The Fresh Market's fiscal Q3 earnings rise 1.8% versus a year ago to US$11.1M as net sales climb 13.4% to US$364.5M, comparable-store sales increase 3.1%; CEO says gross margin continued to expand despite challenging economic conditions

GREENSBORO, South Carolina , November 21, 2013 (press release) – Diluted earnings per share were $0.23

• Net sales increased 13.4% to $364.5 million

• Comparable store sales increased 3.1%

The Fresh Market, Inc. (NASDAQ: TFM), a high-growth specialty retailer, today announced unaudited sales and earnings results for its thirteen week third quarter ended October 27, 2013.

Financial Overview

In the third quarter of fiscal 2013, net sales increased 13.4% to $364.5 million and comparable store sales increased 3.1%, compared to the fiscal quarter ended October 28, 2012. Net income in the third quarter of fiscal 2013 was $11.1 million, compared to $10.9 million in the corresponding period in fiscal 2012. Diluted earnings per share in the third quarter of fiscal 2013 were $0.23, compared to diluted earnings per share of $0.23 for the corresponding prior year period.

Craig Carlock, President and Chief Executive Officer commented, “We continued to invest in our growth strategy this quarter as we opened ten new stores in seven states, from Florida to California. Entering the final quarter of the year, I believe we are well-positioned to deliver store unit growth in excess of 17% and open a record 22 new stores this fiscal year.” Carlock added, “Our base business continues to perform well, although we experienced increasingly challenging economic conditions as the quarter progressed. Even under these conditions, comparable store sales growth exceeded three percent this quarter and gross margin continued to expand.”

Third Quarter Operating Performance

Third quarter total net sales increased 13.4% to $364.5 million and comparable store sales increased 3.1% to $308.7 million compared to the corresponding prior year period. The third quarter comparable store sales increase resulted from a 2.8% increase in transaction volume and a 0.3% increase in average transaction size. During the latter part of the quarter, the Company experienced an unanticipated sales slowdown across its store base, which it attributes to changing economic conditions and softening consumer confidence. Sales from stores in new markets were mixed.

The Company's gross profit increased 14.8%, or $15.7 million, to $122.1 million in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012. For the same period, the gross margin rate increased 40 basis points to 33.5% compared to the corresponding prior year period. This increase in the Company's gross margin rate was primarily attributable to improvement in the merchandise margin rate as a result of reduced shrink expense, partially offset by a rise in occupancy costs as a percentage of sales.

Selling, general, and administrative expenses for the third quarter of fiscal 2013 increased $12.3 million to $88.9 million compared to the third quarter of fiscal 2012. Selling, general, and administrative expenses as a percentage of sales increased by 60 basis points to 24.4% for the period, compared to 23.8% for the corresponding thirteen week period in fiscal 2012. This increase in expenses as a percentage of sales was primarily attributable to higher store level compensation expense, including employee healthcare claims costs and pre-opening costs associated with ten new store openings during the quarter compared to six last year.

Operating income increased $1.0 million to $18.9 million for the third quarter of fiscal 2013, compared to $17.9 million for the third quarter of fiscal 2012. Operating income as a percentage of sales for the third quarter of fiscal 2013 decreased 40 basis points to 5.2%, compared to 5.6% for the corresponding period of fiscal 2012. This decrease was primarily attributable to the 60 basis point increase in selling, general, and administrative expenses discussed above, and an increase in depreciation expense, which was partially offset by a 40 basis point improvement in gross profit margin.

The effective tax rate for the third quarter of fiscal 2013 was 37.9% of pre-tax income, compared to 37.3% for the corresponding thirteen week period of fiscal 2012.

