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TFM > SEC Filings for TFM > Form 10-K on 27-Mar-2013All Recent SEC Filings

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Form 10-K for FRESH MARKET, INC.


27-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with those statements. You should read the following discussion in conjunction with "Item
6. Selected Financial Data" and our audited consolidated financial statements and related notes which are included elsewhere in this Form 10-K. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under "Cautionary Note Regarding Forward-Looking Statements," "Item 1A Risk Factors," and included in other portions of this Form 10-K.

Overview

The Fresh Market is a high-growth specialty retailer focused on creating an extraordinary food shopping experience for our customers. Since opening our first store in 1982, we have offered high-quality food products, with an emphasis on fresh, premium perishables and an uncompromising commitment to customer service. We seek to provide an attractive, convenient shopping environment while offering our customers a compelling price-value combination. As of January 27, 2013, we operated 129 stores in 25 states, in the Southeast, Midwest, Mid-Atlantic, Northeast and West regions of the United States.

We believe several key differentiating elements of our business have enabled us to execute our strategy consistently and profitably across our expanding store base. We believe that our differentiated shopping experience has helped us to expand our business primarily through favorable word-of-mouth publicity. Within our smaller-box format, we focus on higher-margin food categories and strive to deliver a more personal level of service and a more enjoyable shopping experience. Further, our smaller-box format is adaptable to different retail sites and configurations and has facilitated our successful growth.
Additionally, we believe our disciplined, comprehensive approach to planning and merchandising and the support we provide our stores allow us to deliver a consistent shopping experience and financial performance across our store base.

Operating income for fiscal year 2012 increased $18.6 million, to $101.5 million, compared to $82.9 million for the year ended January 29, 2012. Net income for the year ended January 27, 2013 was $64.1 million as compared to $51.4 million for the year ended January 29, 2012. Diluted earnings per share for the year ended January 27, 2013 was $1.33 compared to diluted earnings per share of $1.07 for the year ended January 29, 2012.

Outlook

We intend to continue our profitable growth by expanding our store base, driving comparable store sales and increasing our operating margins. Consistent with our history of growth, we intend to open new stores in existing markets and penetrate new markets. We view expansion of our store base as a core competency and have nearly quadrupled our store count since 2002. We opened 16 new stores in fiscal 2012 and believe there is a significant opportunity to continue to increase our number of stores. In addition, if attractive opportunities arise, we may use lease inducements to acquire leases as a way to expand our store base and penetrate new markets. Our results of operations have been, and may continue to be, affected by the


timing and number of new store openings, because new stores generally have different performance profiles and greater variability in sales volumes than our mature stores, and because the overall revenue contributed by new stores may vary from period to period based on the relative timing of new store openings within each period.

We aim to increase our comparable store sales by generating growth in the number and size of customer transactions. Key elements of our strategy include increasing customer awareness, offering new and differentiated products and continuing to provide a distinctive in-store experience. We also intend to increase our operating margins through scale efficiencies, improved systems, continued cost discipline and enhancements to our merchandise offerings. We expect store growth will permit us to benefit from economies of scale in sourcing products and will allow us to leverage our existing infrastructure for scale efficiencies.

We believe that we are well-positioned to capitalize on evolving consumer preferences and other trends currently shaping the food retail industry. These trends include: a growing emphasis on the customer shopping experience; an increasing consumer focus on healthy eating choices and fresh, quality offerings, including regionally and locally sourced products; an improving perception of private-label product quality; and an increase in the average age of the U.S. population which, driven by an aging Baby Boomer population which, we believe, tends to make a greater number of shopping trips and higher food at home spending per household than younger age groups.

We expect continued sales growth in fiscal 2013. The magnitude of expected growth could vary significantly due to overall economic and competitive conditions, and due to volatility in the supply and costs of commodities such as meat, cheese and produce. The Company expects that the development and maturation of new stores will also drive future sales growth. We anticipate opening an additional 19 to 22 new stores by the end of 2013, in addition to remodeling three to five stores during the same period.

How We Assess the Performance of Our Business

In assessing our performance, we consider a variety of performance and financial measures. The key measures that we assess to evaluate the performance of our business are set forth below:

Sales

Our sales comprise gross sales net of coupons, commissions and discounts. Sales include sales from all of our stores.

The food retail industry and our sales are affected by general economic conditions and seasonality, as well as the other factors, discussed below, that affect our comparable store sales. Consumer purchases of specialty food products are particularly sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, the level of disposable consumer income, consumer debt, interest rates and consumer confidence. In addition, our business is seasonal and, as a result, our average weekly sales fluctuate during the year and are usually highest in the fourth quarter when customers make holiday purchases.

