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The Fresh Market Up on Q2 Earnings & Revenue Beat; Keeps View

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Shares of The Fresh Market, Inc. rose 7.2% in after-hours trading on Aug 21, the day the company announced better-than-expected second-quarter fiscal 2014 results.

This specialty grocery retailer beat the Zacks Consensus Estimate for both earnings and revenues on strong comparable store sales (comps).

The Fresh Market’s second-quarter adjusted earnings of 36 cents surged 12.5% year over year on the back of solid sales which made up for softer margins despite a competitive retail environment. Lower tax rates also benefited the quarter. Adjusted earnings excluded store closure and exit costs related to previously announced store closings in California and Texas. Earnings also beat the Zacks Consensus Estimate by a penny.


Quarter in Detail

Total revenue of $422.2 million beat the Zacks Consensus Estimate of $416 million by 1.5% and increased 19% year over year driven by strong unit growth as well as improved comps during the quarter. Comps increased 2.9% owing to a 2.7% increase in number of transactions and a 0.2% increase in average transaction size. Traffic improved in the quarter, which resulted from solid execution of promotion and merchandising programs.

The improvement in sales also comes from the company’s effort to deliver fresh produced meat, upscale as well as stable groceries, prepared foods and numerous natural and organic options throughout the store. The company also focuses on higher margin items such as prepared foods.

Gross profit went up 18.5% to $143.7 million backed by higher sales. However, gross margin decreased 20 basis points (bps) to 34% due to input cost inflation, partially offset by a modest increase in merchandise margin. Rising occupancy costs also hurt margins. Gross margin decreased 40 bps sequentially.

As a percentage of revenues, selling, general and administrative (SG&A) expenses increased 20 bps to 23.5% due to higher store labor and benefit costs. Adjusted operating margin declined 50 bps to 6.8% in the quarter due to weak gross margins and higher SG&A ratio.

The Fresh Market opened four new stores, including two stores in Florida and one each in Texas and New York, bringing the total store count to 158 in 26 states as of Jul 27, 2014. The new stores opened also exceeded company’s expectations.

Fiscal 2014 Outlook Maintained

The Fresh Market reaffirmed its fiscal 2014 earnings per share outlook and expects it in the $1.56 to $1.66 range, excluding store closure costs of 21 cents. The company continues to expect comps growth in the range of 1.5% to 3.5%.

In 2014, the company plans to open 22 stores and remodel 4 to 5 stores.

Third Quarter Fiscal 2014 Guidance

The company forecasts comps to be at the low to mid-point of fiscal 2014 comps growth of 1.5% to 3.5% in the third quarter, as the company expects increasing competitive pressure related to store openings compared with the prior year. The company plans to open 6 new stores in the third quarter.

The Fresh Market carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better-ranked companies in the retail sector include Citi Trends Inc. , Mens Wearhouse Inc. and Buckle, Inc. (BKE - Free Report) . While Citi Trends and Mens Wearhouse sport a Zacks Rank #1 (Strong Buy), Buckle Inc carries a Zacks Rank #2 (Buy).

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