The Fresh Market's (TFM) CEO Craig Carlock on Q1 2014 Results - Earnings Call Transcript

May.22.14 | About: The Fresh (TFM)

The Fresh Market Inc. (NASDAQ:TFM)

Q1 2014 Earnings Conference Call

May 22, 2014 05:00 PM ET

Executives

John Mills - ICR

Craig Carlock - President and CEO

Jeff Ackerman - EVP and CFO

Analysts

Chuck Grom - Sterne Agee

Robby Ohmes - Bank of America Merrill Lynch

Kate Wendt - Wells Fargo

Ken Goldman - JPMorgan

Brian Cullinane - Wolfe Research

Rupesh Parikh - Oppenheimer

Jason DeRise - UBS

Sean Naughton - Piper Jaffray

Joe Edelstein - Stephens

Karen Short - Deutsche Bank

Mark Miller - William Blair

Kelly Bania - BMO Capital

Ben Brownlow - Raymond James

Joe Feldman - Telsey Advisory Group

Andrew Wolff - BB&T Capital Markets

Operator

Greetings, and welcome to The Fresh Market First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference call over to your host, John Mills of ICR. Thank you, you may begin.

John Mills

Thank you, good afternoon and welcome to The Fresh Markets first quarter fiscal 2014 earnings call. 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, we’d like to remind everyone that any forward-looking statements made by management during today’s call are subject to the Safe Harbor statements found in The Fresh Market’s press release and SEC filings. The Company’s first quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables, are available on The Fresh Market’s corporate web site at the thefreshmarket.com under the Investor Relations section. This call is being recorded and a replay will be available on the Company’s website for approximately 30 days.

It is now my pleasure to introduce Mr. Craig Carlock, President and CEO of The Fresh Market for opening remarks.

Craig Carlock

Good afternoon and thank you for joining us. Today I’d like to provide an overview of our first quarter results, discuss the progress we’re making on unit growth and our real estate pipeline and update you on the steps we’re taking to support our long-term growth. Jeff will then discuss our financial performance in more detail and our financial outlook for the remainder of fiscal 2014. After our prepared comments we will have time to answer your questions.

We are pleased with our first quarter performance as we march along the path we outlined on our March conference call. Our sales and earnings results were in line with our expectations as we achieved adjusted earnings of $0.43 per diluted share excluding the impact of store closure activities on a comparable store sales increase of 2.5%. Comparable store sales in the month of February were tough due to weather related interruptions and store closures but sales in March and April rebounded as we anticipated.

With the exception of the first few weeks, growth in customer traffic remained steady throughout the quarter but growth in basket size was more modest. We continued to invest in thoughtful promotions and new customer offerings as we work to broaden our appeal to new and existing customers.

Turning to new store openings, during the quarter we continued to increase our store penetration in our existing markets and open seven stores, three in Florida, two in North Carolina, one in Illinois and one in Virginia. We have been encouraged by the initial customer reception in sales and as a group these store openings exceeded our expectations. In fact six of these seven new stores had first day sales that rank in the top one-third of all new store openings for The Fresh Market.

Since the quarter ended, we have opened three more new stores, one in Florida, one in New York and one in Texas and all three had solid day one sales and opened in line with our expectations. We’re pleased with the performance of these 10 stores and we are excited about our planned future stores and the opportunity is still available in new and existing markets.

While we normally don’t highlight individual store performances, I’d like to comment on our new store in the Houston area. This store has only been open a couple of weeks but based on its solid initial sales and relatively low capital requirements, we are very encouraged about its potential to be a high return store for the Company.

Turning to real estate development, as we said on our last call, we are committed to more profitable growth in the future. We would like to update you on our progress phasing several key refinements into our real estate development strategy. First, we are taking a more cautious approach to the pace of expansion in major metropolitan markets. This is consistent with our historical approach when 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. Even if this means unit growth rates may be closer to 12% to 15% annually, we believe it will ensure more predictable returns.

Second, we continue to refine our real estate sales forecasting models which we believe will enhance the consistency of new store returns. It’s early but the changes we have made to the forecasting process have yielded greater accuracy based on observations and new store openings this year.

Third, we are refining our real estate site selection to emphasize lower risk built-to-suit opportunities. This shift in site selection tend to move more of the capital burden to our landlords who accept it because they recognized the value created by our tendency. We have exited certain capital intensive deals and we continue to scrutinize our pipeline for opportunities to reduce the number of stores with high occupancy costs.

Fourth, in the fall of last year, we contracted with a real estate analytics firm to update our white space analysis for the South Eastern, United States and to provide us with better capabilities in assessing potential sites in new and existing markets.

While we are encouraged by the preliminary results, there is still a lot of work to be done to finalize the analysis. The next step is to identify the theoretical capacity of the Fresh Market stores in a given geographical area. Then we will filter and perhaps discount the capacity numbers based on the availability and projected operating cost for the potential trade areas. Finally, we will identify specific sites in the targeted trade areas without excess overlap.

We expect to complete the assessment of the South Eastern U.S. in the next 90 to 120 days. Once the white space analysis is completed, we will discuss its implications and how we might use the findings to augment our real estate expansion.

In the meantime, we are continuing with our new store expansion and refining our pipeline for 2014 and beyond. At this time, our plans for fiscal 2014 call for us to open 23 to 24 new stores, seven of which will be in Florida. We are asked about plans in California and Texas. This summer we will open one store in California in Laguna Hills and we have three stores in the Dallas, Fort Worth area that are slated to open in the next 12 months.