Year to Date Operating Performance

For the thirty-nine week period ended October 27, 2013, net sales were $1.09 billion, a 13.2% increase compared to the corresponding thirty-nine week period in fiscal 2012, and comparable store sales increased 3.2%. Net income increased 12.3% to $48.8 million as compared to $43.5 million in the prior year period. Diluted earnings per share for the first three quarters of fiscal 2013 increased 12.0%, to $1.01, compared to diluted earnings per share of $0.90 for the corresponding thirty-nine week period in fiscal 2012. The Company incurred approximately $0.9 million in expenses related to the settlement of certain legal matters and costs related to the Company's secondary stock offering during the thirty-nine weeks ended October 29, 2012, which impacted the comparability of results and should be considered by investors in assessing the Company's ongoing operations on a comparable basis.

Balance Sheet and Cash Flow

During the third quarter of fiscal 2013, the Company generated $35.0 million in cash flow from operations and invested $40.5 million in capital expenditures, of which $38.4 million related to new and remodeled stores. For the year to date fiscal 2013 period, the Company generated $104.6 million in cash flow from operations and invested $92.2 million in capital expenditures, with $85.1 million spent on real estate activities.

The Company's cash balance as of October 27, 2013 was approximately $14.6 million. The total outstanding balance on the Company’s revolving credit facility decreased 20.0%, or $8.4 million, to $33.6 million from January 27, 2013.

On a trailing four quarter basis for the period ended October 27, 2013, the Company's return on assets was 16.8%, return on invested capital, excluding excess cash, was 23.5%, and return on equity was 27.5%. These financial return measures are non-GAAP financial measures. The schedules attached to this press release include a discussion of these non-GAAP measures, as well as the details of our calculations of these financial return measures.

Growth and Development

During the third quarter of fiscal 2013, the Company opened a record ten new stores, including stores in Alabama, California, Florida, Indiana, Kansas, Texas and Virginia. As of October 27, 2013, the Company operated 146 stores in 26 states.

The following table provides additional information about the Company's real estate and store opening activities through the third quarter of fiscal 2013. Leases signed as of October 27, 2013 are for stores expected to open during or after fiscal 2013.

  Stores Opened

in FY 2013

Leases Signed for Future

Store Locations 1

Number of new leased store locations

15

27
Number of ground leased and owned property store locations 2
Number of relocations
Average capital cost per store 2 $4.1 million  
 

Information for All

Open Stores

 
Average store size (gross square feet) 21,190  
Total rentable square footage (at end of period) 3.1 million  

Note 1: Includes leases for stores expected to open after October 27, 2013 and such leases typically include customary leasing conditions. In general, we do not announce the location of a new store until all conditions to the lease are satisfied or our involvement in the property or project will be made public in connection with governmental permitting or approvals or in dealing with other third-parties. We generally identify a store as “coming soon” when we take possession of the property and commence our construction related activities. The Company's website sets forth the most current list of announced lease locations and stores that are “coming soon.”

Note 2: Net of capital contributions, if any, received from landlords and including building costs, but excluding cost of land for owned stores. Lease inducement costs and similar prepayments in connection with acquiring or entering into new leases are not included in the capital cost per store and are included as a long-term asset and expensed over the primary term of the lease.

Fiscal 2013 Outlook

The Company expects its recent comparable and new store sales performance and expense trends to continue for the rest of the fiscal year and has revised its outlook for earnings accordingly. The Company now expects diluted earnings per share to be $1.42 to $1.47.

For fiscal 2013, management expects the Company to:

  • Open 22 new stores
  • Incur meaningful occupancy and pre-opening costs associated with new store openings in fiscal 2013 and new store openings scheduled for the first quarter of fiscal 2014
  • Spend approximately $115 to $125 million in capital expenditures, primarily related to real estate investments
  • Increase comparable store sales 3.0% to 3.5%
  • Achieve operating margin as a percentage of sales consistent with the prior year, as the Company continues to make operating expense investments related to its accelerated growth plans
  • Generate diluted earnings per share of $1.42 to $1.47, assuming an effective tax rate of 37.0%

2013 Third Quarter Earnings Conference Call

The Company will host a conference call today at 5:00 p.m. Eastern Time. During the conference call, the Company may answer questions concerning its business. The Company's responses to these questions, as well as other matters discussed during the conference call, may contain or constitute information that has not been previously disclosed.

