The Fresh Market Sees Sales, Profits Grow

MARK HAMSTRA

GREENSBORO, N.C. — The ability to pass along inflation and drive bigger baskets while controlling costs helped The Fresh Market here post its seventh consecutive quarter of 4%-plus comparable-store sales last week.

The 107-store chain beat analysts' expectations for the second fiscal quarter with net income of $10.5 million, vs. pro forma profits of $6.9 million a year ago, and a 13.6% increase in sales, to $259.5 million. Comps rose 4.6% in the period, including a 1% increase in transaction counts and a 3.6% increase in basket size.

New-store development also remained robust, with five new stores opened during the quarter and a total of 12 to 14 planned for the year.

“We continue to be encouraged by our new-store performance in both existing and new markets,” said Craig Carlock, chief executive officer, in a conference call with analysts.

During the second quarter, The Fresh Market opened new stores in Boca Raton, Fla.; Evansville, Ind.; Pawleys Island, S.C.; Montvale, N.J.; and Vienna, Va. It recently signed leases for stores in Milwaukee; New Orleans; Richmond, Va.; and Pinecrest, Fla.

“The primary risk to the [company's] story is that the company encounters execution issues with its rapid store expansion,” noted Edward Aaron, a Denver-based analyst with RBC Capital Markets, although he remains positive on the company's prospects.

“Stable sales trends, firm gross margins and good new-store productivity validate [The Fresh Market's] growth plans, in our opinion,” he said.

He cited the company's gross margins of 32.7%, which expanded 100 basis points year-over-year, and reduced operating expenses.

“As revenues grew, we also continued to expand our margins,” Carlock said. “In the second quarter, we increased our operating margin from 5.2% last year to 6.5% this year despite pressure from rising food and commodity costs and despite the additional costs incurred related to being a publicly traded company.”

Through the first half, net income totaled $24 million, vs. pro forma net income of $19.1 million a year ago. Sales totaled $524 million, up 11.8%, and comps rose 4.3%. The company projected comp-store sales gains of 4% to 5% for the full year.