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The Fresh Market (NASDAQ:TFM)

Q4 2013 Earnings Call

March 06, 2014 5:00 pm ET

Executives

Kenneth Levy

Craig Carlock - Chief Executive Officer, President and Director

Jeffrey C. Ackerman - Chief Financial Officer and Executive Vice President

Analysts

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Brian Cullinane - Wolfe Research, LLC

Rupesh Parikh - Oppenheimer & Co. Inc., Research Division

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Shane Higgins - Deutsche Bank AG, Research Division

Joe Edelstein - Stephens Inc., Research Division

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Jason DeRise - UBS Investment Bank, Research Division

Operator

Greetings, and welcome to The Fresh Market Fourth Quarter and Fiscal Year 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference call over to your host, Ken Levy. Please go ahead, sir.

Kenneth Levy

Thank you, operator. I'd like to welcome everyone to The Fresh Market's Fourth Quarter and Full Year Fiscal 2013 Earnings Call. Joining me on today's call are The Fresh Market's President and Chief Executive Officer, Craig Carlock; and Executive Vice President and Chief Financial Officer, Jeff Ackerman.

Before we begin, I want to remind you that any forward-looking statements we make today are subject to our Safe Harbor statements found in our press release and SEC filings. Our fourth quarter and fiscal year 2013 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 remarks, we will have a question-and-answer session. 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

Good afternoon, and thank you for joining us today. We have a lot of material to discuss on today's call, and I'd like to outline the ground we plan to cover. I'll provide an overview of our fourth quarter results, discuss our real estate process and refinements we're making to support our long-term growth and highlight our operating plan for 2014. Jeff will then discuss our financial performance in more detail and provide our financial outlook for fiscal 2014.

There are 3 overarching messages that we want to convey today: first, business in core geographies, which we define as states east of the Mississippi, remains strong and is growing, period; second, we are modifying our real estate expansion plans to focus more on markets where we have greater brand awareness and demonstrated success; third, we are taking decisive action on underperforming stores to improve profitability.

Let me now turn to fourth quarter sales. Consolidated sales rose 15.1% in the fourth quarter, while comparable store sales grew 3.1%. Growth in customer traffic and basket size was evenly split. We believe these are solid results when considering the headwinds of a more cautious consumer and condensed holiday calendar and severe weather. Weather was particularly harsh in the Midwest and on the East Coast where our store base is concentrated. We estimate that weather had a negative 1-percentage-point impact on comparable store sales this quarter.

Turning to new store development. We continued to open stores on time and under budget. In the fourth quarter, we opened 5 stores for a total of 22 openings in 2013. New stores east of the Mississippi opened on average in line with our expectations, and our historical models effectively predicted their sales and contribution. We are pleased with this performance and excited by the number of opportunities still available on the East Coast. New stores, however, in certain markets, such as Sacramento and Houston, have faced meaningful profitability hurdles and weighed on corporate earnings. As a group, our 9 new stores in California and Texas had a $0.075 drag on earnings in the fourth quarter. While this is very disappointing, it is not indicative of the profitability and performance of the other 142 stores in our network at year-end.

Allow me to add some color on our experiences in the Sacramento and Houston markets. Our approach to entering these 2 markets was a departure from our approach to entering new markets in the past. In markets like Chicago and Atlanta, we enjoyed success by adding new stores gradually, which allowed us to gain knowledge of local consumer tastes, build and train our employee base carefully and build our brand with customers through word-of-mouth publicity. In Sacramento and Houston, however, we aimed to give ourselves a jump-start in the markets and accelerate brand building by opening several stores in a relatively short period of time. In Sacramento, our group of 3 stores has lagged internal forecasts and weighed substantially on corporate profitability during the past 2 quarters. In assessing our experience in Sacramento, we attribute the poor profitability to the absence of brand awareness and general market characteristics that were not as dynamic as we initially forecasted. After evaluating the capital investments and time required to achieve our desired performance levels, we decided to exit the Sacramento market. This action will improve our profit outlook and allow management to focus its energy on higher return opportunities.

Let me note the sales in our 2 remaining California stores, in both Palo Alto and Santa Barbara, substantially exceed sales levels in each of the 3 Sacramento area stores that we're shutting, and sales trends have firmed in both of those markets. In Houston, we entered the market by leasing 4 desirable sites, with a plan to open these stores within a few weeks of each other. We believe that high population density and a strategic premium investment in these former grocery sites will pave the way for accelerated brand building and robust sales. While customers in Houston enjoy our assortment of high-quality merchandise, as well as the unique shopping environment we offer, aggregate sales do not support our capital investment in the market. Although we've made incremental investments in advertising and promotions in Q4 and have seen some traction, we believe that the close proximity of 2 of our Houston stores is weighing on their profitability. As a result, we will close 1 store, River Oaks, in the Houston market.

