Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Fresh Market, Inc. (NASDAQ:TFM)

Q1 2013 Earnings Conference Call

May 29, 2013; 09:00 a.m. ET

Executives

Craig Carlock - President & Chief Executive Officer

Sean Crane - Executive Vice President, Chief Operating Officer & Interim Chief Financial Officer

Analysts

Jason DeRise - UBS

Stephen Grambling - Goldman Sachs

Ben Brownlow - Raymond James

Kelly Bania - Bank of America/Merrill Lynch

Sean Naughton - Piper Jaffray

Priscilla Tsai - JP Morgan

Shane Higgins - Deutsche Bank

Mark Miller - William Blair

David Magee - SunTrust

Kate Wendt - Wells Fargo Securities

Chuck Cerankosky - Northcoast Research

Operator

Good day ladies and gentlemen and welcome to The Fresh Market, first quarter 2013 earnings conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions).

Now, I’ll turn the conference over to your host, Sean Crane, Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer. Please begin.

Sean Crane

Thank you operator. I’d like to welcome everyone to The Fresh Market’s, first quarter 2013 earnings call. I’m Sean Crane, Executive Vice President and Chief Operating Officer and Interim Chief Financial Officer. Joining me on today’s call is The Fresh Market’s President and Chief Executive Officer, Craig Carlock.

Before we begin the discussion of our business results, I want to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statements found in our press release and SEC filings.

Our first quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables are available on our corporate website under the Investor Relations section.

After our prepared comments, we will have time to answer your questions. Please note that a replay of this call will be available for 30 days on our website at www.thefreshmarket.com.

With that, let me turn the call over to Craig.

Craig Carlock

Thank you Sean and good morning everyone. We are pleased to report first quarter earnings per share of $0.46, which represents near 15% growth from last year. Our solid financial results give the year off to a good start and reinforce our confidence in our full-year outlook.

I was glad to see our business and customer traffic improve on a sequential quarter basis. Net sales grew a solid 13%, driven by new store openings and comparable store sales of 3%.

Customer traffic this quarter rose 60 basis points from a year earlier, even as we lapped one of the best traffic quarters in our company’s history. This progress provides another confirming data point, that the slowdown we experienced late last year was essentially confined to the two-month period of November and December.

Even though our performance was solid this quarter, we did not take lightly the pullback that we experienced in Q4. We are a disciplined company and committed to thoroughly understanding our business and growing our customer base. We continue to expand, invest in people and leverage systems to evaluate our performance and better understand our customers.

Based upon the increase in traffic count and comp sales, we believe our customers are more confident than they were in the fourth quarter. So today we are updating our fiscal 2013 guidance to increase comparable store sales to the range of 2.5% to 4.5%.

Let me now turn the call over to Sean, for a deeper discussion of some of the key drivers this quarter.

Sean Crane

Thank you Craig. We are proud of the sales and profit results we achieved this quarter, especially as we lapped last year’s strong comp performance and continue to execute well.

In the first quarter, The Fresh Market’s diluted earnings per share rose 14.6% to $0.46 from $0.40 in the prior year’s quarter. We realized this earnings growth, despite incurring higher than normal employee healthcare claim costs and a previously disclosed increase in share-based compensation expense.

Total net sales grew 12.9% this quarter, with comparable store sales growth of 3%. Comp sales were driven by a 240 basis point increase in transaction size, and a 60 basis point rise in transaction count. Basket size benefited from a 1.6% increase in average unit retail, as well as a 0.8% increase in items per transaction.

This quarter we posted an acceleration in comp sales from Q4 and good growth from last year’s very strong 8.2%, which was the highest since the company’s IPO in 2010. Furthermore, on a two-year stack basis, comparable sales growth was 11.2% in the first quarter, driven by a 6.3 percentage point increase in traffic and a 4.9 percentage point increase in transaction size. Our two-year stack accelerated by 230 basis points on a sequential quarter basis.

Our newest stores, which are excluded from the comp set opened at 85% productivity, which continues to meet our expectations and is within our historical productivity range of 80% to 90%.

Total square footage increased approximately 13% compared to last year, to 2.8 million square feet at the end of the first quarter. These are solid trends and as Craig mentioned, provide us confidence as we assess our outlook for the full year.

The Fresh Market strong in-store experience, differentiated offerings and focus on execution continued to resonate with customers. We continue to test new promotional programs and remained at about 20% of total sales, about the same as last year.

