Sales slowed during Q3, while retailer booked costs from new store openings

Sales slowed during Q3, while retailer booked costs from new store openings

Regional US retailer The Fresh Market has cut its forecast for annual earnings after a "challenging" third quarter.

The company expects to generate diluted earnings per share of US$1.42 to $1.47 for the year, down from its previous guidance of $1.50 to $1.55.

Earnings growth slowed in the third quarter to 27 October when compared to The Fresh Market's second quarter.

Diluted earnings per share in the third quarter of fiscal 2013 were $0.23, flat on a year ago. Net income was up, increasing 1.8% to $11.1m. In the second quarter, net income grew 17.9% to $15.6m.

The Fresh Market's SG&A costs grew, as healthcare claims costs pushed up staff expenses, and as the retailer opened ten stores.

Net sales increased 13.4% to $364.5m. Comparable-store sales grew 3.1%. On the second quarter, comp sales were up 3.4%.

President and CEO Craig Carlock said: "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."

Andrew Wolf, an analyst at BB&T Capital Markets, said lower shrink helped The Fresh Market's gross margin.

However, Wolf said the retailer's operating margins missed his forecasts amid a "a "steep slowing" sales in October and higher-than-anticipated store costs.

"From a macro perspective, top-line trends softened across all geographies in October due to weakening consumer sentiment," he said.

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GREENSBORO, N.C.--(BUSINESS WIRE)--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%

Original source: The Fresh Market