Each of these deals were struck in 2012 or 2013. That said occupancy and capital cost for these stores are lower and more consistent with our historical spend then those we opened in 2013 and none of these new stores contains an upfront lease inducement payment. Furthermore our forecast for each of these stores is based upon updated sales expectations that reflect our recent experience and learnings from new market entries, including the impact of a lack of brand equity.

In addition to our real estate development, we continue to make progress on a number of initiatives to drive long-term sales and earnings growth. We are investing in our capabilities to develop and execute more effective promotions and customer offerings that are designed to drive traffic and sales.

We continue to test various promotions and in March we implemented a weekly meal-deal event that has seen a growing response with customers. Each event has a theme that leverages multiple departments to build awareness of our product offering at a great value. These product and promotion efforts also include the expansion of our private label program and continued introduction of new items in our deli and prepared foods areas which we believe represent a significant growth opportunity. We are also testing the hosting of more community events and engaging in limited direct mail while being mindful of the expense.

We are continuing with our remodel program and now anticipate four to five store remodels which we expect will improve the customer experience, defend against competition and promote future comp growth. All of these are scheduled for the end of the year with a couple of previously planned remodels deferred until 2015 as we negotiate lease modifications and permits. Finally, we have identified a number of opportunities to better manage costs and improve efficiencies without sacrificing customer service or corporate productivity.

Before concluding, I’d like to offer a couple of thoughts on a competitive environment. We have observed and recent extensive third-party customer research has confirmed that consumers come to us because of our unique combination of outstanding food quality, engaging customer service and an inviting store environment. We believe this combination provides us great flexibility and differentiates us from our competitors who compete on ingredients based product assortment, price or some combination.

We have found and research confirms that consumers are increasingly shopping at more than one food store, which supports our belief that our success is not contingent on providing one-stop shopping for consumers. Although we believe our positioning sets us apart for the long-term, we acknowledge that competitive openings are affecting our comp store sales growth rate and we have factored this into our guidance.

With regard to pricing we remain mindful of and respectful of our competitors, their pricing decisions and their potential impact on our marketplace. In addition to carefully monitoring prices, we remain excited about our ability to lower our unit costs as we grow through improvements in our supply chain. Finally at this point, pricing in the market appears rational and any price changes we make are primarily a result of changes to our underlying costs.

In conclusion our year’s off to a good start. We achieved strong first quarter results and we see increasing sales levels in our new stores, both of which give us confidence in our full year outlook. We believe in our brand and our business model and are highly motivated to grow earnings. We intend to do so by continuing to carefully expand our store base, driving comp store sales and improving operational efficiencies. We’re confident that as we more effectively merchandize and promote our products, manage our shrink, and increase our buying power, we will better be able to leverage fixed costs and maximize profitability.

With that I’m going to turn the call over to Jeff to provide color on the financials.

Jeff Ackerman

Thank you, Craig. As Craig mentioned, we are pleased that our comparable store sales are back on track. The quarter started off slowly due to the impact of winter storms but once weather conditions returned to normal, we showed steady growth in customer traffic and sales, ending with a successful Easter. We made investments to drive traffic, but still achieved earnings in line with our expectations.

In the first quarter The Fresh Market’s GAAP-EPS was $0.34 per diluted share, a net sales growth of 17.6%. Excluding store closure costs of $0.09 per diluted share related to previously announced store closings in California and Texas, adjusted earnings were $0.43 per diluted share.

Sales were driven by strong unit growth and a 2.5% increase in comparable store sales with average transaction volume increasing 1.8% and transaction size increasing 0.7%. As we mentioned on our last call, the inclement weather resulted in a number of weather related store closures and volatility in sales and traffic in February which we estimate had an approximately 40 to 50 basis point impact on comp store sales in the quarter.

Sales reflected a slight mix shift as some of our promotions were designed to drive traffic and accommodate sales of lower priced items. Promotional sales as a percent of revenues, increased slightly from the prior year to approximately 21.5% due to the successful execution and favorable response to our promotions, more so than an increase due to frequency or depth of promotions.

Gross margin contracted 90 basis points this quarter to 34.4%, due to a 60 basis point decline in the merchandize margin rate, related primarily to our decision to hold the line on pricing and absorb some cost inflation. As in the most quarter, cost per unit inflation continued to accelerate in proteins, mostly seafood and meat, as well as some produce and dairy categories.

Gross margin was also impacted by 30 basis points due to an increase in occupancy expenses. Selling, general & administrative expenses as a percentage of sales increased 70 basis points from last year to 22.9%, mainly due to expenses associated with new stores. The deleveraging was associated with higher store labor costs and new stores and pre-opening expenses for the stores opened in Q1. We opened seven new stores during the quarter, compared to two new stores in the same quarter last year which added approximately 20 basis points to SG&A expenses as a percentage of sales. We did experience a little leverage in corporate G&A due to eliminating some corporate redundancies.

For the quarter fully diluted earnings per share were $0.34 and adjusted earnings per share were $0.43. Adjusted EPS excludes pretax store closure and exit costs of $7 million or $0.09 related to the four stores that were closed in California and Texas. Excluding the closure and exit costs.

Operating losses and other expenses attributable to the stores in California and Texas negatively impacted year-on-year earnings performance by approximately $0.02 per diluted share which was slightly better than our expectations. The impact of weather related store closures and increase in pre-opening expenses were in line with our expectations.

Looking at our capital spending, our CapEx totaled $24.4 million for the first quarter, the majority of which related to new stores. We expect full year capital expenditures in fiscal 2014 of approximately $110 million to $130 million, primarily to fund the opening of 23 to 24 new stores and the remodeling of four to five stores.