Gross profit increased 14.8% to about $129 million, and the gross margin rate increased 60 basis points to 35.3% during the first quarter. The increase in gross margin rate was driven primarily by expansion in merchandised margins.

We continue to realize leverage on our buying as we purchased from more stores and benefit from disciplined inventory and supply chain management and we are happy with our in-stock position, forecasting and ordering, which allowed us to optimize sell through in the first quarter, especially on seasonal products. Retail inflation was a bit over 2% this quarter, and in-line with our recent quarterly trends.

For the quarter, selling, general and administrative expenses increased 15.6% to $81.5 million. SG&A expense as a percentage of sales increased 50 basis points from last year to 22.2%. This increase was primarily attributable to a sharp rise in employee healthcare claim costs, which was significantly higher than our historical experience and expectation.

We also incurred higher store management headcount associated with new store openings that will occur later this year and an incremental layering of expense related to share-based compensation.

Depreciation expense this quarter totaled $12.3 million, a rise of 16.7%, reflecting our rapid unit expansion over the past 12 months.

Operating income for the first quarter increased 13.8% to $35.4 million, while operating margin increased 10 basis points to 9.7%. The primary driver of this increase in operating margin this quarter was a higher merchandised margin, which fully offset an increase in healthcare claims cost.

We gained incremental benefit from various state and federal tax credit opportunities, which contributed to a slight decrease in our effective tax rate to 37.1% in the first quarter.

Moving to the balance sheet and cash flow statement. This quarter the company generated $45.9 million in cash flow from operations, and invested $17.2 million in capital expenditures. $13.7 million, approximately 80% of these capital expenditures related to new and remodeled stores, as we continue to expand our brand and enter new markets.

During the quarter we opened two new stores and currently operate 131 stores in 25 states. We finished Q1 with a cash balance of approximately $11 million and total debt outstanding of $15 million. Despite accelerating our growth, this is a reduction in debt outstanding of $24.1 million versus the corresponding period last year. At quarter end, The Fresh Market had availability of $147.1 million under its revolving credit agreement.

Average inventory on a FIFO basis per store at the end of the first quarter increased 5.5% compared to the corresponding period last year. The increase resulted primarily from inventory investments we are making in new and growing product categories, to support our overall sales growth. Cost inflation this quarter was a bit more than 2%.

Given our continued improvement in earnings performance and our disciplined approach to asset utilization, our key financial return metrics remain strong. On a trailing full quarter basis, the company’s return on assets was 18.4%, return on invested capital was 25.6%, and return on equity was 30.2%.

With that, I’ll turn the call back over to Craig.

Sean Crane

Thanks Sean. As I reflect on the quarter, we made significant progress. Between capital investments, new hires and extending our business analytics capabilities, we had a very productive quarter and executed well on all fronts. Our new store pipeline remains robust and I am particularly happy about how our team has performed in the phase of the transition and leadership.

Our new store construction is going very smoothly, and we are making strong progress in signing new leases to ensure record store growth this year and next. We opened two stores this quarter, one in Charlottesville, Virginia and another in Aiken, South Carolina. Both are trending as we expected and we remain on track to open 19 to 22 new stores this fiscal year.

In the second quarter we have broken ground on a number of new projects; are in the final stages of work on new stores in Palo Alto, Pittsburgh and Houston, to name a few. Our Palo Alto location will open next week and we are excited to open a second store in California. Similarly, we are on track to open our four Houston stores in the second and third quarters.

I want to remind you that the majority of our stores this fiscal year will open in the third and fourth quarters. While these openings will accelerate our square footage growth to 15% or more this year, the timing of these openings will provide an expense headwind. We will carry incremental costs related to headcount, debt ramps and pre-opening expenses, but we will receive relatively little revenue benefit this year from these new stores.

We anticipate a more balanced opening schedule in fiscal 2014, and believe that our new store openings in the second half of this year will serve as a tailwind to both sales and profits next year.

Last week we announced that Jeff Ackerman will join The Fresh Market as our new Chief Financial Officer. Jeff will start with us on June 3 and I’m excited to have his leadership and strong business planning skills to complement our executive team. He’s a great fit for our culture, brings a strong consumer background and we look forward to his joining us next week.

As some of you may know, we added to our business analytics capabilities about a year ago with a $2 million investment that upgraded our business intelligence platform. With the first quarter, we are now cycling on the initial metrics captured by this system and we are beginning to measure sales and assess our business operations with a level of sophistication and timeliness that we previously lacked.