The call will be broadcast via a live audio webcast at www.thefreshmarket.com, within the Investor Relations section of the Company website. Investors and analysts interested in participating on the call are invited to dial (877) 407-0666 or (201) 689-8023 to access the call. A telephone replay will be available for two weeks following the call. To access the replay, please call (877) 660-6853 or (201) 612-7415 with conference ID #13572688.

About The Fresh Market, Inc.

Founded in 1982, The Fresh Market, Inc. is a specialty grocery retailer focused on providing high-quality products in a unique and inviting atmosphere with a high level of customer service. As of November 21, 2013, the Company operates 149 stores in 26 states across the United States. For more information, please visit www.thefreshmarket.com.

Forward Looking Statements: This document contains forward-looking statements that reflect our plans, estimates, and beliefs regarding future business and financial performance and financial condition, and include those in the "Fiscal 2013 Outlook" section above. These statements involve a number of risks and uncertainties. Any statements contained herein (including, but not limited to, statements to the effect that The Fresh Market or its management "anticipates," "plans," "estimates," "expects," "believes," and other similar expressions) that are not statements of historical fact should be considered forward-looking statements. The following are some of the factors that could cause actual future results to differ materially from those expressed in any forward-looking statements: accounting entries and adjustments at the close of a fiscal quarter; unexpected expenses and risks associated with our business; our ability to remain competitive in the areas of merchandise quality, price, breadth of selection, customer service and convenience; the effective management of our merchandise buying and inventory levels; the quality and safety of food products and other items that we may sell; our ability to anticipate and/or react to changes in customer demand; changes in economic and financial conditions, including the outcome of negotiations surrounding U.S. fiscal policy which, even if resolved, may be adverse due to tax increases and spending cuts, and the resulting impact on consumer confidence; other changes in consumer confidence and spending; unexpected consumer responses to promotional programs; unusual, unpredictable and/or severe weather conditions, including their effect on our supply chain and our store operations; the effectiveness of our logistics and supply chain model, including the ability of our third-party logistics providers to meet our product demands and restocking needs on a cost competitive basis; the execution and management of our store growth, including the availability and cost of acceptable real estate locations for new store openings, the capital that we utilize in connection with new store development and the anticipated time between lease execution and store opening; the mix of our new store openings as between build to suit sites and second-generation, as-is sites; the actions of third parties involved in our store growth activities, including property owners, landlords, property managers, contractors, subcontractors, government agencies, and current tenants who occupy one or more of our proposed new store locations, all of whom may be impacted by their financial condition, their lenders, their activities outside of those focused on our new store growth and other tenants, customers and business partners of theirs; global economies and credit and financial markets; our ability to maintain the security of electronic and other confidential information; serious disruptions and catastrophic events; competition; personnel recruitment and retention; acquisitions and divestitures, including the ability to integrate successfully any such acquisitions; information systems and technology; commodity, energy, fuel, and other cost increases; compliance with laws, regulations and orders; changes in laws and regulations; outcomes of litigation and proceedings and the availability of insurance, indemnification, and other third-party coverage of any losses suffered in connection therewith; tax matters; numerous other matters of national, regional and global scale, including those of a political, economic, business, and competitive nature; and other factors as set forth from time to time in our filings with the Securities and Exchange Commission. Any forward-looking statement, including any contained herein, speaks only as of the time of this release and we do not undertake to update or revise them as more information becomes available or to disclose any facts, events or circumstances after the date of this release that may affect the accuracy of any forward-looking statement, except as may be required by any applicable securities laws.

This press release, and access to our earnings call, is also available in the Investor Relations portion of The Fresh Market, Inc. website (http://ir.thefreshmarket.com/).

The Fresh Market, Inc.
 