The reduction in CapEx from our previous estimate is largely related to our decision to defer some new store openings and remodels to 2015, as well as the deferral or elimination of several stores originally anticipated to open in early 2015 and for which a portion of CapEx was to be realized in the fourth quarter of fiscal 2014.

These changes reflect the ongoing commitment we have to achieve our predictable and profitable results and provide better visibility into our real estate pipeline for 2015. We generated cash flow from operations in the first quarter of $56.2 million, compared to $45.9 in the prior year, reflecting improvements in working capital.

Now I’ll spend a minute on our guidance. As Craig mentioned, we are encouraged by the sales trends in our new stores and remain confident in our outlook and prospects for growth in 2014. While we are not providing quarterly guidance in the second quarter, we will be facing minor headwinds as recently opened stores ramp up to their sales run rate and we expect the pressures we saw on gross margin in the first quarter to continue. We plan to open four stores during the quarter, three of which are already open. In addition, we expect to recognize most of the remaining store closure and exit costs associated with the four stores that were closed in California and Texas.

Also in Q2 we may begin experiencing an increase in healthcare cost due to a greater than expected number of employees enrolling for benefits at the beginning of May. The actual cost will be driven by the claims incurred.

Taking into account the strength in our business and the headwinds I just mentioned, we continue to expect 2014 adjusted EPS of a $1.56 to a $1.66 per diluted share, which excludes store closure costs of approximately $21 million or $0.27. On an adjusted basis EPS is expected to grow 11% to 19% for the fiscal year. GAAP EPS is now expected to be $1.29 to a $1.39 per diluted share.

Sales will be driven by new store openings and reflect a better balance of new store openings within our existing footprint. Our expectations for comp sales growth remain in the range of 1.5% to 3.5% including the impact of competition. We still expect our tax rate to be approximately 37.5%.

We remain confident in our strategy and believe that enhancing the execution of our overall business model and continuing to expand our store base will position us to deliver greater overall profitability. With that we’d be happy to take your questions. Operator.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question comes from the line of Chuck Grom with Sterne Agee. Please proceed with your question.

Chuck Grom - Sterne Agee

Thanks. Just on the outlook for the rest of the year with merchandise margins down 60 basis points in the first quarter and it looks like a similar amount in the second quarter. Just wondering what you are expecting for the back half to get back to flat? And how you guys plan to do that?

Jeff Ackerman

Chuck, its Jeff. First-off, we are looking at some pretty soft comps from the back half of the year and we’re also executing better on our promotions and so I think it is right in line with kind of what we have talked about last time. We feel pretty comfortable about being able to deliver on the gross margins.

Chuck Grom - Sterne Agee

Okay. So, that’s how you guys are thinking about it. Merchandise margins are going to be down 16 in the front half of the year and then be up by a commensurate amount in the second half. I just want to make sure, I’m modeling it correctly in the quarter.

Jeff Ackerman

Yes, well I think the first thing you have to take into consideration on a gross margin is that we were down 60 basis points but the margins that we had, that we were cycling on were the highest margins the Company’s had in over two years. So, that’s how I think more about it. And the rest of the year was more normal.

Chuck Grom - Sterne Agee

Okay. And then just on the competitive landscape. Whole Foods has been obviously investing in price and it’s largely been in the center part of their store and sort of the next phase looks like it’s going to be on the perimeter, which given your mix of product, there will be some -- a little bit more overlap. And I am just wondering, how do you guys plan to respond and how much that is factored into the guidance today?

Jeff Ackerman

We are going to watch this very carefully. We are going to be exceptionally mindful of what our competitors are doing. But I would tell you that our research, our view is that people are coming to us for the quality of the service, the quality of the food and a different shopping experience. They don’t see us as an organic all natural retailer. There’s a couple others out there that are organic all natural retailers. People are coming to us for something different. So we think that gives us a little bit of different platform on which to compete and may make our customers less prone to price sensitivity of what our competitors do.

Chuck Grom - Sterne Agee

And my last question, we just noticed that you guys have changed your operating hours a little bit, looks like at the beginning of April and just wondering if that helped out at all in April and what do you think it can do to comps and to profitability of the stores going forward?

Craig Carlock

Sure, first we’ve always adjusted our store hours just based on local needs. And at the request of some of the teams in the field we had probably about 40 stores where we set up that they would open an hour earlier, and this was really just done as a convenience to our customers and more than an effort to try and drive incremental sales. And they’re doing that with a constant number of labor hours. So there is -- again it’s not a huge number of stores that were effected. It’s more like kind of 40. But we don’t see this necessarily as a big way to drive comp store growth and that was not the intent of doing it in the first place.

Operator

Thank you. Our next question comes from the line of Robby Ohmes with Bank of America Merrill Lynch. Please proceed with your question.

Robby Ohmes - Bank of America Merrill Lynch

Craig, I was hoping maybe you could give us some color on what categories are performing for you guys, if there has been any changes in relative momentum within categories. That would be one question. Another question would be, are you regionalizing assortments more and I understand the promotional approach but is it a standard approach across the store or are you doing very different things in different areas of the store base. And the final question, sorry about asking three in a row; could you give us any update on your distribution, remind us where your agreements with Burris stand et cetera? Thanks.

Craig Carlock

I think your first question was around how our categories are performing? In any year we’ll have some that are doing a little better and some that are growing a little more slowly, but the one I would say is our perishable categories are doing well. People continue to turn to us and enjoy perishable offerings. Sea food has been a struggle; the price increases and cost increases that we’ve all been through have affected us in sea food. And so that’s one that’s been a battle. But in general I wouldn’t say that there is remarkable variation across the categories. We feel like have business is healthy and sound. Perishables are growing well and weren’t affected by the cost structure.