Today uniform coding allows us to run advanced analytics across product categories, geographies and store vintages to better spot sales trends, product affinities and promotional opportunities.

At a high-level this information allows us to review transaction level detail to better understand the basket in-store performance and merchandising, as well as marketing opportunities. Information is both timely and actionable and has already augmented our gross margin through better promotional cadence, labor scheduling and inventory management.

For a growing company like ours, these tools are meaningful and add discipline to our operations. Not only do they simplify data access and streamline processes, but they also make our employees more efficient, as we spend less time crunching numbers and more time analyzing them.

While we are still early in leveraging our business intelligence system, we expect this platform will provide us with a solid set of tools by which to advise our merchants and enhance our productivity throughout the company.

In closing, let me say that I’m happy with the strong progress we are making as we grow our business and build our brand. We achieved solid results this quarter and enter the second quarter positioned to deliver upon our financial guidance and realize strong double-digit square footage growth.

With that, I will now open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Jason DeRise of UBS. Your line is open.

Jason DeRise - UBS

Just wanted to ask a couple of follow-ups on the new start productivity. Could you maybe share just how that’s burying across your different regions as you’ve been expanding out from your core base, maybe updating. How it’s going in California? How it’s going in any of the new stores in the Northeast for example, better still in the comparable base? And then also, you have very strong strength in the core markets. You’ve had some very strong openings in Florida. How those are still doing?

Craig Carlock

We think about our store returns and our new store productivity and classes and we are at 80% to 90% productivity levels right now; we report right in the middle of that range. That’s the range we’ve been predicting and forecasting; we feel very comfortable with.

With respect to Roseville, Roseville is off to a fine start. Its well within the range of what we see when we open new stores. We’ve got future stores coming quickly, really in the Sacramento area. We are looking forward to openings in Fair Oaks and help grow later in the year and we’ve got Palo Alto opening next week.

So we are excited about California, we are committed to Sacramento and Roseville and we feel good about 80% to 90%, which is where we have been historically.

Jason DeRise - UBS

When you guys are picking your locations, I know you guys are looking at demographics and where your potential shoppers may be coming from. Are the shoppers in California the ones that you expected or are you pulling from further away? I mean, is there any insight that you have on that?

Craig Carlock

I don’t think that we’ve seen anything different or remarkable about our opening in Sacramento and Roseville compared to what we’ve seen in other new markets. We go into new markets and people come in and they try the store, they enjoy the food. We are a shopping store that provides convenience and service and quality and tends to be shopped by folks who live in the immediate areas, and then over time we built up to a little bit longer draws, the reputation builds. So I feel like its right down the middle of what we’ve seen in other areas.

Jason DeRise - UBS

And one last follow-up on California; is there anything different about the mix, the products that are being purchased? Have you had to make adjustments in assortment already or any color you can add on that?

Craig Carlock

No real dramatic changes to our mix or to our assortment. I mean, we carry very high-quality perishable items and those items tend to be well received by customers wherever we go. So what people appreciate is freshness, cleanliness, size, color, taste, flavor and that’s what we are providing everywhere we open a store, so no real changes, nothing that’s making us alter our thinking about our assortment.

Now, we often bring in local items and to the extent we can source local items, whether they are perishable, like in produce or whether they are nonperishable like in the grocery department, we’ll do that. But those are items that provide visibility to our desire to be part of the community and so we’ll certainly do that. But those don’t make a large portion of the sales.

Jason DeRise - UBS

Okay. I may hop back in the queue and let some other people have a chance here.

Craig Carlock

Okay, thank you Jason.

Operator

Your next question is from Stephen Grambling with Goldman SachsSteve. Your line is open.

Stephen Grambling - Goldman Sachs

Good morning, thanks for talking my question. I guess one quick follow-up to Jason’s questions, which would just be on the new store productivity. Should we be expecting higher new store productivity from some of the upcoming openings in Palo Alto or Houston, just to generate similar returns to the existing store base?

Craig Carlock

I think that’s not how we think about it. We think about, hey, we’re going to open 19 to 22 stores. Some will surprise us on the upside, some will surprise us probably on the downside. On average we ought to be in the 80% to 90% range. We just don’t have the precision to forecast the sales the way your describing and so we think about this and I don’t think any retailer does, so we think about this in the 80% to 90% range, this is how we think about things.