We have given careful thought to our decision to close these 4 stores, taking into consideration extensive analysis of our expected future cash flows, each store's long-term strategic impact and the time and energy management has allocated to these stores. Based on our analysis, we believe the timely closure of these stores is in the best interest of the company and our future profitability. Charges related to the impairment of real estate and store assets totaled $27.6 million in the fourth quarter. Excluding this charge, adjusted diluted EPS for the quarter was $0.39.

As a result of our experience in Sacramento and Houston, we are facing 3 key refinements into our real estate process to achieve more predictable future results. First, we will be taking a more cautious approach to entering new major metropolitan markets. Our real estate plan will be more conservative and place a greater emphasis on existing market expansion while slowing the pace of openings in markets west of the Mississippi River in the near to medium term. We believe this approach will allow us to better control occupancy costs, leverage existing market data to improve sales forecasts and improve productivity among our new class of stores prior to making incremental market investments. Our unit growth rate in fiscal 2013 was 17%, and our expansion included 8 openings in California and Texas alone. We do not anticipate this proportion of openings in new markets in the near to medium term. In fact, in 2014, we expect no more than 5 of our 23 to 25 stores to be in Texas or California.

Second, we have modified our real estate selection process and sales forecasting to include new analytics, which we believe will improve the strength of stores added to our pipeline and enhance the consistency of new store openings. In addition to qualitative market research, we have both updated our existing forecast methodology and added a new dynamic forecasting model to augment this process. In preliminary back testing, this model has shown a high level of consistency in predicting sales performance and profit contribution. We began this process last summer and have employed internal and external resources to develop it. The benefits of this revised process are being used for leases being signed now for stores opening beyond 2014.

Third, in the fall, we contracted with real estate analytics firm to update our white space analysis for the southeastern United States and also to provide us with better capabilities in assessing sites in all of our markets. We last performed a white space analysis in early 2010 and believe that there are numerous additional trade areas in the Southeast that can support a Fresh Market store, especially since our margins have improved and our required breakeven sales levels have declined in recent years. We also have observed that new stores in the Southeast are creating less cannibalization of existing stores than we initially modeled. This gives us confidence in The Fresh Market's ability to select additional new sites in established markets that will provide returns in line with our robust historical average. Taken together, with heightened analytical metrics, we are confident this refined real estate expansion plan will enable us to grow profitably and predictably.

Before I turn the call over to Jeff, I'd like to comment on our outlook for fiscal 2014. In developing our annual plan, we focused on returning to solid earnings growth from improved store level execution, new store pipeline enhancements and a balance of investments and cost controls.

In fiscal 2014, we plan to open 23 to 25 new stores, 7 of which will be in Florida. We expect new Florida stores will contribute approximately 250 operating weeks to our corporate P&L, which is a fivefold increase from these 2 stores we opened in Florida in 2013. Another modification we have made to this year's pipeline is reduce the number of stores with higher occupancy costs. This should reduce the overall P&L risk associated with our 2014 class of stores.

Focusing on our expansion plans for California and Texas, this year, we will open 1 store in California, in Laguna Hills, 1 store in a Houston suburbs -- suburb and 3 stores in the Dallas-Fort Worth area. Each of these deals were struck in 2012, but we remain comfortable with the characteristics of these sites and the analysis that led to their selection. They are not, let me repeat, not similar in structure or cost to the existing Houston stores or the more expensive California deals we have done.

Occupancy and capital costs are more reasonable for the 5 stores we plan to open this year between California and Texas. And none of these new stores contains an upfront lease inducement payment. Furthermore, our forecast for each of these sites is based upon updated sales expectations that reflect our historical experience and learnings from each respective market.

Beyond the refinements we are making to our real estate plan, we are able to make investments for long-term growth. Let me highlight a few of these related to the new fiscal year. We recently completed an employee survey to assess engagement levels and receive feedback. This effort will provide for even better ways to connect each employee's contribution to customers in our corporate goals. Our compensation programs throughout the company are being tailored to reward performance, with a greater emphasis on company's sales. We are also investing in our capabilities to develop and execute more effective promotions and customer offerings. We have smoothed the pace of new store openings and identified process efficiencies at the same time. We anticipate 5 to 8 store remodels, which lays the foundation for an improved customer experience, defense against new market competition and a tailwind to future comp growth.

Finally, we have identified a number of opportunities to better manage costs and improve efficiencies without sacrificing customer service or corporate productivity. These involved eliminating redundant or overlapping responsibilities in our G&A expenses and holding preopening expenses flat to last year, as well as reducing some of our non-merchandise procurement spend.

I would like to conclude my remarks by emphasizing that we remain committed to growing The Fresh Market into a national brand. We are confident that our fresh food offering, great customer service and warm, inviting environment is a concept that consumers will continue to embrace as we grow our store base.

In our 32 years of operating in the specialty food industry, we have had our ups and downs. Though we are not satisfied with our 2013 results, we are confident that we can leverage our brand and our existing market position, which we anticipate will deliver double-digit revenue, unit and earnings growth.

