Fresh Market Beats; Ups Guidance

The Fresh Market, Inc.’s (TFM - Snapshot Report) second quarter adjusted earnings of 28 cents inched past the Zacks Consensus Estimate of 27 cents by a penny. Earnings improved 26.4% from the prior-year quarter. Solid top line and comparable sales growth combined with better margins drove the earnings in the quarter.

The second quarter earnings included impact of 2 cents related to transaction expenses forequity offering (1 cent) and legal settlement costs (1 cent).

Quarter in Detail

Total revenue of this specialty grocery retailer increased 20.6% to $313.0 million, driven by comparable sales growth of 8% and strong new-store productivity level. Comparable store sales benefitted from higher customer trafficand increase in transaction size.

Gross profit expanded 25.6% to $106.7 million in the quarter, while gross margins improved 140 basis points to 34.1% due to expansion of merchandise margins.

Selling, general, and administrative expenses (SG&A), including expenses related to the equity offering and legal settlement, increased 25.8% to $74 million. As a percentage of revenue, SG&A expenses increased 100 basis points to 23.7% due to higher corporate expenses.

Operating margins increased 40 basis points in the quarter to 6.9%, driven by solid gross margins.

Fresh Markets opened five new stores in the quarter. As on July 29, 2012, the company operated 121 stores in 24 states.

Outlook for 2012

Following the strong first half results and an optimistic outlook for the next half, Fresh Market raised its financial guidance for 2012.

Fresh Market expects to generate comparable store sales growth in the range of 5.5% to 6.5% for 2012, up from prior guidance range of 4.5% to 6.5%. Comparable store sales growth is expected to continue to be driven by increasing transactions and transaction size.

Operating margins are expected to increase 30 to 50 basis points over 2011 margin of 7.5%, up from prior expectation of an increase in the range of 20 to 40 basis points. The operating margin guidance includes the impact of equity offering and legal settlement costs incurred in the second quarter.

Earnings are expected to range between $1.33 and $1.38, up from prior guidance range of $1.28 to $1.34. The earnings guidance represents an increase of 25% to 30% over fiscal 2011 earnings per share of $1.07. Fresh Market plans to open 14-16 stores and relocate one store in 2012.

Capital expenditure guidance range of approximately$95 million to $105 million remained unchanged, which mainly deals with real estate investments.

Our Recommendation

We currently have a Neutral recommendation on Fresh Market. The stock carries a Zacks #2 Rank (a short-term ‘Buy’ rating). The back-to-back strong quarterly results and the improved guidance justifythe short-term Buy rating on the stock.