I think your second one was on regional assortment. We want to have regional products and we want to have local products but that will always be a small minority of the 10,000 or so skews that we have in the store. So it’s something we think we can do better on over time, and so I think it’s an area we’ll continue to look to invest slowly and profitably in let’s say. But I wouldn’t point to any changes in our performance as a result of being particularly more regional.

And I think your third question was on distribution. Our contract is up in early part of calendar year 2016. So we’ve got ’14 and ’15 to work on the contract and renewal and the bid process, and we will be vigorously involved in that in the second half of this year and next year and we’ll post you at the right time. But right now we’re preparing for the process of considering our options but we haven’t begun the process of considering our options.

Operator

Thank you. Our next question comes from the line of Kate Wendt with Wells Fargo. Please proceed with your question.

Kate Wendt - Wells Fargo

So I guess first just on inflation it sounds like some of your competitors are expecting this could pick up a little bit more in the back half. What does your guidance assume in terms of whether or not you’re going to pass this through? I know you didn’t as much here in Q1.

Jeff Ackerman

Hi, Kate. It’s Jeff. As far as the inflation goes, we did not choose to pass a lot of that through in the first quarter. And as we’re looking forward, fortunately for the next couple of quarters we’re in pretty good shape as far as having some contracts that are guaranteeing some of our pricing. Now obviously that doesn’t completely insulate us from inflation. And where we’ve seen the increases have really been -- the biggest driver was sea food and then kind of meat and produce and a little bit of dairy as we mentioned. At this point we don’t see those accelerating meaningfully but we do expect that we’ll have kind of current levels of inflation persisting through the year.

Kate Wendt - Wells Fargo

And then I guess also for Jeff. On SG&A I guess even ex preopening costs, obviously you guys had a lower comp growth this quarter although little better than we expected but still de-levered on the expense side. How are you thinking about just what levels comps you think you’d going forward to start leveraging this line ex-preopening costs. I know your guidance suggest perhaps some more leverage in the remainder of the year.

Jeff Ackerman

Kate our SG&A; at the corporate level we are driving even with the sales growth we have -- we still drove a bit improvement or a bit of leverage. And then as you mentioned the biggest -- probably one of the bigger deleveraging factors was on some of the preopening expenses but the single largest one really is labor with some of the new stores as we ramp those up and as we get more efficient with our labor force in those new stores, as they come down the learning curve and that’s just pretty normal for what we see on the labor cost side.

Craig Carlock

So, I think overall for the year I think we are -- I think that we can go ahead and still kind of deliver may be a little bit of leverage on SG&A but it really comes down to -- in the short-term maybe it’s, we need a bit more but the Company has historically been able to drive leverage even back in 2008 when the Company saw some negative comp. So, we feel like we can definitely adjust the cost structure to whatever we need to do.

Kate Wendt - Wells Fargo

Okay, that’s great to hear. And then just I guess finally, you mentioned the competitive openings against previous year. Could you provide roughly what percent of stores will face new competition versus last year? And I guess whether -- now that we are into May, whether you are seeing that impact be in line with what you thought or greater or less than how you had modeled it?

Craig Carlock

It’s certainly in line with our expectations, maybe a hair more severe than we expected. For this quarter, we had 41 stores affected that would not have been affected the same quarter a year ago. So anything happened in the last 12 months, first quarter through, we had 41 of our stores affected. So that’s pretty dramatic number of stores that are affected by competitive openings and that’s what we were trying to outline last time and what we would say again this time.

I want to make a distinction though between competitors affecting our comp store growth rate and competitors affecting our ability to grow units over the long haul. We remain very confident that we can grow our Company, grow our franchise, grow our units but the reality is when competitors open on us, it does affect the same-store sales growth rate.

The other point I’d like to make on this is that when competitors open on a store, that store sales tend to drop and then within the next 12 months they are growing again, sometimes faster than 12 months but general rule of thumb, within 12 months they’re growing. So, it’s not as if our sales dropped and then they drop again and drop again. It’s quite the opposite. They drop once and they build from there.

Operator

Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.

Ken Goldman - JPMorgan

Forgive me if you mention this, and I may have missed it. Can you talk about how comps have done in the first few weeks of the second quarter? Hoping for a number obviously but any commentary will help.

Craig Carlock

Well, I think I will just say that in May they are more like March and April than February. So stable, good. We’re pleased. Much more like March and April and not like February.

Ken Goldman - JPMorgan

Okay. And then everyone calculates returns differently but based on how we look at lease adjusted ROIC, 1Q came in lower level than usual the last few years and it’s not surprising right? You’re investing in the business. But as I’m curious -- I am curious I guess, as you look into the future, should we be modeling continued slippage in this line going forward or is there a turning point down the road where we should expect returns to I guess start creeping up again?

Jeff Ackerman

Ken, its Jeff. The ROIC has been down a little bit but that’s something that we expect to improve absolutely over time. Part of that has been some of the investments that we made during 2013 and the incurrence of some capital leases. So that increased kind of the asset side of things and then as we have talked, there was some soft performance with some stores. But absolutely from where we are here, we definitely expect to be able to move up.

Ken Goldman - JPMorgan

Great. And then Jeff one more for you. Looking at your receivables, at least again our model could be different than others but they’ve been steadily rising over time. Can you talk a little bit about this trend and what’s been driving it and what you think you can do to sort of mitigate it?

Jeff Ackerman

Well actually with the receivables relate to is our real estate deals where we have tenant improvement coming from the landlord. So that’s the biggest driver on that.

Operator

Thank you. Our next question comes from the line of Scott Mushkin with Wolfe Research. Please proceed with your question.

