $425.8 million. However, revenues missed the Zacks Consensus Estimate of $430 million by 1.0% due to an unfavorable retail sales environment. Difficult sales environment, the result of reduced consumer spending, has been affecting The Fresh Market’s top line for the past 2–3 quarters. In the reported quarter, frequent storms and severe winter forced the closure of many stores, hurting sales.

Comparable sales increased 3.1%, same as in the third quarter owing to an unfavorable retail sales environment and severe weather (hurt comps by 1 percentage point).

Gross margin declined 50 basis points (bps) to 33.5% due to a decline in merchandise margin rate due to heavy promotional activity in some new markets. Rising occupancy costs also hurt margins. Gross margin was flat sequentially.

As a percentage of revenues, selling, general and administrative (SG&A) expenses increased 50 bps to 22.8% due to higher pre-opening costs and difficult year-ago comparisons (fourth-quarter 2012 included some benefits from insurance reimbursements). Operating margin declined 110 bps to 7.2% in the quarter due to weak gross margins and higher SG&A ratio.

The Fresh Market opened five stores in the quarter bringing the store count to 151 in 26 states as of Jan 26, 2014.

Annual Results

In fiscal 2013, Fresh Market witnessed 13.7% increase in revenues to $1.51 billion, missing the Zacks Consensus Estimate of $1.56 billion. Comparable store sales increased 3.2% in the year, within the guidance range of 3.0–3.5%.

Adjusted earnings of $1.40 per share missed the Zacks Consensus Estimate of $1.43 by 2.1%. Adjusted earnings increased 5.2% from the prior year. Earnings also missed the guidance range of $1.42–$1.47.

Restructuring Plan

The plan includes closing four underperforming stores in California and Texas; slowing down expansion in new markets and instead focusing on existing core markets; and better management of cost and improving efficiencies.

2014 Outlook

The Fresh Market expects 2014 earnings in the $1.56 to $1.66 range, excluding store closure costs. Charges related to closure of the four stores will be recorded in the first and second quarters of 2014. On an adjusted basis, earnings per share are expected to grow 11% to 19% in the fiscal year.

In 2014, the company plans to open 23 to 25 stores. Comps are expected to increase in the band of 1.5–3.5% for 2014, representing a decline from 2013 levels.

First Quarter to be Tough

In the first quarter of 2014, management expects earnings in the range of 41 to 44 cents per share, excluding store closure costs.

Management warned that store closures due to difficult weather conditions would hurt earnings by a penny in the quarter. Moreover, the underperforming stores in California and Texas are expected to hurt earnings per share by 3 cents.

Comps are expected in the lower end of the full-year target of 1.5–3.5% due to difficult weather conditions and sluggish consumer spending environment.

Other Stocks to Consider

The Fresh Markets carries a Zacks Rank #4 (Sell). Better-ranked companies in the retail/supermarket segment are Koninklijke Ahold N.V. (AHONY), Etablissements Delhaize Fr (DEG - Snapshot Report) and Spartan Stores Inc. (SPTN - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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