With that, let me turn the call over to Jeff to provide more color on the quarter and to share details of our financial outlook for fiscal 2014.

Jeffrey C. Ackerman

Thank you, Craig. As Craig mentioned, we experienced a challenging fourth quarter due to a number of circumstances, the financial impacts of which I'll discuss in a moment. Despite many challenges, 2013 was a record year for The Fresh Market in terms of revenue as we reached $1.5 billion in sales, a 13.7% increase over the prior year on comp sales growth of 3.2%. For the full year, fully diluted earnings per share were $1.05, and adjusted earnings per share were $1.40. Adjusted EPS excludes pretax charges of $27.6 million related to the impairment of certain real estate and store-related assets. Activities associated with new and existing stores operating in California and Texas accounted for an $0.18 decline in the EPS from the prior year, of which $0.15 was unplanned.

Turning to the fourth quarter, The Fresh Market announced adjusted earnings of $0.39 per share on net sales growth of 15.1%. New stores and a 3.1% increase in comparable store sales supported top line sales, with average transaction size increasing 1.6% and transaction volume increasing 1.5%. Like other retailers, our business was impacted by frequent storms and severe winter weather, which negatively affected traffic, sales and margin. Storm activity disrupted normal customer traffic patterns and led to week-to-week sales volatility.

Lower-than-expected sales in comp and non-comp stores negatively impacted earnings by approximately $0.04, with an additional $0.02 impact related to lower gross margins, which I'll discuss in a moment. These were partially offset by reduced SG&A expenses.

In the quarter, we made investments in proteins to drive holiday traffic, especially in new markets. While promotional activity in new markets was high, promotional sales as a percent of revenues across the entire company was in line with the prior year. Cost per unit inflation continued to accelerate in seafood, while it moderated in most other categories. Our promotional activity had the net effect of weighing on gross margin.

Gross margin contracted 50 basis points this quarter to 33.5% due to a 40-basis-point decline in the merchandise margin rate related primarily to heavy promotional activity in select new markets, as well as a 20-basis-point increase in occupancy costs. Gross margin in our comp store set increased 10 basis points.

Selling, general and administrative expenses as a percentage of sales rose 50 basis points from last year to 22.8%. This increase in expenses as a percentage of sales was attributable to insurance reimbursements in the fourth quarter of 2012, which did not repeat in the fourth quarter of fiscal 2013, and higher preopening costs. The higher preopening expenses were associated with 5 new store openings during the quarter compared to 2 new stores in the prior year quarter. This increase contributed approximately 20 basis points to selling, general and administrative expenses as a percentage of sales.

As I mentioned, The Fresh Market also recorded a noncash charge of $27.6 million in Q4, equal to $0.35 per diluted share to cover impairment of certain real estate and store-related assets associated with 7 retail locations, including the planned closure of 3 stores in Sacramento and 1 in Houston. We anticipate the recognition of lease liabilities, severance and other costs associated with these store closures will precipitate an additional $18 million to $20 million in charges in the first half of fiscal 2014. The bulk of these charges will be booked at the time that The Fresh Market ceases operations at the 4 closing stores in Sacramento and Houston.

Our goal in making the decision to close these stores was to take swift action and address the persistent headwinds we faced in these respective markets. And as a result, management will be able to focus energy and resources on projects with higher returns. As Craig noted, we have also implemented new analytics and forecasting methods designed to improve our store site selection process and enhance the accuracy of sales forecasting. We are also placing greater emphasis on store unit growth in core markets while slowing the rate of expansion west of the Mississippi River in the near to mid-term. We believe these efforts will deliver more predictable financial performance for the company.

Looking forward to fiscal 2014, I'd like to share with you our financial outlook. While we will not be providing quarterly guidance on an ongoing basis, I would like to share with you our expectation for the first quarter due to the volatility we have experienced in the first period of fiscal 2014. We expect adjusted earnings for the first quarter of $0.41 to $0.44 per diluted share, excluding the impact of the portion of the $18 million to $20 million or $0.23 to $0.26 per diluted share in charges related to store closures that will be recognized in the first quarter. The biggest impact to the quarter will come from comp store sales growth, which we expect to be at the low end of our full year guidance of 1.5% to 3.5%. Driving this slowdown is a combination of harsh winter weather, which has impacted a majority of our store network, and a general choppiness in consumer spending, which has persisted. Our stores in California and Texas will serve as a headwind to results until the second half of the year when we will realize year-over-year operating improvement. We estimate these stores will have a $0.03 drag on EPS in the first quarter. Finally, we will open 7 stores in the first quarter, which will drive incremental preopening costs of approximately $0.01 per share.

For the full year, we expect to realize adjusted EPS of $1.56 to $1.66, excluding store closure costs of $18 million to $20 million or $0.23 to $0.26 per diluted share. On an adjusted basis, EPS is expected to grow 11% to 19% for the fiscal year. Sales will be driven by 23 to 25 new store openings and reflect a better balance of new store openings within our existing footprint.

