The Fresh Market Ramps Up Expansion Plans

MARK HAMSTRA

GREENSBORO, N.C. — The Fresh Market is accelerating new-store development plans to approach its historic expansion levels of 15% annually, the company said during its first quarterly conference call with investors last week.

The upscale food retailer, which had an initial public offering last November and currently operates 100 locations in 20 states, said it plans to open 12 to 14 new stores in the current fiscal year.

“Beyond 2011, our pipeline is very strong,” said Craig Carlock, president and chief executive officer. “We have signed 11 leases for stores to open in the future and we expect to sign several more leases in the coming weeks.”

The company also has “numerous potential stores in various stages of negotiation and development,” he added, including locations in “key areas in the Northeast and California.”

The company's website lists planned openings in New York, New Jersey, Connecticut, Florida, Georgia, Indiana, Maryland, South Carolina and Virginia. Announcements about specific sites in California, where The Fresh Market is in the “site selections and negotiation” stages — could be forthcoming, Carlock said.

In the recently ended fourth quarter, The Fresh Market said comparable-store sales were up 6% over year-ago levels, although the company reported a loss of $18.1 million after charges related to the IPO. The loss compared with net income of $20.82 million in the preceding year.

Many of the company's margin metrics improved, however, as the company expanded sales against its cost structure. Excluding IPO-related share-based compensation expense and related payroll tax expense in the fourth quarter of 2010, which reduced operating income by $28.8 million, adjusted operating income increased 23.5% to $26.8 million, compared with a year ago.

Sales for the quarter rose 13.1%, to $289.44 million. The 6% comp-store gain included a 3.5% gain in the number of transactions and 2.5% gain in basket size. The company said 1.1% of the growth came from having an extra day, compared with the preceding year.

For the year net income was $22.9 million, down about 53% from the preceding year. Adjusted for one-time accounting items, net income rose 36.4% for the year, to $41.2 million. Sales for the year were up 13%, to $974.2 million.

Comparable-store sales for fiscal 2010 were up 5%, as transaction count grew 3% and average basket grew 2%.

Despite the gains in sales and income, the stock fell about 10% immediately following the report, after it had doubled in value in the three months since the IPO.

Edward Aaron, a Denver-based analyst at RBC Capital Markets, said the selloff reflected “grounding of expectations” after the successful IPO.

Karen Short, a New York-based analyst with BMO Capital Markets, said investors might also have been reacting to a possible slowdown in sales trends in recent weeks.

“Investor expectations were higher than [analysts'] consensus,” she said. “We also suspect the stock was reacting unfavorably to comments on top-line trends into January and February because — by our calculation — the trends decelerated on a two-year basis from the run rate seen throughout [the fourth quarter].”

The Fresh Market said it expected comps to increase 4% to 5% for fiscal 2011.

In other news on the call, the retailer said it was expanding its private-label penetration, particularly in the grocery and dairy categories. The company launched 40 new private-label products in those two departments in 2010 and plans to launch another 90 in 2011.

The company also said it has been coping well with inflation and expects to continue to do so through better buying and selective promotion. “We are currently meeting with many of our vendors to discuss their 2011 costs and promotional programs, and we are very encouraged by our negotiations so far,” Calock explained.