Stephen Grambling – Goldman Sachs

Okay and then on guidance, are there any special items in the back half that are keeping the EPS guidance in-line, despite the bumped comp and seeming encouraging tone?

Craig Carlock

No, there really aren’t any unique items. What we would say, how I’m thinking about this is we feel better about sales than we did 90 days ago, so we bumped the sales forecast up. But we still have three quarters of the year left. We need to open, what is it, 17 to 20 of our 19 to 22 stores and we need to get them opened on time. We need to see what their sales levels are. We need to better understand product costs and so in my view the things that provide for our guidance range still exist and that’s why there’s really no reason to change that range.

Stephen Grambling – Goldman Sachs

Thanks, and then one last one before I get off the floor. Just on the holiday, you mentioned that you’ve had some time to digest and analyze the weakness that you saw. Can you maybe give us a sense for what you believe drove the change then, and then also maybe discuss how you would either adjust prophecies going forward to flex to that kind of environment?

Craig Carlock

Well, I think we wanted to say that we came into the fourth quarter with over 7% year-to-date comps, and so we had a great deal of momentum. In the first week of November, with the hurricane and the second week there was an election and we saw our sales pattern change as people began to focus on potential changes to income tax rates and potential changes to their own personal situations.

And then as there was certainty around those things, in early January, our sales patterns improved, and it’s continued to be steady and stable since that point. And so I feel like we’ve essentially isolated our pattern into a November, December time frame.

I don’t know that we should put together extensive plans to deal with unforeseen macroeconomic events. It would be nice to have them from time to time, but I think our effort is better spent preparing for day-to-day execution, and so that’s what our focus is on.

Stephen Grambling – Goldman Sachs

Great, thanks so much. Good luck.

Craig Carlock

Thank you.

Operator

Thank you. Our next question is from Ben Brownlow of Raymond James. Your line is open.

Ben Brownlow - Raymond James

Hey, good morning, great quarter. You touched on product inflation being up around 2%. Can you comment on what you are seeing turn into the second quarter and relate that to your pricing strategy or any planned price investments going forward?

Craig Carlock

Well, the nice thing about selling across a broad range of product and product categories is if you have inflation in one area, for instance produce, you might be able to offset your promotional activity and you’re other drivers of customer traffic in other parts of the store.

And so the inflation we are seeing is manageable and we are able to in some cases pass it on, in some cases save it off through price negotiations, some cases benefit from better contracts when we buy in some parts of the store to absorb it than other parts and so that’s how we approach it. Does that answer your question?

Ben Brownlow - Raymond James

It does, and just one follow-up. The annual share based comp, can you specifically break that out?

Craig Carlock

Well, I think what we’ve tried to say, as we went public our Board of Directors and compensation committee put together a program that essentially kicked off in 2011 and those takes four full years to get to kind of lapping the initial kickoff of those programs and as a ballpark number, those programs are adding about $2 million per year in expense for the years 2011 through the year 2014. So when you get to 2015, I’m not saying – these essentially laps at the beginning of the program.

Ben Brownlow - Raymond James

Great. Thank you.

Operator

Thank you, and your next question is from Kelly Bania of Bank of America/Merrill Lynch. Your line is open. Please check your mute button.

Kelly Bania - Bank of America/Merrill Lynch

Hi, good morning Craig and Sean. I was wondering if you could touch on the investments you mentioned, I think in some faster growing categories and new products assortment, and any color on what those are and how those plans are for the rest of the year?

Sean Crane

This is Sean. We’ve made some investments in some new categories like the health and beauty and continue to expand grocery, so where we might do small remodels in a store and expand the footprint in our grocery department as we continue to work on expanding our private label and those are some high growing categories for us.

The other part of the growth was again a little bit of the cost inflation, but as we look out for the year, we expect to probably continue in that same range that we currently are.

Kelly Bania - Bank of America/Merrill Lynch

Great, and then just another one on the customer analytics that you mentioned. I think you said that it maybe helped the gross margin already, but I was just curious on any early insights that you may share with us as you kind of dive deeper into that information and plans on how you can use that further in the next couple of years.

Craig Carlock

I think the first point is that this helps us understand sales quickly and better than we did before, about what’s selling in particular stores, what’s been sold together, what’s being sold within baskets, and so those are the kinds of things that help us get a sense of how people are shopping and what they are buying.