Comp sales growth is expected to be in the range of 1.5% to 3.5%. Underlying comp momentum remains unchanged in markets where we already face competition. However, we anticipate competitive openings in other markets, which will heighten the impact of competition relative to fiscal 2013. Our full year outlook also reflects the weather-related impact of the first quarter and a general uncertainty about the economic environment due to a more cautious consumer.

In fiscal 2014, we expect merchandising margin to be in line with 2013 results while increasing investments in customer activities and promotions. On the expense side, we expect the SG&A as a percentage of sales to be in line with fiscal 2013. We have identified a number of opportunities to manage cost better without sacrificing quality, standards or in-store service. We anticipate much of these savings will come from removing corporate redundancies and better expense management on store operating costs, as well as from new store openings, which will be fully offset by incentive compensation costs accruing at target levels in fiscal 2014. We expect our tax rate to be approximately 37.5%. We plan to open 23 to 25 new stores and remodel another 5 to 8 locations, which will boost CapEx to $125 million to $145 million for the year.

Average CapEx per store will be lower in fiscal 2014, which reflects a greater mix of built-to-suit stores relative to as-is sites. The cadence of new store openings should be fairly balanced, with 7 stores opening in the first quarter, 5 to 6 in the second quarter and 10 to 12 new stores opening in the second half of fiscal 2014. We are excited about our 2014 growth plan. It delivers double-digit unit growth and reduces volatility in new store performance through more geographic balance and improved forecasting discipline. A key point of differentiation for The Fresh Market remains our talented employees, who provide unparalleled service and strengthen our brand in the communities we serve. I'd like to thank them for their dedication.

With that, we would be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Charles Grom with Sterne Agee.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Craig, just when we did the IPO a bunch of years back, 500 stores was the goal. And I'm just wondering, with you guys pulling away from a couple of these markets west of the Mississippi and refocusing on stores east of the Mississippi, which I think actually makes a lot of sense for you guys, I mean, what does the long-term store goal look like based on the work you've done with the new real estate team?

Craig Carlock

Let me make a couple of points, Chuck. We don't have any information today that leads us to believe that U.S. capacity for The Fresh Market is anything less than 500. But we're talking about, as a change of pace in our openings west of the Mississippi, not necessarily a change to the total. So that's one point. The second point is we're very optimistic, based on our experiences so far, about our ability to add stores in the Southeast. We're seeing less cannibalization than we've been expecting. We're lowering our breakeven as we've built our margins. And flat out, we've seen some really strong openings in the Southeast. So based on that, we're updating our white space analysis. We've hired a firm, same firm we used in April 2010. We'll have an update, and then we'll be in a position to answer definitively. Right now, we're not moving off the 500.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay. And, I guess, I'm just a little bit confused. You say you're closing a couple of stores in California, but you're still going to open up 1 store this year. And you're going to close a store in Houston, but then you're going to open up another couple. I guess, just how do you know you're not going to be in this position 18 months from now with closing the same store? What are you guys doing differently?

Craig Carlock

Well, the decisions we're making to expand slowly reflect the confidence we have in the deals that we've struck and also reflects the learnings that we've had in California and in Texas so far. So we've taken what we've learned, we've folded that in, but the deal characteristics we're now looking for are quite a bit different. So in effect, we haven't seen the sales levels that we thought we would, and so that implies that we need to obtain deals with lower occupancy costs, lower rents, lower capital structures. And when we can find those deals, we're happy. The other thing I would say is we have stores in Palo Alto and Santa Barbara with good revenue levels. We have stores in Houston with good revenue levels. So it's a matter of matching the costs with the revenue levels that, based on our experiences, we now expect to achieve.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay. Okay, good. And then just my follow-up question would be just -- we observed a pretty big increase in the promotional intensity here locally, most recently, yesterday, with the Little Big Meal Thursdays and Fish Fridays. And, I guess, are you guys concerned at all that you're kind of retraining your shopper to only shop when you have these events? And you seem to have a lot more daily events than you did a couple of years back. And, I guess, what are the implications for gross margins over the long term with the increase in these promotions?

Craig Carlock

Well, we continue to feel like these promotions, and I would characterize these as shorter duration, deeper discount and very popular items, are a way to draw new people into the franchise. And so we believe we're getting folks who wouldn't otherwise be there, in many cases, are getting additional frequency or trips that we wouldn't otherwise receive. So we're watching to see if we're retraining. But we -- as we think about pricing, we think that lowering our everyday prices or something like that a little bit isn't nearly as effective as a promotion that really connects with customers. But we're watching the issue you raised. But we haven't seen day of the week shifting or a business evolve in a way that would suggest we're getting any undesired effects.