Comparable Store Sales

Our practice is to include sales from a store in comparable store sales beginning on the first day of the sixteenth full month following the store's opening. We believe that comparability is achieved approximately fifteen months after opening. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. There may be variations in the way that our competitors calculate comparable or "same store" sales. As a result, data in this Form 10-K regarding our comparable store sales may not be comparable to similar data made available by our competitors.

Various factors may affect comparable store sales, including:

overall economic trends and conditions, including general price levels in the economy;

consumer confidence, preferences, and buying trends;

our competition, including competitor store openings or closings near our stores;

our competitors expanding their offerings of premium/perishable products;


          the pricing of our products, including the effects of inflation,
           deflation and our promotional activities which we evaluate and adjust
           in the ordinary course of our business;

the number of customer transactions at our stores;

our ability to provide an assortment of distinctive, high-quality product offerings to generate new and repeat visits to our stores;

the level of customer service that we provide in our stores;

our in-store merchandising-related activities;

our ability to source products efficiently;

our opening of new stores in the vicinity of our existing stores;

the number of stores we open, remodel or relocate in any period; and

severe or unfavorable weather conditions.

As we continue to pursue our growth strategy, we expect that a significant percentage of our sales growth will continue to come from new stores not included in comparable store sales. Accordingly, comparable store sales is only one measure we use to assess our performance.

Gross Profit

Gross profit is equal to our sales minus our cost of goods sold. Gross margin rate measures gross profit as a percentage of our sales. Cost of goods sold is directly correlated with sales and includes the direct costs of purchased merchandise, distribution and supply chain costs, buying costs, store supplies and store occupancy costs. Store occupancy costs include rent, common area maintenance, real estate taxes, personal property taxes, insurance, licenses and utilities. Cost of goods sold is exclusive of depreciation, which is reported separately. The components of our cost of goods sold may not be identical to those of our competitors. As a result, data in this Form 10-K regarding our gross profit and gross margin rate may not be comparable to similar data made available by our competitors.

Gross margin rate enhancements are driven by:

economies of scale resulting from expanding our store base;

reduced shrinkage as a percentage of sales; and

productivity gains through process and program improvements.

Changes in the mix of products sold may also impact our gross margin rate.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include certain retail store and corporate costs, including compensation (both cash and share-based), pre-opening expenses, and other corporate administrative costs. Share-based compensation expenses include those incurred in connection with our initial public offering as well as those arising from grants made under our 2010 Omnibus Incentive Compensation Plan. Pre-opening expenses are costs associated with the opening of new stores including costs associated with travel, recruiting, relocating and training personnel and other miscellaneous costs. Pre-opening costs are expensed as incurred.

Labor and corporate administrative costs generally decrease as a percentage of sales as a result of an increase in our sales. Accordingly, selling, general and administrative expenses as a percentage of sales are usually higher in lower volume quarters and lower in higher-volume quarters. Store-level compensation costs are generally the largest component of our selling, general and administrative expenses. The components of our selling, general and administrative expenses may not be identical to those of our competitors. As a result, data in this Form 10-K regarding our selling, general and administrative


expenses may not be comparable to similar data made available by our competitors. We expect that our selling, general and administrative expenses will increase in future periods due to our continuing store growth.

Income from Operations

Income from operations consists of gross profit minus selling, general and administrative expenses, store closure and exit costs and depreciation.

Income Taxes

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our financial statements in the period that includes the enactment date.

Change in Fiscal Year-End and Presentation of Financial Information

On January 26, 2011 our Board of Directors approved a change in our fiscal year-end from a calendar year-end of December 31, to a fiscal year-end of the last Sunday of January, commencing with fiscal 2011. In connection with the change of our fiscal year-end, we had a thirty day transition period from January 1, 2011 to January 30, 2011, the audited results of which are reported below.

We changed our fiscal year-end in order to offer more comparable quarterly and annual data to our investors. As a specialty retailer focused on foods, our operations are more active during the periods surrounding holidays and can be subject to seasonal differences in the event that holiday periods fall within a particular fiscal period one year and a different fiscal period in a subsequent year. By changing our fiscal year-end, revenues, including the use of gift cards given as holiday gifts, in the months of December and January will now appear in the same fiscal quarter and fiscal year resulting in greater comparability of our period-to-period financial results regardless of whether most customer purchases are made at the end of December or the beginning of January. In addition, the Easter holiday and the time periods surrounding Easter are significant shopping periods for us and the change in our fiscal year-end means that these periods will always be in our first fiscal quarter rather than occurring variously from one year to the next in the first quarter or the second quarter. We believe that this change in fiscal year-end will provide investors with a more comparable quarterly and annual picture of our Company's operations.

Included in this report are our consolidated balance sheets as of January 27, 2013 and January 29, 2012, as well as consolidated statements of comprehensive income, stockholders' equity and cash flows for the fiscal years ended January 27, 2013, January 29, 2012, one month period ended January 30, 2011, and fiscal year ended December 31, 2010.