And it’s very useful to us when we put together promotion plans to know what items are in baskets and what items are not and so that’s been the primary use, it’s better promotion effectiveness. When you know if a promotion item is contained in a basket and you know what other items are contained in those baskets, then that’s very useful.

Kelly Bania - Bank of America/Merrill Lynch

Great. Thank you.

Craig Carlock

Okay.

Operator

Thank you. Our next question is from Sean Naughton of Piper Jaffray. Your line is open.

Sean Naughton - Piper Jaffray

Hi. Just a follow-up on the guidance. You talked about the back half and the release being a little bit stronger than the first half. Is there any takeaway there, anything we should think about, that comment in terms of how you’re planning Q2 and the year-over-year dynamics there that may be affecting comparability?

Sean Crane

I would say that the weighting is slightly heavier in the back half than the first half, but because of how this quarter turned out, they are more evenly weighted at this point than we thought they would be 90 days ago.

I don’t think there’s any takeaway though. I mean what you are seeing is just, hey we are opening a bunch of stores in the second half of the year, so the first half of the year we’ve got investments and getting store management ready, debt rents, pre-opening expenses, those kinds of things and then in the low revenue to off set that, and then you get to the latter part of the year when stores get open and the costs and sales revenues balance or match up quite a bit better.

Sean Naughton - Piper Jaffray

Okay. And then on the SG&A front you talked about a pretty sharp rise in employee claim costs. Is this something that we should think about as something that we could impact SG&A moving forward? Some potential de-leverage there or do still expect that that is a line item that could potentially leverage for this year?

Sean Crane

Well, I don’t think healthcare claims cost will be an item where we would see the leverage. We did see a significant increase in the claims of high dollar claims and as we look ahead, although this was a significant increase, we are anticipating that this will be some increase. We are hopeful that it doesn’t continue at the current rate, but we do see a little bit of a headwind there.

Sean Naughton - Piper Jaffray

So, just the consolidated SG&A maybe a little bit of a headwind due to some of these unforeseen costs when you started the year?

Sean Crane

A little bit compared to when we started the year, yes.

Sean Naughton - Piper Jaffray

Okay, that’s fair. And then just lastly on the merchandise margin front, are you guys seeing better rates on individual items or are you getting any benefits from mix within the store or is it really just a combination of both? Any color there would be really helpful as you guys did have another very impressive quarter on that line item.

Sean Crane

Yes, the primary drivers of our merchandized margin improvements, where we are still benefiting from our specialty grocery contract improvements and we will have cycled off that, so we won’t see that benefit in Q2 year-over-year.

We continue to leverage these analytical tools to better manage our inventory, reducing our shrink as we continue to test new promotions. We are finding interesting ways to continue to drive traffic, while also reducing shrink, because we are getting better turns and then just given our growth and adding stores and the leverage that we are getting from that as we negotiate with our vendors, that continues to provide us a great tailwind.

Sean Naughton - Piper Jaffray

Thanks for taking the questions. Best of luck in Q2.

Craig Carlock

Thank you.

Operator

Thank you. Your next question is from Ken Goldman of JP Morgan. Your line is open.

Priscilla Tsai - JP Morgan

Hi, this is Priscilla Tsai in for Ken today. So just besides from the improved consumer precision behavior after the holiday, is there anything you can speak to about, any pricing or marketing initiatives you did specifically to improve traffic during the quarter?

Craig Carlock

No, I’d say we continued to test and learn about promotions that are targeted, targeted by day of the week, in some cases targeted toward new store markets, but nothing radical. I mean I would say we want – we’ve always run promotions, we’ve always been testing and learning and that’s how I like to think about what we are trying to do.

Priscilla Tsai - JP Morgan

Okay. But you wouldn’t call in any like elevated promotional level this quarter versus last?

Craig Carlock

No. I think about 20% of our sales are around promotion this quarter and that’s been a fairly steady statistic. I think we have tried, again we tried some things on Tuesdays a couple of years ago, we tried some things on Saturdays earlier this year and now we are trying some things on Friday through the weekend. I mean, but this is what I would call the normal set of good, curious kinds of things that we ought to be doing to see how our customers respond and what can generate incremental traffic.

Priscilla Tsai - JP Morgan

Okay, that’s helpful. And then I was wondering, just as a follow-up to the previous SG&A question, so are you still expecting modest leverage this year and what level of comp do think is necessary to achieve leverage going forward?