Jeffrey C. Ackerman

Chuck, this is Jeff. I just want to tag on to what Craig said there, that as far as the margins go, we still feel that the ability to grow our scale and leverage our buying power with our vendors allows us to continue to offset those, and we should be able to hold those margins flat. The merchandising margin should be flat.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay. And then, Jeff, just on that 1.5% comp for the quarter, is that consistent with your quarter-to-date trends or is there an expected pickup as the quarter progresses?

Jeffrey C. Ackerman

I'm sorry the 1.5% for?

Craig Carlock

Guidance.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

You said the comp. The low end of the -- they said the low end of the full year for the first quarter. I was wondering if that's consistent with the past 5 weeks, 4 weeks.

Jeffrey C. Ackerman

Well, with the weather, as we talked about, that's what's influencing our guidance for the first quarter. And so, yes, we'll be at the low end for this first quarter and, again, with really just the weather that we've seen. But when we're outside the weather, we've seen things pick back up. And so on a weighted average basis, that's where we'll probably be for the first quarter.

Operator

Our next question comes from the line of Robbie Ohmes with Bank of America.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

A couple of follow-up questions. Jeff, I think you mentioned heightened competition in your guidance. Can you maybe elaborate on where you guys are seeing heightened competition? And what kind of competition is it? Is it the traditionals responding to existing stores? Is it natural organic competitors growing? Is it mom and pops doing a better job of competing with you guys when you come into a new market? Maybe, Craig and Jeff, maybe help us understand what's changing there.

Craig Carlock

Yes, this is Craig. What we're referring to is that we expect more stores, more of our stores, to be affected by openings of our competitors as we roll through 2014 than we've seen in the past. And so it's a measurable difference in a number of openings we'll see. Now what happens when a competitor opens is that we usually see some impact, it could be small to medium impact, and then we comp positively from there. So we might drop down and then comp positively after some time in the market with the new competitor. But we're trying to be -- reflect the fact that more openings will be held in stores for weighted markets that have not occurred in the past. A couple of other points though. We believe that each of our competitors and us serve a different specialty niche. And so some of us specialize in fresh perishables. Others are almost nonperishables. We're more suburban. There are others that are more urban. And so while we compete with one another, we each have a distinct place. And then last point we'd make is that we believe that more and more competitors are opening stores, and we ourselves are opening stores because of such a great secular trend that we're all trying to take advantage of.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Got you. And then the Southeast less cannibalization that you saw, what do you think that -- what's driving that in the face of rising competition?

Craig Carlock

Well, I think that when our customers are shopping at a store that's, let's just say, a 20-minute drive and we're able to give them an opportunity to shop at a store that's a 5- to 10-minute drive, we're -- instead of moving $1 from one store to the other, we might be losing $1 at the far away store and picking up $2 in the closer store. Because it's so much more convenient. They're shopping a little more than we thought.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Got it. And then the last question, just a follow-up on Chuck's question. So the 25 leases that you've signed, you're saying that the average rents expected on those leases and the capital investments are lower and, therefore, more in line with an expectation of a lower sales contribution from those stores in new markets? Is that how we should read that?

Craig Carlock

Yes. I would say they don't demand the same high level of sales that some of our stores in California and Houston would have demanded. So I think that's a fair statement.

Jeffrey C. Ackerman

But I think just consistent with not only the capital spend and occupancy cost being at historical levels, I mean, these are also stores in these markets that will have revenues at those historical levels as well.

Operator

Our next question comes from the line of Scott Mushkin with Wolfe Research.

Brian Cullinane - Wolfe Research, LLC

This is actually Brian Cullinane on for Scott. Just wanted to touch -- so the -- you called out the 40 basis points of gross margin due to the heavy promoting in some of the distant markets, and clearly, those weren't in the comp base since the comp gross margin were up 10 basis points. Do you think in some of those -- the existing stores that are outside those core markets, the California, the Houston stores, is that level of promotion going to need to continue to drive the sales or are you going to pare back off of those with the lower lease -- the rent expenses and that sort? Can you just talk about that?

Craig Carlock

This is Craig. We don't expect to continue the high level of promotional activity that we executed in the fourth quarter. We had some new stores that opened. We wanted to give them every possible chance to succeed and to grow and to bring new people into our franchise. We've provided great values and we advertised those great values. It's not something we normally do. And the business didn't really stick in January and February. And so we won't do that -- we don't see a need to do that again. That doesn't sound like a good idea to us. That doesn't mean we won't, from time to time, promote in new stores or try some things, but as an ongoing permanent change, no, it's not what we're planning.

Brian Cullinane - Wolfe Research, LLC

As we look at the fourth quarter next year, it'll be kind of a more of a onetime down in the gross margin and kind of cycle through that is what you...

Craig Carlock

Well, I think that, conceptually, yes. All else constant is -- what you've said is true. But we don't know the cost of the proteins and the other items we'll be selling next year in the fourth quarter, so it's hard for me to say anything other than refer to the guidance we gave for the year.

Operator

Our next question comes from the line of Rupesh Parikh with Oppenheimer.