As we did in the Form 10-K for the fiscal year-end January 29, 2012, we have provided management's discussion and analysis of financial condition and results of operations comparing the year ended January 29, 2012 against the year ended December 31, 2010. We have also provided a comparison of the fiscal year ended January 29, 2012 against the unaudited fifty-two week period ended January 30, 2011. The purpose of this presentation is to provide period-to period comparisons that are consistent and enable greater comparability in the review of our operational and financial performance.

Thus, this section is organized in the following order: (i) Year Ended January 27, 2013 Compared to the Year Ended January 29, 2012; (ii) Year Ended January 29, 2012 Compared to the Unaudited Fifty-Two Weeks Ended January 30, 2011;
(iii)Year Ended January 29, 2012 Compared to the Year Ended December 31, 2010; and (iv) One-Month Audited Transition Period Ended January 30, 2011 Compared to the One-Month Unaudited Period Ended January 31, 2010.

Non-GAAP Adjusted Financial Results

In addition to presenting our financial results in conformity with GAAP within this Form 10-K, we are also presenting results for the unaudited fifty-two weeks ended January 30, 2011 and the year ended December 31, 2010 on an "adjusted" basis in order to exclude the impact of certain charges related to our initial public offering and the tax effect of converting from an S-corporation to a C-corporation in connection with our initial public offering. Specifically, results for the unaudited fifty-two weeks ended January 30, 2011 and for the year ended December 31, 2010 include share-based compensation and related


payroll tax expenses arising from the vesting of equity awards at the time of the initial public offering, as well as income tax charges incurred in order to establish beginning deferred tax balances arising from our conversion from an S-corporation to a C-corporation. In addition, we did not incur federal corporate income tax for a portion of the unaudited fifty-two week period ended January 30, 2011 and for a portion of the year ended December 31, 2010, due to our previous S-corporation status. Our adjusted results exclude the impact of the charges related to our initial public offering and reflect a pro forma provision for corporate income taxes for the portion of 2010 during which we had S-corporation status except in states in which S-corporation status is not recognized. Except where the context otherwise requires, the use of the term "adjusted" or "as adjusted" with reference to the financial results discussed in this management's discussion and analysis refers to the adjusted results described in this paragraph. These adjusted financial results are non-GAAP financial measures. We believe that the presentation of adjusted financial results facilitates an understanding of our operations without the one-time impact associated with the initial public offering and the prior S-corporation tax treatment. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

For a reconciliation of adjusted results to GAAP results and a discussion of why we use non-GAAP financial measures, see "Year Ended January 29, 2012 Compared to the Unaudited Fifty-Two Weeks Ended January 30, 2011" and "Year Ended January 29, 2012 Compared to the Year Ended December 31, 2010".


Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of sales.

                                                         Year Ended (1)                                          One Month Ended               Year Ended
                         January 27,             January 29,                                                       January 30,                December 31,
                            2013                    2012                January 30, 2011 (unaudited) (2)               2011                       2010
                                                             (dollars in thousands, except share and per share amounts)
Consolidated
Statements of
Income Data:
Sales               $ 1,329,131   100.0 %   $ 1,108,035    100.0  %             980,403           100.0  %   $     78,149    100.0  %   $    974,213    100.0  %
Cost of goods
sold                    877,433    66.0 %       741,184     66.9  %             659,344            67.3  %         53,302     68.2  %        654,986     67.2  %
Gross profit            451,698    34.0 %       366,851     33.1  %             321,059            32.7  %         24,847     31.8  %        319,227     32.8  %
Selling, general
and
administrative
expenses (3)            303,495    22.8 %       247,047     22.3  %             245,955            25.1  %         17,623     22.6  %        244,378     25.1  %
Store closure and
exit costs                  976     0.1 %           437      0.0  %                 775             0.1  %             37      0.0  %            792      0.1  %
Depreciation             45,741     3.4 %        36,485      3.3  %              33,483             3.4  %          2,729      3.5  %         33,122      3.4  %
Income from
operations              101,486     7.6 %        82,882      7.5  %              40,846             4.2  %          4,458      5.7  %         40,935      4.2  %
Other expenses
(income):
Interest expense          1,498     0.1 %         1,858      0.2  %               2,209             0.2  %             87      0.1  %          2,374      0.2  %
Other income, net             -     0.0 %            (2 )    0.0  %                (171 )           0.0  %             (1 )    0.0  %           (170 )    0.0  %
Income before
provision for
income taxes             99,988     7.5 %        81,026      7.3  %              38,808             4.0  %          4,372      5.6  %         38,731      4.0  %
Recognition of
net deferred tax
liabilities upon
C-corporation
conversion (4)                -     0.0 %             -      0.0  %              19,125             2.0  %              -      0.0  %         19,125      2.0  %
Tax provision
(benefit) (4)            35,855     2.7 %        29,631      2.7  %              (1,655 )          (0.2 )%          1,712      2.2  %         (3,309 )   (0.3 )%
Net income          $    64,133     4.8 %   $    51,395      4.6  %   $          21,338             2.2  %   $      2,660      3.4  %   $     22,915      2.4  %
Net income per
share:
Basic and diluted   $      1.33             $      1.07               $            0.44                      $       0.06               $       0.48
Dividends
declared per
common share        $         -             $         -               $            0.83                      $          -               $       1.00
Shares used in
computation of
net income per
share,
Basic                48,076,675              48,002,273                      47,991,045                        47,991,045                 47,991,045
Diluted              48,294,299              48,137,519                      48,014,349                        48,095,459                 48,059,882
Pro Forma Data
(unaudited):
Income before
provision for
income taxes                                                          $          38,808                                                 $     38,731
Pro forma
provision for
income taxes (5)                                                                 15,172                                                       15,113
Pro forma net
income (5)                                                            $          23,636                                                 $     23,618