Craig Carlock

If we are looking at just SG&A and if there is wage rate inflation of 2% and most of SG&A is variable cost and with wage inflation 2% and other items, you’d need close to 2% of comp sales to get leverage.

Priscilla Tsai - JP Morgan

Okay. Okay, thanks a lot. I’ll pass it on.

Operator

Thank you. Our next question is from Shane Higgins of Deutsche Bank. Your line is open.

Shane Higgins – Deutsche Bank

Yes, good morning guys. Hey, can you guys just speak to how sales trended throughout the quarter as the quarter progressed?

Craig Carlock

It was very steady through the quarter. Nothing remarkable, no remarkable months

Shane Higgins – Deutsche Bank

And the week, so it sounds like the week-to-week sales volatility was a lot lower than what you guys experienced in the fourth quarter?

Craig Carlock

I would say that the months were steady in the first quarter and that is a little bit different than the fourth quarter, where November and December were more difficult than January.

Shane Higgins – Deutsche Bank

Okay, thanks. And can you guys just talk about the return metrics? I see that they’ve come down a little bit year-over-year. Is that a function of going out to California and out West where the real estate and the stores are a little bit more expensive?

Craig Carlock

I guess I might characterize it as its been fairly steady since we’ve started reporting them and when we pay attention to all of them, but the ROIC has been around 25 to 26 every quarter we reported. So we feel like the returns are healthy, we are very proud of them.

Shane Higgins – Deutsche Bank

Okay. So we should expect kind of that level going forward?

Craig Carlock

I don’t think we guide ROIC. But I think you can expect us to do real estate deals that are good returns, but well in excess of our cost to capital.

Shane Higgins – Deutsche Bank

Okay, great. Thanks.

Operator

Thank you. Our next question is from Marc Miller of William Blair. Your line is open.

Mark Miller - William Blair

Yes, great thanks. Building on that question and also integrating an earlier one on the new store productivity, since we are going into markets that have denser population, more expensive real estate presumably, shouldn’t the new store productivity be higher or towards the high end of the 80% to 90% range and if in doing so you are just saying, being the same, wouldn’t that imply that return on capital would go down?

Sean Crane

Yes. I think I understand the question and my assessment is that as we move into new markets, it’s frankly too soon to tell. We’ve opened some stores in our home base where we have great brand equity, great recognition and we had great sales. We’ve also opened open some stores in our home base where we have great brand equity, we have not so great sales.

And then we go into newer markets, whether it’s New England or whether its Chicago or California and I expect the same thing, we are going to have some that exceed our expectations and some that are diminished.

I wish and what my conclusion, let me say this way, my conclusion from that is that brand equity and new markets is one variable, but there are many other variables; for instance, co-tenancy, traffic counts, parking, visibility, the level of competition in there, and so all those things are as important and taken together, perhaps more determinative than just hey, but new market in a denser area.

So it’s a very tricky answer, but the one I give I think is the honest one which is we see a range of sales volumes when we open new stores. And I’m unwilling to say that, oh in high-density areas we are going to do better or in new markets you might do worse, it really isn’t that straightforward.

But what we can say is, hey, if we open new stores, we are getting tremendous returns on average. We are going into these markets and people enjoy the food, they enjoy the shopping experience, there are glad to have us come and so it gives us confidence that the concept is portable and people enjoy the offering that we provide. So that’s how we see it Mark. I know that’s maybe a little counterintuitive, but that really is how we see it.

Mark Miller - William Blair

No, I understand there’s many dimensions to this. Maybe just one follow-up to this. I think there’s the perception that your incoming cost of real estate is significantly higher going forward. Can you just provide any perspective around how much more per square foot you might be paying this year or in the coming years relative to where we’ve been? Is that meaningfully changed?

Craig Carlock

We certainly have some deals that are more expensive, but we continue to open stores, deals that are a little less expensive than average. I don’t think the average has meaningfully changed.

Mark Miller - William Blair

Okay, thanks. I’m sure both you and Jeff – sorry, you and Sean are excited about Jeff joining here. Can you maybe share with us what, about his background or experience are most important and really what are the top priorities you have for him as he joins? Thanks.

Craig Carlock

Thank you. We are very excited to have Jeff start next week. He’s been a public company CFO for several years and so that’s very exciting. He’s seen a broad range of industries, so we’ll benefit from that experience. We found as we met folks from around the country that Jeff had a good operational mindset and that will be very useful to us.