Rupesh Parikh - Oppenheimer & Co. Inc., Research Division

So my first question just has to go back to the comments you made on the consumer. You made a comment that you saw choppiness in consumer activity throughout the quarter. Would you say this is more broad-based in all your markets or was there -- or is there a difference you're seeing between weather -- some of the weather and non-weather-impacted markets?

Craig Carlock

It's difficult to rate [ph] because the weather has been so prevalent. And -- but that's the choppiness we're referring to, as much weather as anything else.

Rupesh Parikh - Oppenheimer & Co. Inc., Research Division

Okay. And then in terms of your new store productivity expectations for this upcoming year, do you still expect to be within your normal targeted ranges? And as you go into some of these -- as you continue to expand into California and Texas, do you have any plans to just improve the brand awareness and performance of these stores versus [indiscernible].

Craig Carlock

On the first point, I would say, we're very excited about this class of stores. In fact, we've opened 5 stores already this fiscal year, and these stores are off to a very good start. And I don't mind saying that our February new store productivity jumped quite a bit from January. So we're off to a real good start. We're very optimistic about the year. It's too soon to make a call. We don't really forecast new store productivity, but we're very optimistic about how we've begun. And you had a second question, too.

Rupesh Parikh - Oppenheimer & Co. Inc., Research Division

Yes. And then just in terms of California and Texas, as you go into, for example, Dallas, do you expect to do anything differently from a brand awareness perspective?

Craig Carlock

Well, when we went into Houston and into parts of California, we've tried some different ways to reach out to customers. I think for us, it's a question of the cost and the benefit. We're very open-minded about new ways to reach people, and we've done a little bit more direct mail recently the last couple of years. But I wouldn't expect a dramatic change. I don't mind telling you that once we're testing a couple of things though to drive awareness, we're testing having a field-based of, call it, merchandising coordinator or somebody to get folks into the stores for testing at 1 existing market and we're testing in Houston to see if we can't drum up activities and other ways to draw interest in our food offering by bringing people into the store, by doing more on the ground events.

Operator

Our next question comes from the line of Kate Wendt with Wells Fargo Securities.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

First of all, I commend you on refocusing the strategy. I know that's no easy task, and I think it makes a lot of sense. Just thinking actually forward to 2015, it sounds like you haven't necessarily signed any leases yet. Do you think you'll have to slow your stores at all if you refocus on existing markets just in terms of the number of near-term lease opportunities in these areas? Or is it too soon to tell there?

Craig Carlock

Well, we have signed leases for 2015, and probably some of the leases we have will be 2016. It's too soon for me to provide flavor or guidance or anything like that for 2015.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Okay. Got it. And then on California, I think, originally, you were expecting to open another Southern California store in Yorba Linda. So I'm assuming that, that lease you had pulled back from?

Craig Carlock

We've decided to defer that opening. We still have that lease.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Okay, great. And then maybe for Jeff. You said that 7 stores were included in the impairment. What were the other 3 stores that were impaired that weren't the 4 that you're closing?

Jeffrey C. Ackerman

Yes. So as you said, the 7 was the 4 that we're closing, then we have 1 additional one -- or actually 2 additional in California and Texas. And then the third one or the seventh one, if you will, is a lease that's on a store close to the end of its lease, and it's being affected by road construction. So it's not a big deal.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Okay, got it. Great. And then just one final one on merch margins. You guys mentioned that you expect them to be flat this year, even as you promote a little bit more. What will the offsets to that promotional activity be in terms of the opportunities there? And then will you be focusing on the -- with the promotions on any particular categories?

Craig Carlock

We -- each year, as we grow, we're able to create efficiencies with our buying, and so the efficiencies could be from those who grow the food or produce the food. And you have those who ship the food and then you have those who warehouse the food. So we expect our merchandising group year in and year out to lower its purchase cost of goods, and some of that can be reinvested in promotions. And that's what we're referring to. Yes, I think you had a second part to that question, didn't you?

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Any particular categories they're going to be focused on where you feel like you want to focus your promotional efforts on?

Craig Carlock

No. I'd say we've had good success promoting proteins in middle of the week, and we've had good success trying some other things on the weekends. But it's -- we make these decisions based on the dynamics of each department in our store. Each department stands alone. Each is a profit center, so to speak. And we look at the revenues we're generating, the current cost in a department and make our decisions quarter-by-quarter.

Kate Wendt - Wells Fargo Securities, LLC, Research Division

Okay, great. And then just finally, this kind of was touched upon in an earlier question about the promotional activity, but how do you think about the decision to kind of choose promotions versus investing in everyday prices? And kind of your philosophy around that as we move forward.

Craig Carlock

Well, we measure our everyday prices vigorously and rigorously with respect to conventional competitors and specialty competitors. And we're comfortable with our everyday prices, and we're very comfortable we're delivering value with our everyday prices. So the promotions tend to drive more activity, and we said the everyday price is sort of in line with the competitors and the quality they provide relative to the quality we provide.