Brian Cullinane - Wolfe Research

This is actually Brian on for Scott. Thanks for taking the questions. Just wanted to touch on maybe within the comp, can you -- maybe not quantify, or if you can that’d be great -- but just talk about the difference between some of the newer stores and the older stores and how those are different? And then may be some of the difference between your core markets and some of the non-core markets, how you are seeing those comps different?

Craig Carlock

Well I think like most retailers, our newer younger stores comp a little better than older stores but I don’t think that should surprise anyone and that’s what we’re seeing. And then another thing we look at is how we’re comping when competitors are in the market and when they are not. And so the stores that don’t face competition are comping higher. So couple of differences there.

Jeff Ackerman

I’d just add that even in stores that are 12 years older, we’re still seeing some growth there.

Brian Cullinane - Wolfe Research

They’re still positive though? All those stores?

Jeff Ackerman

That’s right.

Brian Cullinane - Wolfe Research

And then just maybe some on -- we touched on inflation but I just wanted to ask you maybe a little differently. There has been a lot of some -- some of the produce, some of meats and perishable, the other perishables are seeing pretty high year-over-year price increases. What level do you think have you seen historically that you start to seen historically that you start to see a pull back from the consumer and they start to taper off, maybe how they’re buying or how frequently they’re buying. Any color there?

Craig Carlock

That is really a function of the item. For instance one pound packaged strawberries, we can sell them $2 for five, we can sell them 2.99, 3.99, a little bit of $4.99 but above $4.99 a pound, we would struggle to sell very many of them. And so that’s some strawberries.

You go to apples $2.99 is an important price point. And you go to farm raised salmon and -- so it’s really -- it’s an individual decision, this is what we watch very carefully and pay attention to those the responses we get as we change our prices. But I don’t have a rule of thumb that says at a certain percentage, certain things happen or don’t happen. It really is category by category, product by product.

But I think our point in saying that our margins were compressed this quarter is to say that this is -- food retail prices are high for some people and it’s tough to pass all of the cost on. So that’s certainly the general point.

Operator

Thank you. Our next question comes from the line Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh - Oppenheimer

So in I wanted to delve little further into your new store performance. You mentioned that your Houston store and some of the other locations had really strong one day sales. Was there anything that you did differently this quarter to help drive that stronger performance? And also just in terms of how you guys -- what your calculation is for new store productivity in the quarter?

Craig Carlock

So in general we open stores using the same process that we’ve typically followed and that’s really a pretty soft advertising. And so not doing anything dramatically different across the 10. And the Houston store though, we did try to get the word out. And so we did a little extra advertising, we did a billboard, we did some community involvement but nothing that’s going to dramatically affect the returns or the cost structure of that store.

Rupesh Parikh - Oppenheimer

And then just one other question. In terms of your promotions you mentioned success with your -- I think it was a new weekly meal-deal event. With those new promotions are you starting -- do you feel like you’re getting more new customers or are you seeing a better response from some of your existing customers?

Craig Carlock

I think the good news on this one is if these promotions do appeal to new people or folks who are there in frequently but some of our loyal customers certainly come and enjoy them too. But when we look at the credit cards, we’re seeing new numbers so to speak and new faces. So that’s a good thing.

Operator

Thank you. Out next question comes from the line of Jason DeRise at UBS. Please proceed with your question.

Jason DeRise - UBS

It’s Jason DeRise. I wanted to ask a bit about the cadence of openings, talking about ensuring quality of the openings and maybe it’s more of a range of 12% to 15%. So I don’t know I guess in that 3% delta versus the previous plan, what would you do with the extra cash that the business spits off, not going back into opening?

Craig Carlock

I’ll let Jeff answer on the capital use. But let me comment on the range. So last year we opened 22 units. I think our base starting last year was 129. So was 17% growth and what we’re trying to say is we’re really going to target 15%. We’d only be north of 15% if something really opportunistic came along and then in some years it could be a little less than 15%. So that would be the message that we would get out about our growth rate. And then to the extent that frees up capital, Jeff, talk about that.

Jeff Ackerman

Sure. Hey Jason. Looking at our capital allocation our primary focus is -- first priority is really just investing in the business. So that’s what we’ve been doing and that’s what we expect to continue to do. We’ll look at other investments that we can make, not only just in real-estate but elsewhere and so -- someone asked a question earlier about the Burris contract. That could be a potential area where we would make some investments if we decided to bring some of those supply chain activities in house.

So we have a regular conversation. I won’t say it’s every meeting but it’s something that we keep the Board updated on our use as a capital and capital allocation and as long as we have opportunities to invest in the Company and drive growth, that’s where we are going to focus.

Jason DeRise - UBS

Okay. And with the stores that are opening up in your core markets, have you noticed a difference in the self-cannibalization rates, I guess now how many, I can’t think of the number off the top of my head but it’s quite a lot of stores in Florida and there’s more to come. So how should we think about that?

Craig Carlock

We have I think 37 stores in quarter now. Cannibalization has either been at our forecast of less than our forecast. So we haven’t had any negative surprises on cannibalization. We have only had positive surprises. So it’s something we factor in when we look sites. It’s not meaningful at this point and it’s been, we have taken a conservative approach to looking at it and so we have not been burned.

Jason DeRise - UBS

Okay. And my last question asked is about the guidance range. Can you just talk about some of the, just help us understand the range of what has to happen to get to the top end of the range, what has to happen to get to the bottom, what are you most concerned about or optimistic about than that?