I think job one, priority one, is to come in and get to know specialty grocery retailer and get to know, I’d say, the model, which would be heavily influenced by real estate and growth and get up to speed with the dynamics of growth, the way that you are all familiar with it and the way we think about it.

Mark Miller - William Blair

Thanks, good luck.

Craig Carlock

Thank you.

Operator

Thank you. Our next question is from David Magee of SunTrust. Your line is open.

David Magee - SunTrust

Yes, hi Craig and Sean. Congrats on the good numbers.

Craig Carlock

Thank you.

David Magee - SunTrust

Just a couple of follow-up questions at the risk of beating a dead horse, on the new stores in California, what is your experience so far with the cost structure, i.e, distribution and others that you are seeing so far and over time. Do you see new opportunities become more efficient than you might be this year out on the West Coast?

Craig Carlock

Well, I do think that over time we’ll become more efficient, because we learn things and because when you have multiple stores going in that direction, that will be slightly one up, but we made adjustments to our delivery, order and delivery schedule before we ever open that store, to keep the costs in line with costs on the East Coast.

So we sourced what we could in California and that would be the most highly perishable items. We’ve gone to two deliveries a week instead of three and then we’ve made sure to the extent we can, that we are not paying for the freight or the empty truck or we are sharing the rewards of a full on its way back from California.

So, we’ve been concentrating on that freight piece and then the frequency of delivery and then sourcing what we can locally, and then you put all that together, the cost structure is in line with the East Coast.

David Magee - SunTrust

Thank you for that. And secondly, I apologize if you touched on this already, but the average ticket size year-to-year sort of flattened out a bit relative to trend line. Is that just sort of the noise level thing or is there any factor that you have behind that?

Craig Carlock

I think we are within the range of sort of the quarterly durations of that number. I like the phrase noise level and I’m happy with that characterization.

David Magee - SunTrust

Fair enough. Thank you.

Operator

Thank you. Our next question is from Kate Wendt of Wells Fargo Securities. Your line is open.

Kate Wendt – Wells Fargo Securities

Yes thanks. First of all congratulations on hiring Jeff. I had a chance to work with him for a fair amount in the past and he’s really top notch. So that was a great higher.

Craig Carlock

Thank you.

Kate Wendt – Wells Fargo Securities

Just starting off, I’m wondering if you could talk a little bit about how your more mature stores are comping, given that the ramp in some of your newer stores is likely driving a portion of the overall comp?

Craig Carlock

So, the mature stores, my struggle is that, I just struggle to paint a broad-brush on anything. But I would just say that if we have stores and aren’t affected by competition or don’t know housing developments that are coming in or markets that are sort of steady state, I think we’ve said all along, hey, we expect the comp in the 3% to 5% range over the long haul and we expect our mature stores to be at the bottom of that and you get the new store tailwinds and you get to the three to five. I think we are right in line with that. I wouldn’t adjust your view on that in any way.

Kate Wendt – Wells Fargo Securities

Okay. And then just following up on Shawn’s question, coming off of a nice quarter as merged margin expansion, I was wondering how you are thinking about your ability to lapse the 137 basis point increase in gross margin you saw in Q2 of last year.

Craig Carlock

Well, I think that our outlook for operating margin is relatively flat versus last year. We don’t foresee the same degree of beats going forward as we had in the first quarter. So that would be how we think about it. But the fundamentals that created the better gross margin will remain. I mean we negotiate better deals, we fill up trucks, we get lower unit cost, you get those kinds of things. But Sean mentioned that we cycle on the specialty grocery contract and so that will reduce the year-on-year improvement.

Kate Wendt – Wells Fargo Securities

Got it, and then just finally, you just recently touched on how your longer-term guidance is 3% to 5% comp. Obviously you are hitting back to that point. How do you think about the trade-off between sales enlarged in this scenario, in terms of eventually promoting or investing more in price to drive comp stock into the mid or high digit range that you were fighting previously.

Craig Carlock

I appreciate that question. I would say that is exactly how we think about it; if there is a balance between comparable store sales and getting money to the bottom line and what we are interested in is building long-term relationships with our customers and getting long-term profit dollars to the bottom line. And so I would say, in general we want to know that our promotions generate profit dollars and we are very disciplined about watching for that.

Kate Wendt – Wells Fargo Securities

All right. Great, thank you.