Operator

Our next question comes from the line of Shane Higgins with Deutsche Bank.

Shane Higgins - Deutsche Bank AG, Research Division

Just looking at that pretax charge that you took for the quarter, Craig or Jeff, how much of that is cash versus noncash?

Jeffrey C. Ackerman

This is Jeff. It's all noncash.

Shane Higgins - Deutsche Bank AG, Research Division

It's all noncash? Are there any other leases that you guys may be looking to get out of or is this kind of -- is this it for a while?

Jeffrey C. Ackerman

No, we've -- as we're required to do every quarter, we take a look at all our leases and we are -- we've taken all the actions we need to.

Shane Higgins - Deutsche Bank AG, Research Division

Okay, great. And just in terms of -- just back onto the promotions that you took in the fourth quarter. Did you guys expect there -- do you guys think gross margins would have actually been a bit higher if not for that? I mean, obviously, we've been higher, but would they have been up if not for those few markets? And I know you guys said merchandise margins should be more stable. I mean, how should we think about like the first half of this year in terms of modeling our gross?

Jeffrey C. Ackerman

So let me -- it's Jeff again. So let me maybe answer the first part of your question. I think the best indicator of our performance on margins for the fourth quarter was to think about the comp stores. And so, as we said, we saw a 10-basis-point improvement in gross profit within the comp store set. And then as we think about margins for this year, as we said, we're looking at merchandise margins being, more or less, flat. We're going to continue to invest in promotional activities to drive traffic and to try and broaden the appeal of our offering to a broader customer base. And the headwind for gross profit then will be the occupancy costs.

Shane Higgins - Deutsche Bank AG, Research Division

Okay, great. And then just last one on your inflation expectations for this year. What do you guys have embedded in your own comp outlook?

Craig Carlock

Well, it's very modest. But I would point out that we're seeing a real spike in seafood costs and it's really limiting. And that's an important department for us, and it's really limiting our ability to promote and achieve revenues in that department. So very modest overall, with pretty dramatic change, however, in seafood, which we're feeling in our comp sales right now.

Operator

Our next question comes from the line of Joe Edelstein with Stephens.

Joe Edelstein - Stephens Inc., Research Division

First, can you just give us the new store productivity number for the quarter as you calculate it?

Jeffrey C. Ackerman

Yes. The new store productivity for the quarter was 73%.

Joe Edelstein - Stephens Inc., Research Division

And that's adjusted for all the timing of the stores, correct?

Craig Carlock

That's right. We look at that on -- really, on a bi-week basis. We weight that.

Joe Edelstein - Stephens Inc., Research Division

Okay. And I'm hoping you can tell us a bit more about some of the new analytics and the forecasting methods with the site selection process. Are there any significant changes to the site criteria in terms of the geography, population, demographics that you're looking for?

Craig Carlock

So we've developed an internal model, and it's a regression model. I think a lot of retailers have tried this. In fact, we've tried this in the past, and we never felt like we had enough stores for it to be very predictive. We now have a rich enough set of stores that what we're finding is this is relatively predictive and has a lower forecast error rate, if you will, than the very quantitative methods we used in the past that were effectively an analog method. So I don't want to get into what variables we look at. I consider that proprietary, which ones we look at and how they're weighted. But I would just tell you that the regression model has a much lower forecast there than our analog method.

Joe Edelstein - Stephens Inc., Research Division

Okay. And also, as part of the guidance, you've called out plans to remodel 5 to 8 stores. Can you just remind us how much comp lift you typically see after a remodel?

Craig Carlock

It can be anywhere from 5% to 30%. I think double digits is a safe assumption. We think this will really boost those stores in the year 2015. These will be remodeled midway through this year. So it helps us a little bit this year, but most of the help will be felt next year.

Joe Edelstein - Stephens Inc., Research Division

Okay. And then as you've also spoken about today with the Southeast and seeing less cannibalization in that market, are you seeing any similar trends that you could comment on perhaps in the mid-Atlantic region or any other markets?

Craig Carlock

Well, we just don't have as many experiences opening stores close to one another in mid-Atlantic, so I don't have a lot of data to say we've got less than we expected.

Joe Edelstein - Stephens Inc., Research Division

Okay. And then just last question for me. It's a bit of a follow-up in terms of how you're thinking about pricing. Can you just tell us how often you're conducting pricing checks, and secondly, how many SKUs that covers?

Craig Carlock

We conduct at least monthly. In some product categories, it will be more often than that. And we're going to cover, let's say, up to 100 items that are important to customers on those checks.

Operator

Our next question comes from the line of Ben Brownlow with Raymond James.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Just a follow-up on a prior question. What was the new store productivity outside? That 73%, I assume, included Texas and California. What was it, excluding Texas and California?

Jeffrey C. Ackerman

78%, excluding the 4 stores we're closing. 78%.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

And just to be clear, the 5 openings that you have in California and Texas are 4 to 5 planned for 2014. That -- you're not expecting a higher level of sales. It's purely a lower capital investment?