Consolidated Statements of Comprehensive Income
(In thousands, except share and per share amounts)
(unaudited)
                 
                 
  For the Thirteen Weeks Ended   For the Thirty-Nine Weeks Ended
  October 27,   October 28,     October 27,   October 28,
  2013   2012     2013   2012
                 
Sales $ 364,457   $ 321,494     $ 1,085,847   $ 959,275
Cost of goods sold   242,400     215,137       713,175     633,485
Gross profit   122,057     106,357       372,672     325,790
                 
Operating expenses:                
Selling, general and administrative expenses   88,865     76,590       252,869     221,087
Store closure and exit costs   74     131       347     856
Depreciation   14,224     11,749       39,266     33,164
Income from operations   18,894     17,887       80,190     70,683
Interest expense   1,089     526       2,554     1,109
Income before provision for income taxes   17,805     17,361       77,636     69,574
Tax provision   6,741     6,472       28,818     26,086
                 
Net income $ 11,064   $ 10,889     $ 48,818   $ 43,488
                 
Net income per share:                
Basic and diluted $ 0.23   $ 0.23     $ 1.01   $ 0.90
                 
                 
Weighted average common shares outstanding:                
Basic   48,217,984     48,068,869       48,191,399     48,057,451
                 
Diluted   48,442,252     48,323,150       48,389,426     48,280,923
                 
Comprehensive income:                
Net income $ 11,064   $ 10,889     $ 48,818   $ 43,488
Other comprehensive income   -     -       -     -
                 
Total comprehensive income $ 11,064   $ 10,889     $ 48,818   $ 43,488
                         
The Fresh Market, Inc.
       
Consolidated Balance Sheets
(In thousands, except share amounts)
(unaudited)
       
  October 27,   January 27,
  2013   2013
       
Assets      
Current assets:      
Cash and cash equivalents $ 14,606     $ 8,737  
Accounts receivable, net   8,920       6,830  
Inventories   56,626       43,985  
Prepaid expenses and other current assets   3,346       7,675  
Income tax benefit   1,948       -  
Deferred income taxes   4,219       3,784  
       
Total current assets   89,665       71,011  
       
Property and equipment:      
Land   2,846       2,846  
Buildings   60,887       19,106  
Store fixtures and equipment   313,545       272,249  
Leasehold improvements   208,821       170,483  
Office furniture, fixtures, and equipment   13,592       12,224  
Automobiles   1,433       1,335  
Construction in progress   27,309       18,661  
       
Total property and equipment   628,433       496,904  
Accumulated depreciation   (241,307 )     (207,060 )
       
Total property and equipment, net   387,126       289,844  
Restricted cash   -       14,205  
Other assets   8,252       10,309  
       
Total assets $ 485,043     $ 385,369  
       
Liabilities and stockholders' equity      
Current liabilities:      
Accounts payable $ 50,977     $ 35,634  
Accrued liabilities   63,440       54,385  
       
Total current liabilities   114,417       90,019  
       
Long-term debt   33,600       42,000  
Capital leases and financing obligations   26,019       2,088  
Deferred income taxes   21,975       24,053  
Deferred rent   12,729       11,341  
Other liabilities   23,529       18,009  
       
Total noncurrent liabilities   117,852       97,491  
       
Stockholders' equity:      
Preferred stock – $0.01 par value; 40,000,000 shares authorized,    
none issued   -       -  
Common stock – $0.01 par value; 200,000,000 shares authorized,    
48,221,704 and 48,144,620 shares issued and outstanding      
as of October 27, 2013 and January 27, 2013, respectively   482       482  
Additional paid-in capital   111,528       105,431  
Retained earnings   140,764       91,946  
       
Total stockholders' equity   252,774       197,859  
       
Total liabilities and stockholders' equity $ 485,043     $ 385,369  
               
The Fresh Market, Inc.
         
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
         
         
    For the Thirty-Nine Weeks Ended
    October 27,   October 28,
    2013   2012
Operating activities        
         
Net income   $ 48,818     $ 43,488  
Adjustments to reconcile net income to net cash provided by        
operating activities:        
Depreciation and amortization     39,432       33,330  
Loss on disposal of property and equipment     13       129  
Share-based compensation     4,256       3,218  
Excess tax benefits from share-based compensation     (180 )     (288 )
Deferred income taxes     (2,513 )     (4,248 )
Change in assets and liabilities:        
Accounts receivable     (2,090 )     (1,943 )
Inventories     (12,641 )     (9,935 )
Prepaid expenses and other assets     1,273       (1,309 )
Accounts payable     15,343       7,742  
Accrued and other liabilities     12,907       6,267  
Net cash provided by operating activities     104,618       76,451  
         
Investing activities        
Purchases of property and equipment     (92,169 )     (62,752 )
Proceeds from sale of property and equipment     76       6,696  
Net cash used in investing activities     (92,093 )     (56,056 )
         
Financing activities        
Borrowings on revolving credit facility     376,132       341,668  
Payments made on revolving credit facility     (384,532 )     (358,768 )
Payments made on capital leases and financing obligations     (97 )     (45 )
Proceeds from issuance of common stock pursuant to employee stock        
purchase plan     176       136  
Excess tax benefits from share-based compensation     180       288  
Payments on withholding tax for restricted stock unit vesting     (80 )     -  
Proceeds from exercise of share-based compensation awards     1,565       963  
Net cash used in financing activities     (6,656 )     (15,758 )
         
Net increase in cash and cash equivalents     5,869       4,637  
Cash and cash equivalents at beginning of period     8,737       10,681  
         
Cash and cash equivalents at end of period   $ 14,606     $ 15,318  
         
Supplemental disclosures of cash flow information:        
Cash paid during the period for interest   $ 1,308     $ 733  
         
Cash paid during the period for taxes   $ 39,265     $ 35,765  
         
Non-cash investing and financing activities:        
Property and equipment acquired through capital leases and financing obligations   $ 40,267     $ 1,915  
                 
The Fresh Market, Inc.
Calculation of Return Metrics (1)
(Unaudited)
       
       
  October 27, 2013 January 27, 2013 October 28, 2012
  Calculated Using Calculated Using Calculated Using
  GAAP GAAP GAAP
Return Metrics - Trailing Four Quarters Net Income Net Income Net Income
Return on assets (2) 16.8% 18.4% 18.5%
Return on invested capital (3) 23.5% 25.9% 26.3%
Return on equity (4) 27.5% 32.4% 35.3%
       
       
       
(1) The return metrics do not represent financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP). For a discussion of financial measures not prepared in accordance with GAAP, please see below. The Company's management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses these measures for reviewing financial results of the Company. The financial return metrics are calculated on a trailing four quarter basis. Our manner of calculating these return metrics is set forth in the footnotes below and may not be comparable to the manner in which other companies calculate these return metrics.
       
(2) Net Income/Average Assets      
       
(3) (1-Tax Rate)*(EBIT)/(Average Assets - Average Cash - Average Non-Interest Bearing Current Liabilities). EBIT, which is not presented as a stand-alone financial measure, is a non-GAAP financial measure and equals net income plus interest expense plus provision for income taxes.
       
(4) Net Income/Ending Equity      
       

Non-GAAP Financial Measures

     
While the Company reports financial results in accordance with US generally accepted accounting principles (GAAP), we also provide certain non-GAAP operating performance measures. This non-GAAP information is provided as a supplement, not as a substitute for measures of financial performance prepared in accordance with GAAP. We use this information internally to make operating decisions, and believe it is helpful to investors because it allows period-to-period comparisons of our ongoing operating results. The information can also be used to perform trend analyses and to better identify operating trends that may otherwise be masked or distorted. Finally, the Company believes such information provides a higher degree of transparency. Investors should consider non-GAAP measures in addition to, not as a substitute for, measures of financial performance prepared in accordance with GAAP.

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