                                                                                           One Month
                                                 Year Ended (1)                              Ended             Year Ended
                              January 27,      January 29,                                January 30,
                                  2013            2012         January 30, 2011 (2)          2011           December 31, 2010
Other Operating Data
(unaudited):
Number of stores at end of
period                                129             113                   100                  100                    100
Comparable store sales
growth (6)                            5.7 %           5.4 %                 5.0 %                1.4 %                  5.0 %
Gross square footage at
end of period (in
thousands)                          2,714           2,383                 2,129                2,129                  2,129
Average comparable store
size (gross square feet)
(7)                                21,192          21,256                21,239               21,273                 21,205
Comparable store sales per
gross square foot during

period (7) $ 524 $ 501 $ 480 $ - $ 481

(1) On January 26, 2011, our Board of Directors approved a change in our fiscal year-end from December 31 of each year to the last Sunday in January of each year, commencing with the Company's 2011 fiscal year, which started January 31, 2011 and ended January 29, 2012.

(2) For comparative purposes, we have presented the selected consolidated statements of income data for the unaudited fifty-two weeks ended January 30, 2011, which is not covered by the auditors' report.

(3) In November 2010, we recorded share-based compensation and related payroll tax expenses of $28.8 million or $17.6 million, net of tax, in connection with our initial public offering. This expense affected the consolidated statements of income for the unaudited fifty-two weeks ended January 30, 2011 and the year ended December 31, 2010.

(4) Income tax expense for 2010 included a $19.1 million charge to recognize a net deferred tax liability resulting from the tax reorganization carried out in connection with our initial public offering. In the period after becoming a C-corporation, from November 2010 through January 30, 2011, we recognized a $2.0 million income tax benefit that resulted from our net loss during that period. Additionally, in the period after becoming a C-corporation, from November 2010 through December 2010, we recognized a $3.7 million income tax benefit that resulted from our net loss during that period.

(5) Prior to November 2010, we were treated as an S-corporation for U.S. federal income tax purposes. As a result, our income was not subject to U.S. federal income taxes or state income taxes where S-corporation status is recognized. In general, the corporate income or loss of an S-corporation is allocated to its stockholders for inclusion in their personal federal income tax returns and state income tax returns in those states where S-corporation status is recognized. We terminated our S-corporation status and converted to a C-corporation in November 2010 in connection with our initial public offering, and we are now subject to additional entity-level taxes that will be reflected in our consolidated financial statements. The pro forma provision for income taxes reflects combined federal and state income taxes on a pro forma basis, as if we had been treated as a C-corporation, using blended statutory federal and state income tax rates of 39.1% for the unaudited fifty-two weeks ended January 30, 2011 and 39.0% for the year ended December 31, 2010. These tax rates reflect the sum of the federal statutory rate and a blended state rate based on our calculation of income apportioned to each state for each period.

(6) Our practice is to include sales from a store in comparable store sales beginning on the first day of the sixteenth full month following the store's opening. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. There may be variations in the way that our competitors calculate comparable or "same store" sales. As a result, data in this Form 10-K regarding our comparable store sales may not be comparable to similar data made available by our competitors.

(7) Average comparable store size and comparable store sales per gross square foot are calculated using the gross square footage and sales for stores included within our comparable store base for each month during the given period. We have excluded the comparable store sales per gross square foot calculation for the one month period ended January 30, 2011, due to its lack of comparability to the remainder of the financial data.

Percentage totals in the above table may not equal the sum of the components due to rounding.


Year Ended January 27, 2013 Compared to the Year Ended January 29, 2012

Sales

. . .

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