Craig Carlock

I would say we've -- the idea getting into Texas was to get in with the 4 former grocery sites as a way to get our foot in the door. And once we got our foot in the door, we've been striking deals that are -- that have the economic characteristics of deals that we're used to, where we don't pay lease inducements, we don't have significant capital expenses and we have average rent levels. So the way I would characterize those is they're the kinds of deals that we're used to doing.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

All right. And then just one last for me. On the weather impact, I know you said it was $0.01 for the first quarter. Can you give us an idea of how many stores and kind of days lost were affected?

Craig Carlock

We've measured this every which way. We could count stores. We could count hours they are closed. I mean, I think the best number to use is the one Jeff gave with the $0.01, to be honest. I don't mean to be a smart aleck. It's just sometimes they're open, but no one's there. And if they're open and no one's there, it really affects shrink. And maybe the shrink was a more important factor than the fact that we were still open, but we had a huge shrink. So there's a lot of dynamics in that. The other point I would make is our fiscal year started in late January. The big snowstorm around Atlanta affected our distribution around the Super Bowl. And then the next big snowstorm was around Valentine's Day, and we had an awful lot of roses in our store that were not sold on the 13th because there was a big storm that day. And so I think go with the $0.01, and it's just been really dynamic the last few weeks.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Okay. And then just one last one, sorry. The gross, the comments you made on the gross and the SG&A margin, is it fair to assume that you're kind of factoring a flat operating margin for the year?

Craig Carlock

That's right.

Operator

Our next question comes from the line of David Magee with SunTrust Robinson Humphrey.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Craig and Jeff, just a couple of questions. One, the $0.075 drag you mentioned for the fourth quarter, I think, do you have a number for the stores being closed? Do you have a number for the year last year that would be comparable?

Jeffrey C. Ackerman

What the year-on-year impact was?

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Well, just what that number -- if it was $0.075 for the fourth quarter or what would it have been for the 2013 year.

Jeffrey C. Ackerman

Well, as we put in here, year-on-year, the impact associated with stores in California and Texas was $0.18. That was the incremental impact.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Okay. When you mentioned the competition, opening stores, yes, I still wasn't clear whether you're speaking about specialty competition or conventional. I'm just not aware of anybody that's got a niche like yours opening stores against you right now.

Craig Carlock

We're primarily referring to the specialty competitors that you'd be familiar with, that they're opening on more Fresh Market stores as a percentage and in the absolute than they have in the past. And this has an effect on us that we'll feel through the year.

Jeffrey C. Ackerman

I'd just also on that, that's not a phenomenon that's any different than when we open on someone else in the market. And as Craig said earlier, after 1 year then, we see that continue to grow. We're in markets where we have those competitors and they've been there for a while. We are growing.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then in the past, you talked about the possibility of stores that maybe have a subpar opening in the first year and then comping better with that store the second year. Is that something that could happen this year with the 2013 stores that you're not closing? Do you anticipate a better rebound from those stores?

Craig Carlock

Yes. Yes, it's -- often what happens is folks come in during the fourth quarter, whether it's Thanksgiving, Hanukkah, Christmas, New Year's, and they have a fantastic experience. And we see a reasonable lift in the first part of the following year. And so that -- what you've described is entirely possible.

Operator

Our next question comes from the line of Jason DeRise with UBS.

Jason DeRise - UBS Investment Bank, Research Division

In the original 500 store guidance, obviously, there is a portion that were east of Mississippi. Can you share what that number is? I know you're going back and you're fine-tuning in -- you think you can build your stores closer. But based on the 500, can you share how many of those were current markets or not west markets?

Craig Carlock

I don't want to give or I don't really have at my fingertips a detailed reconciliation of where that 500 was. I'll give you an anecdote though. That 500 had 42 in Florida. We're sitting today with 35. We're going to finish the year with 40 in Florida, and I think we'll blow by that 42 that's in Florida.

Jason DeRise - UBS Investment Bank, Research Division

Okay. And do you think the 80% to 90% new store productivity range is still valid or do you think that we need to think about lower numbers?

Craig Carlock

Well, I would say it's valid, but again, what we're as focused on as that or even more focused is on the return characteristics. And there are many markets where the returns can be quite good at lower -- at a number lower than 80%, 80% of the ratio of new stores sales to our company average, call it, or comp store average. And you can have some great returns if you get the right deal structure at a number less than 80%.

Jason DeRise - UBS Investment Bank, Research Division

I mean, when you're getting better deals, are you settling for like B [ph] locations instead of A locations or is there still deals to be had on A location?

Craig Carlock

A locations in smaller markets. It's A locations in smaller markets have those characteristics I was describing. An example might be Daphne, Alabama; Lynchburg, Virginia.

Okay. Thank you very much for calling today. We've enjoyed the chance to explain the quarter to you. We'll talk to you at the end of the next quarter.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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