Craig Carlock

Well, I think one of the things we will still continue to watch is just our comp sales, how those pan out. The new store opening still have a quite a few numbers although we feel pretty good about that and I think the biggest thing though is just as we look forward is there maybe some uncertainty around the gross margin. So just with cost inflation, so that’s one thing to watch. And then as we mentioned -- that’s one headwind but as we mentioned, the other we will have to keep an eye on is healthcare costs.

Jason DeRise - UBS

Okay. And to get to that top end of the range, what needs to break your way?

Craig Carlock

I think that we see a really nice strong comp sales growth. We see that allows us really to better leverage our labor force, allows us to better leverage our occupancy costs and the SG&A, that will obviously be the biggest driver.

Operator

Thank you. Our next question comes from the line of Sean Naughton with Piper Jaffray. Please proceed with your question.

Sean Naughton - Piper Jaffray

First, the color on competition is really helpful but just wanted to follow-up; you mentioned that you have 41 stores that are impacted by the competition. May be can you talk about how those stores are doing overall as a cohort and just the overall impact to your comps that it’s having? And then secondly, I think a lot of people are curious about when a competitor does open up on top of your store, what is the range that it impacts that store and then how long does it take to get back to prior levels?

Jeff Ackerman

Okay. I think -- I don’t want to reconcile our comp growth but we are talking at least a couple of points of comp growth overall that’s affected by our competitors this quarter, at least that. How does it will take? As I said, I think for planning purposes we around here think about a year but it can be less than that. And then as far as the depth of the decline of an individual event, it really depends on how close they are to us and how close they are to the key parts of the trade area, vis-à-vis how close we are to key parts of the trade area. So, it can rally vary from very little, let’s call it less than 5% to double-digits significantly. So -- but it’s not enough to make a store go profitable to unprofitable or open to closed or anything like that. But as a group these 41 events are clipping our comp growth rate.

Craig Carlock

But I think also just on that it’s not that those individual stores were seeing any kind of change in how they are being impacted. So it’s not like new store openings are having a greater impact than they have historically. So just want to make sure that’s clear and after we cycle on it then we see those stores return to growth.

Sean Naughton - Piper Jaffray

Okay, that’s helpful. And then just drilling I guess further down in the merchandise margin again, I think you mentioned some of this was holding the line on the inflation and then some was from promotion. Any way to kind of break that out in terms of how much was potentially a little bit more sales on promo versus just holding the line on input cost?

Craig Carlock

Sean, it was -- absolutely the driver on it was inflation on cost that was really the big driver. We felt good about the promotions that we had, they weren’t excess and they were very thoughtful. I think that there were some interesting things that we were able to do by bundling things together where the promotions involved multiple departments. It encourages shoppers to try different departments in our stores and also by bundling things together, the transaction for taking advantage of the deal itself or the promotion is higher.

So it’s absolutely -- the pressure on the margins was really driven by increasing cost. And I’m again just reiterating what I said earlier. We’re cycling on the best gross margin numbers the Company has had in over two years.

Sean Naughton - Piper Jaffray

And then just one last clarifying question. I think somebody asked about new store productivity earlier typically, I am not sure you guys have given, so just wanted to understand how your internal model calculated that for the first quarter?

Craig Carlock

It was 83%.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Joe Edelstein with Stephens. Please proceed with your question.

Joe Edelstein - Stephens

Just on the new store productivity, that’s a number that always stands out to me a bit compared to some others in this space. I know that you really focus on returns on capital at The Fresh Market. So is your preference to help promote a store early on and help create a really solid opening and then comp at kind of a lower level than your peers maybe doing or would you rather actually start a bit slow and kind of build your comps at a higher rate as that store matures. Is there a preference?

Craig Carlock

I don’t think we feel like we can control that or have the levers to have the precision. So the answer is we’d like to open high and comp high and we do everything we can. Honestly we do everything we can to both but the reality is that people come in, they enjoy the experience right away and we experience lower levels of comp than our competitors. The way we think about that as positive is we get immediate reaction that’s favorable when we open.

Joe Edelstein - Stephens

That’s helpful. And I was hoping you could share some metrics around how you’re tracking your brand awareness? How it’s changing, improving? I am not sure if that’s account of Facebook likes or some other metric but I’m curious how you are measuring it.

Craig Carlock

Our emphasis is on delivering a great store experience and then we watch very carefully our customer count and our sales growth. And we know what’s going on, on Facebook and social media; we do have counts and reports. But what we’re keenly focused on is what are sales.

Joe Edelstein - Stephens

And in Houston you mentioned the new billboard, some other community outreach. Are you expanding the use of your field base marketers in that market and would we expect to see that get rolled out to some other areas?

Craig Carlock

We’ve got one in Atlanta, one field based market representing the Company and one in Houston. We will measure our sales, we will measure the activities, we will see how it honestly works, see how it feels to us and hope it’s looking good and feeling good then we would want to expand it. If it’s tough to find the right formula then we’ll be more cautious.

Joe Edelstein - Stephens

That’s fair.

Craig Carlock

So it’s too soon to tell.

Joe Edelstein - Stephens

Sure, that’s fair. And since you mentioned the third party studies on why customers are really shopping at The Fresh Market. My question is do you think there is an opportunity to push even more into a gourmet, specialty foods offering benefit from that area of the market that’s perhaps seeing some less competition in the natural organic space?

Craig Carlock

We do well with those who are preparing food ingredients based cooking. So I would probably say that -- that’s an area we feel like the store serves pretty well. I’d say what we want to do even better is make sure we have the most relevant food with all the right product attributes in each category, and then make sure our service meets the expectations people have when they walk into the store. The store creates a certain set of expectations and we need to deliver on them.

Operator

Thank you. Our next question comes from the line of Karen Short with Deutsche Bank. Please proceed with your question.

