Fresh Market Earnings Call Nuggets: Inventories and Guidance Details

Fresh Market, Inc. (NASDAQ:TFM) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Inventories

Renato Basanta – Sterne Agee: This is actually (Renato Basanta) on the line for Chuck. First on the comps, 2Q came in at about the midpoint of your prior full year guidance range, and you’ve raised the low end of your comp view by 50 basis points. I understand that you have easier comparisons in the second half but is there anything else that kind of caused you to be more optimistic about full year sales. And I guess related to that can you just talk a little bit about the cadence of same store sales throughout the quarter.

Craig Carlock – President and CEO: For the second quarter I would say the cadence was pretty even nothing remarkable in any of the three months. And for the year I’d say we feel real good about the things that we have visibility into, we’re excited about our holiday plans. We are excited about our promotion schedule, excited about the store managers we’ll have in place as we go through the second half of the year. so we feel real good about those things. So we are cautious a little bit based on the things we see and observe in the macroeconomy.

Renato Basanta – Sterne Agee: Then just a question on inventories, you had a 5.5% increase in 1Q on a per store basis but you know on out math it looks like that number is closer to 8% in 2Q. I know you are investing in health and beauty perhaps grocery expansions and maybe private label and I know you talked about previously running 2% cost inflation. But is there anything incremental there to explain the acceleration from 1Q to 2Q?

Craig Carlock – President and CEO: That’s nothing to be alarmed about. We continue to invest in new products, some of the grocery products we mentioned to raise our inventory levels a little bit, but there is no change in the pattern really.

Guidance Details

Mark Miller – William Blair: To Craig and Jeff I am hoping you can reconcile the two pieces the higher sales both comps and improved new store productivity and then also the lower EPS you kind of touched on this Jeff. But how much of this is may be some pressure on gross margin, it sounds like. And how much of it is non-operating aspects of timing of store openings, pre-opening, et cetera?

Craig Carlock – President and CEO: Yeah, this is Craig. So, a few points on the guidance. We now think we’ll finish at the lower end of the range and so we wanted to adjust our guidance accordingly and we want to make three points. The first is around sales. Let me just say, I have more conviction than ever before of how we will be successful in California, Texas, and our new markets. We know how to identify those stores; we know how to open them, we know how to run them, we know how to staff them; we feel really good. And then once we’re interacting with customers in those stores, it is very comfortable for us, it feels like business as usual. Now, some of these stores have opened better than the stores we first opened at some of the bigger major metros we’ve entered in the past. But we’ve had a few that have opened below our expectations and we’re recognizing that. We’re recognizing also and pointing out that those that have opened a little bit lower have had a better trajectory actually than some of the stores we’ve opened in the past, and so that’s been a real good thing. But despite that we don’t think we’ll make up the gap. So, the first point is new store sales has been a little lighter than we thought, though it doesn’t change our view on how successful we will be over time. The second point is we do have cost pressure in key perishable categories, and we look at the cost pressure and the promotions we want to run and we just think that puts a lid on our margins. I could say it another way and say, despite cost pressure and despite a great promotion calendar, we can hold our margins, we just can’t really build them. And the third point is related to real estate. And I would say our real estate process is really firing on all cylinders. We’re going to be at the high end of the range this year on store openings; next year looks good in the first quarter. So, we’re going to have a more balanced schedule, and that’s bringing expenses into this year. But we haven’t wanted to quantify that one except for the third point, which is to say, $600,000 to $700,000 of expenses are being pulled forward, but that’s a timing thing. We’re pulling forward positive NPV projects, so we feel good about that.

Mark Miller – William Blair: Maybe you can just expand on a one point there for the stores in Texas and California. You said you need to earn the customer loyalty. I mean can you, I guess, highlight any specific initiatives you have there to try to build awareness and to increase that loyalty?

Craig Carlock – President and CEO: So the initiatives that we undertake to build loyalty and awareness, frankly, is the same one we have used for years and years and years and that is we really need to run good stores. We need to source great product, have great managers and have people come in and have a great experience. So that’s our bread and butter plan is that somebody comes in and they say, wow, that food was good, that service was good and they want to come back or they want to tell somebody. Now, we’ve recognize there’s some unique features about these two markets. In Houston we were able to have more advertising frankly and more events because of the timing of the stores was bunched together. So we opened four stores fairly close together and so that was a good thing and it enabled us to be out in the community quite a bit more than usual, so that will be something new and different. And we’re considering a couple of things in California that are more event related than advertising related where we can get into the communities more and build awareness with people and bringing groups into the store, so those are the paths we are going down.

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