Margins Shrink at Fresh Market

GREENSBORO, N.C. — The Fresh Market here last week said profits and sales were both up in double digits in the fiscal third quarter, although profit margins took a hit from inflation and costs for unopened locations.

The fast-growing chain, operating a far-flung network of small, upscale stores focused on perishables and specialty product, posted a 5.5% increase in comparable-store sales for the quarter, including a 2% increase in transactions and a 3.5% increase in transaction size. It was the eighth consecutive quarter of gains in both transaction count and basket size.

The company's earnings missed analysts' estimates by about a penny per share, however, and gross margins were down 60 basis points to 32% of sales.

Most of the margin shortfall appeared to be due to cost inflation, noted Edward Aaron, a Denver-based analyst with RBC Capital Markets. “With inflation expected to moderate from Q3 levels, merchandising margin pressure should prove temporary, in our opinion,” he said in a research note.

The company said it has met some resistance to price inflation in commodity categories like coffee, but is better able to pass along cost increases in value-added items such as prepared foods and deli.

For the 13-week period, which ended Oct. 30, net income was $9.2 million, up 21% vs. pro forma results from a year ago. Sales were up 11.7%, to $263.3 million. Year-to-date net income was up 23.8%, to $33.1 million, on sales of $787.3 million, also an 11.7% increase over a year ago. Comps were up 4.7% for the 39-week span.

The chain opened its seventh store for fiscal 2011 in Towson, Md., its third store in that state. Thus far in the fourth quarter it opened new stores in Stuart, Fla.; Miami Beach, Fla.; and Crystal Lake, Ill.

“We continue to be pleased with the results of our new store openings, and we are encouraged by our new store performance in both existing and new markets,” said Craig Carlock, president and chief executive officer, in a conference call with analysts.

The company expects to open 12 to 14 stores in fiscal 2011, he added, and has 18 sites in the pipeline.

“We believe that we are well on our way to returning to our historical annualized unit growth rate of 15%,” Carlock said.

The company also continues to focus on private-label product development, although it only represents a small percentage of its current volume.

“What we want to do is provide an item [customers] simply cannot get anywhere else,” Carlock said. “When we do that, the private-label program has a chance to really be successful.”

The Fresh Market introduced about 48 SKUs of private-label product in the third quarter.

In response to analysts' questions about increased promotional activity, the company said it continues to eschew heavy promotions. About 19% of volume was generated on promoted items in the quarter, vs. 18% in the third quarter of 2010.