Karen Short - Deutsche Bank

Just curious, so on the cadence over your EPS growth throughout the rest of the year, you kind of gave some directional comments on the second quarter. But given those directional comments your guidance for the second half of the year assumes kind of more like 30%ish growth rate, so obviously we’re looking at much easier year-over-year comparisons but can you maybe give us some color on what your guidance reflects as it relates to the competitive environment? And then again what it reflects as it relates to inflation?

Jeff Ackerman

Well I think the competitive environment we’ve baked into the comp stores sales growth rate guidance -- and really the thing with inflation and the gross margin -- operating margin guidance. So I feel like we’ve got that in there. What’s going to drive the earnings frankly in the second quarter of the year is the stores that we opened last year that have been a drag on earnings, we will begin to lap those openings and we’ll be able to build profit from that point, as well as the fact we’ve had so many early year openings this year that are doing well that are really going to generate some profit in the second half for the year.

Karen Short - Deutsche Bank

That’s helpful. And then I think you guys just made a comment on taking some supply chain activities in house or potentially having the ability or desire to take some supply chain activities in house. Could you just elaborate a little bit on that?

Craig Carlock

I think what Jeff was saying is that is an example, an example how capital could potentially be used. When he was asked about capital allocation right now though, we’re beginning to process -- bidding out our primary supplier contract. That will be this year and next year and we’ll make a decision in advance of say early 2016 when the contract is up.

Operator

Thank you. Our next question comes from the line of Mark Miller with William Blair. Please proceed with your question.

Mark Miller - William Blair

First question is can you give an update on those stores that have been open in Houston and California. Just a sense for whether those are seeing quarter-on-quarter improvement?

Craig Carlock

Yes they are. We’re excited about them. A couple of things I can say is on average their sales are exceeding our expectations at this point. In other words we measure the ramp and we estimate the ramp, we know the average ramp of our new stores and they are ramping on average a little bit better. So that’s encouraging. Our margins have firmed due to some effort; let’s call it managerially on getting our margins right and getting our people trained. And so we’re pretty encouraged.

Mark Miller - William Blair

And then on the prior question about the benefit to EPS this year with not having the losses from the stores that you closed. Can you remind us what that annualized impact is and is that -- I mean how much of that benefit year-on-year would be first half versus it sounds like a little bit more to the back half.

Craig Carlock

Yeah Mark we did not disclose that. All we said was that beginning in the second half of the year we would start to see a favorable year-on-year benefit to our operating income.

Mark Miller - William Blair

I think we were coming up with something maybe in the higher single-digit benefit to EPS year-over-year. Is that a reasonable framework?

Craig Carlock

As I said we didn’t comment.

Mark Miller - William Blair

And then with the growth rate and units that you’ve laid out, I guess what should the growth algorithm that people be thinking about in ’15 and beyond, I think street estimates are 18% growth for next year I guess. I don’t know if you want to have just specific range or a number out there but you may like to have -- expectations to be in the right place. Any comment you can give longer term for where you think the business can go?

Jeff Ackerman

So as far as unit growth, I think it’s a little premature at this point to comment on that. As Craig mentioned, we have a lot of work we’re doing around the white space, a lot of work we’re doing around the strategy there. We’re focused on delivering a more predictable growth pattern growth in results. And I’d actually like to just wait before we talk anything more about unit growth.

But as Craig said in his comments we’re going to be a bit more cautious there and if that ends up with 12% to 15% unit growth, then there maybe some years like that. But I’d also like to just remind you that that prior to last year, the preceding years were all -- had great earnings growth with unit growth below 15%.

Mark Miller - William Blair

So I can understand maybe where you’re going with that is that the unit expansion rate could be a little bit less but if perhaps the stores that you’re opening are better performing or with some of your other initiatives that leverage on expenses the bottom line could be -- I am not trying to -- trying to get a little sense of do you see yourself as a mid-teens grower, high teens -- I mean any more you can say, just?

Jeff Ackerman

Like I said, I would prefer to wait until we can give you anymore wholesome answer with some of the work we’re doing around, looking at the white space developing some of the tools that we are working on and just give you a more wholesome answer at that time.

Operator

Thank you. Our next question comes from the line of Kelly Bania with BMO Capital. Please proceed with your question.

Kelly Bania - BMO Capital

Just first a real estate question, I believe the store that you opened in Houston was a suburban store and it sounds like that’s starting out at least initially successfully. So just curious as you kind of do your research and think about your unit growth longer term, do you -- are you starting to think about suburban versus urban opportunities differently and maybe remind us what that mix is within your store base?

Craig Carlock

Well, our heritage is suburban stores. Our Company was born I the southeast and grew up in suburbs and medium size towns in the southeast and we’ve done very well. I don’t know that we have many that we would call urban. We’ve got some midtown locations and certainly some inside the beltway locations but I think we feel very comfortable in midtown, inside the beltway and suburban locations. But we’re -- does that help. The truth is the people are pushing our food and our food offering in a lot of different environments from midtown Atlanta to Lynchburg, Virginia to the suburbs of Houston. So we continue to feel it’s very affordable the point we’ve got to get right is to match up the capital spend and the rent rate with the expected sales that we’ll achieve.

Kelly Bania - BMO Capital

Okay, that’s helpful. I was just thinking some of the other stores in Houston, I guess, were I think in downtown Houston I was wondering if that have any impact?

Craig Carlock

Well, I would call them inside the beltway and midtown-ish kind of locations but my point is in that particular transaction it was four leases that we purchased. We paid lease inducement, we had pretty high capital costs by our standards and so that’s what created the profit problem there and it wasn’t that there was a lack of receptivity to our concept or our food.