Operator

Thank you. (Operator Instructions). The next question is from Chuck Cerankosky of Northcoast Research. Your line is open.

Chuck Cerankosky - Northcoast Research

Good morning everyone. Craig as you look at the store openings in the second half of the year, there’s a lot going to open in the second half versus the first half. Any comment on where you might hit within that range and what obstacles might be out there that are different this year; whether it’s some of the geographies you are entering or running into the latter part of the calendar where winter might play a role.

Craig Carlock

I mean, we think we’ll have 19 to 22 in I think the second half. In total we are talking about 13 to 15 new stores, so I don’t know that we are expecting difficulty. I mean I think what we expect is that this is quite a bit of organic growth and we have prepared ourselves for it; we’ve hired people; we’ve used outside firms when appropriate, general contractors and folks to help us get the stores built; we’ve trained our people. So we feel very ready, very prepared.

The only difficulties that frankly we worry about are things like all retailers have some things beyond our control. Sometimes municipalities or others take actions that either accelerate your opening or delay your openings, and so there are some things that are a little beyond our control. But as far as The Fresh Market being ready and doing its part, this is what we prepare ourselves for every single day.

Chuck Cerankosky - Northcoast Research

Great. And retail inflation was you said right around 2% in the first quarter. How are you thinking about it as the year goes on, especially in the second half?

Craig Carlock

Well, I think we continue to see something moderate; that’s probably a reasonable number. The protein categories in the recent weeks have spiked up a little bit, so we are keeping a close eye on those, but it’s too soon to change the full-year outlook.

Chuck Cerankosky - Northcoast Research

Okay, and a follow-up on the earlier question about logistics and distribution. As you move into Texas, what might be some of the changes they or enlargements of your total sourcing capability?

Craig Carlock

Whenever we enter a new market and have the benefit of truck routes that are new and different, we ask ourselves what can we source, perhaps to get a good backhaul, and so that would be something we would be doing. And that we have actually taken trips and met with vendors, not to so much change our distribution pattern, but to change, call it the inbound sourcing pattern back toward Atlanta.

Chuck Cerankosky - Northcoast Research

Got you. All right, thank you.

Operator

Thank you. Our next question is from Jason DeRise of UBS. Your line is open.

Jason DeRise - UBS

Thanks for taking the follow-up. I’m wonder if you can provide some commentary about the competitive dynamic out there, maybe just focusing on the various specialty or fresh and natural and organic players throughout the regions. Are you seeing anything different in what they are doing as you open up stores? Are they changing how they compete with you, as you become larger?

Craig Carlock

I think I would say it’s exceptionally competitive. I think that you are aware of the competitors. They are very good. We’ve got a couple who once gone public, once announced plans to go public, so I think that increases the competition. We have one that was bought by a private equity firm, I don’t know a year ago.

So a lot is going on. Capital is funneling into the specialty foods marketplace. But the reason it’s funneling in is because customers are aware of and appreciating new and better ways to shop. And so I think we are all benefiting from that, call it secular trend and so we are in a good position to benefit from that trend and we are going to do everything we can to take advantage of it.

But, I would also point out that each of us compete on a little bit different platform. Some compete on natural and specialty, some compete on price, some compete in heavily urban and metropolitan areas, some are more produce oriented, and some are more nonperishable oriented. So none of us is doing the exact same thing, in the exact same way, at the exact same price points. So I continue to believe that there’s enough customers out there to really support everybody.

Jason DeRise - UBS

Just a follow-up on that. I know that we talked about it in the past, but I get this question a lot, so I want to ask it again. When you are in the same market with multiple of these competitors, does that work in your favor or against you?

Craig Carlock

I would say with respect to the largest specialty competitor, that’s usually who folks are asking about, we have a very similar sales level, whether we are in the market with the largest or whether we are not. So what that speaks to is the trade areas that are big enough and good enough for both of us, to support sales levels for both of us. And so we don’t like to be too close to any specialty competitor, like to be a few miles away, but we can certainly be in the same trade area.

Jason DeRise - UBS

All right. Thanks for taking my follow-up.

Craig Carlock

Sure.

Operator

Thank you. There are no further questions at this time. I’d like to turn the call over to management for any closing remarks.

Craig Carlock

Thank you all for participating in our call today. We look forward to speaking with you in August where we talk about our second quarter earnings. Have a great day everybody.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Fresh Market's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts