Shares of The Fresh Market, Inc. TFM have declined 3.8% since the company reported mixed first quarter fiscal 2015 results on May 21. This specialty grocery retailer beat the Zacks Consensus Estimate for earnings but missed out on revenues.
The Fresh Market’s first-quarter adjusted earnings of 50 cents surged 16.8% year over year. The upside was attributable to an increase in sales and improved margins on the back of expense management and improvement in operating efficiency, despite a challenging environment. Adjusted earnings exclude charges for leadership changes and net store closure. Earnings also beat the Zacks Consensus Estimate of 49 cents by 2.04%.
Quarter in Detail
Total revenue of $462 million slightly missed the Zacks Consensus Estimate of $475 million by 2.8%, but increased 7.2% year over year. The company’s efforts to deliver fresh produced meat, upscale as well as stable groceries, prepared foods and numerous natural and organic options throughout its stores led to the improvement in sales. The company also focuses on higher margin items such as prepared foods.
However, comps declined 0.1% to $404.2 million as a 0.1% increase in the number of transactions was offset by a 0.2% decrease in average transaction size. Comps were mainly impacted by winter storms, which forced the company to temporarily close a significant number of stores during the first quarter. Also, sales were negatively affected by a challenging macro environment and a shift in the company’s pricing and promotional activity compared with the prior fiscal year period.
Gross profit went up 8.4% to $160.6 million backed by higher sales. Further, gross margin increased 40 basis points (bps) to 34.7%, primarily driven by adjustments to the price to cost relationship of merchandise sold. The company also undertook actions to reduce its supply chain costs in order to increase its gross margin. However, it was negatively impacted by the company’s decision to replace health and beauty products with higher growth, food merchandise product categories.
As a percentage of revenues, selling, general and administrative (SG&A) expenses decreased 20 bps to 22.8% primarily due to lower pre-opening expenses. The company opened two stores in the quarter compared with seven in the year-ago quarter. Adjusted operating margin increased 70 bps to 8.7% in the quarter due to improved gross margin and lower SG&A ratio.
Other Update
During the quarter, the company opened two new stores, including one store in North Carolina and another in Missouri, and closed three stores as part of the company’s previously announced exit from the California market. As of Apr 26, 2015, The Fresh Market operated 168 stores in 27 states.
Strategic Initiative
The Fresh Market has decided to close its operations in California, which include stores in Palo Alto, Santa Barbara and Laguna Hills to capitalize on higher growth opportunities and to focus its unit growth resources in the eastern half of the United States over the next three years. The decision was taken after the company anticipated a slower pace of organic store growth in California.
As a result of the store closures, the company anticipates additional charges in 2015 of approximately $20 million to $26 million.
2015 Outlook
Based on first quarter results and the outlook for the remainder of the year, the company has re-affirmed its earnings and sales guidance for fiscal 2015, but lowered its comp sales guidance.
In 2015, the company’s fiscal year will have 53 weeks. Excluding the 8 cents benefit from the 53rd week, the company expects fiscal 2015 adjusted earnings in the range of $1.77 to $1.85 per share, higher than adjusted earnings of $1.61 per share in fiscal 2014.
The company also expects sales growth of approximately 9% to 11% year over year, which includes the benefit of sales from the California store closures. However, the growth rate is softer than the year-ago period’s sales growth of 16%.
The company lowered its comparable store sales growth projection for fiscal 2015. It is now expected in the range of 1% – 3% compared with the previous expectation of 2% to 4% growth. In fiscal 2014, comps growth was 2.9%.
In 2015, the company plans to open 19 stores and remodel 10 stores.
The Fresh Market carries a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked companies in the retail sector include Gordmans Stores Inc. GMAN, Ingles Market Inc. IMKTA and The Kroger Co. KR. While Gordmans Stores sports a Zacks Rank #1 (Strong Buy), Kroger and Ingles Market carry a Zacks Rank #2 (Buy).
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