Kelly Bania - BMO Capital

Okay, that’s helpful. And then just one last question on your everyday pricing structure. Do you still feel very comfortable with how you seem to be having quite a bit of success with the promotions without really negatively impacting your gross margin. But maybe you can just comment on how you feel about your everyday pricing in the market right now.

Craig Carlock

We measure our prices very carefully and regularly. We also measure the perceptions of our prices and we’re comfortable with where we are relative to our specialty competitors. So the facts are, let’s say where we want them. The objective data are where we want them. But the most important thing is to realize people are coming in to have a different shopping experience, to smell literally the bakery going, the coffee, they receive good service, to be able to shop and slowdown and enjoy themselves. So that is not highly contingent on the exact price of a particular item. And so we’ve got to deliver on all of the promises we make when somebody comes in and then I think the prices will be fine. Because if we don’t deliver on the experience the people will say well that’s just not worth it. So we’ve got to be mindful of what our competitors are doing but we’ve got to deliver on the experience as well.

Jeff Ackerman

Kelly, just let me also add that as Craig mentioned we’re looking every month and we’re conducting our own pricing surveys and I can tell you that looking back over the last five months, our prices relative to the competition we’ve maintained on that that relative position.

Operator

Thank you. Our next question comes from the line of Ben Brownlow with Raymond James. Please proceed with your question.

Ben Brownlow - Raymond James

On the 41 stores that were impacted by competitive openings, how -- I guess, of the competitive openings you’re aware of over the next six months or so, what does that number look like, kind of going forward?

Craig Carlock

I think the number of new openings is relatively constant. So we’re talking about 10-ish a quarter. But Ben, as we mentioned before, that’s all been factored into our guidance for the year.

Operator

Thank you. Our next question comes from the line of Joe Feldman of Telsey Advisory Group. Please proceed with your question.

Joe Feldman - Telsey Advisory Group

I wanted to ask you -- congratulations on the quarter by the way. But I wanted to ask you about inventory and I may have missed it in your prepared remarks but it seems like up 25% by my measure versus sales up 18%. Anything to note there? Any were you heavy in any areas or was it just like in transit type inventory or any color you could provide would be great?

Craig Carlock

Yes, I mean there is just -- the inventory obviously is going to continue to grow as our store base grows, as our comps grow and then it’s compounded a bit this quarter by inflation.

Joe Feldman - Telsey Advisory Group

And then the other thing wanted to ask you, if I recall correctly you guys don’t have a loyalty program and I was wondering if you’re testing that anywhere?

Craig Carlock

I’m sorry Joe….

Joe Feldman - Telsey Advisory Group

Sorry, I was asking if you were testing a loyalty program anywhere as a means to kind of help drive traffic or retain existing customers.

Craig Carlock

Well, we have a program whereby our customers can sign up for emails, so they understand what we’re doing. We are looking into some different technology solutions around opportunity to create a -- not a traditional loyalty program -- so that’s not something we’re necessarily interested in. What we’re more interested in is developing an ongoing relationship with our customers and understanding what their buying habits are then being able to customize promotions for them. So that’s more how we think about our royalty program than maybe what some of the other traditional groceries have provided.

Operator

Our last question comes from the line of Andrew Wolff with BB&T Capital Markets. Please proceed with your question.

Andrew Wolff - BB&T Capital Markets

Just wanted to ask on, given your commentary on the cadence of sales, I think it is pretty easy to read through that you’re kind of maintaining the fourth quarter comp rate which is good to hear. But it did -- excluding the weather in February, it did take more merchandise margin investment as it was pointed about earlier. So I was wondering if you’d be willing to give us a view on the cadence on gross margin, maybe not so specifically but sort of a flavor. Have you seen any easing in the gross margin either by, the market starting to pass through so many inflating commodity price increases or for any other reasons.

Craig Carlock

So our gross margin are picked up from the fourth quarter -- the third and fourth quarters of the last year and that tends to happen anyway. So that it tends to be a bit seasonal. But again we passed through some inflation in pricing, but at this point we felt pretty good about what we are able to do in terms of having some promotions and drive some traffic in our comp sales and still deliver on the earnings guidance that we gave.

Andrew Wolff - BB&T Capital Markets

We’re seeing sales sequentially seem about the same but it took more year-over-year increase in gross margin to maintain that. So I know that there is seasonality, and I understand when commodity costs inflate. That’s going to happen to some extent. But I was just wondering if you’re willing to comment on where you see gross margins, how they progress through the quarter or you sound kind of copasetic about gross margins, sort of and I think Craig, earlier you said the market was pretty rational. If you just were to look at your gross margins in isolation, you might think something else.

Craig Carlock

Yes, I think our point is gross margins are affected by the seven new stores and occupancy cost, they are affected by underlying cost inflation that we absorbed and they are affected by a mix effect when the promotions we are on are a little more successful than the promotions a year ago, we get gross profit dollars even if the margin rate is a little lower.

Going forward I think we’re optimistic that we can have good predictable margins in our guidance, and we cycle on some things in the second half that I think will make the comparisons a little easier. We don’t feel like we dropped our gross margins 90 basis points to compete on price. That’s not our interpretation.

Andrew Wolff - BB&T Capital Markets

Okay, that’s what I was checking for. I kind of see that interpretation as well. So. All right. So you’re just saying -- basically you’re saying, as long as the competitive environment stays where it is, there is a reasonably good chance you cycle the easy comparisons in the back half on the gross margin, more or less.

Jeff Ackerman

Yes. That is.

Craig Carlock

This is Craig. Thank you all. We look forward to speaking with you again at the end of our second 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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