Wall Street concerned with The Fresh Market results

Aug 21, 2015Elliot Zwiebach

What is in this article?:

• Wall Street concerned with The Fresh Market results
• CMO's departure

“Results were even more disappointing than we thought and suggest the company is not moving fast enough to address the challenges of a fast-changing food retail landscape.”

—KELLY BANIA, BMO Capital Markets

Wall Street analysts expressed concerns with The Fresh Market a day after the chain reported flat earnings per share and negative comparable-store sales.

“Results were even more disappointing than we thought and suggest the company is not moving fast enough to address the challenges of a fast-changing food retail landscape,” Kelly Bania, an analyst with BMO Capital Markets, New York, said.

“The weak results were likely exacerbated by temporary factors — including produce deflation and double-digit meat inflation — yet we believe TFM is in an identity crisis as it struggles to maintain its industry-leading EBITDA margins while resisting the temptation to more aggressively compete on price but maintain its premium quality and in-store experience.”

Those goals, she added, are complicated by the lack of a permanent CEO and, as of Thursday, the departure of Marc Jones as SVP and chief merchandising and supply chain officer.

“Near-term initiatives — encompassing productivity, brand awareness, advertising, testing and changing promotional and pricing strategies — do not appear to be enough to stabilize comps, [which] leaves a high degree of uncertainty for earnings.”

Karen Short, an analyst with Deutsche Bank, New York, said she believes Greensboro, N.C.-based TFM “needs to invest in price to drive traffic and comps and should cut its unit growth until it can stabilize the core business.”

In discussing financial results with analysts Thursday, Sean Crane, interim president and CEO, said The Fresh Market plans to review its pipeline of expansion targets with a greater focus on returns.

“While the success of our most recent store openings gives us confidence there are significant opportunities for unit growth, we also believe it is prudent to continue to review our current pipeline,” he explained. “In light of current sales and margin performance, we are reviewing the assumptions with a focus on managing return-on-invested-capital for our company and shareholders.”

Addressing the flat earnings and negative comps, Crane said they reflected “changes in our pricing and promotional investments that were less effective than anticipated in a more challenging macro environment, which were partially offset by successful marketing activities as well as the benefit of our expense controls.”

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Jeffrey C. Ackerman, EVP and CFO, said the company’s promotional goal in the second quarter was to improve traffic flow by replacing one-day events with multi-day events, “which we thought would result in better in-store execution and thereby better sales. But looking back, we realize that as we chose the promotions, it required us to take a different approach in terms of the items, and we believe that had an effect on the traffic that came in.

“As we move forward, we’re going to continue to make sure we’re providing a great experience for customers, with great execution, but that we’re also balancing the traffic-driving capabilities of the promotions so we have the right promotions at the right price.”

CMO's departure

Crane announced the departure of the CMO, noting a search is underway "for an individual who will help us accelerate the improvement of our pricing, selection and merchandise offering.”

Until a successor is named, Crane said he will be more hands-on, working with the merchandising team “to bring up some fresh ideas and help with merchandising, pricing, selection and that kind of thing.”

On the supply chain side, Crane said Maria Ross has been hired as VP, supply chain, following three years as VP, supply chain strategy, at BJ’s Wholesale Club and previous stints at Home Depot and Oldcastle.

Crane, The Fresh Market’s VP and COO, was named interim CEO earlier this year. He said the TFM board “continues to interview candidates for the CEO position.”

He said TFM expects negative comps to continue through the second half because of more difficult comparisons with last year and continued deflationary pressures.

Crane listed several initiatives the company has implemented to improve financial results, including a multi-media brand-positioning; refinement of targeted marketing promotions to develop more personalized programs; increased use of social media; an improved customer service program; and efforts to develop more productive backrooms to create better in-stock positions.

Ackerman said the company is also implementing new recruiting tools to help better assess “people that have a propensity to serve”: testing new incentives to align staff with service; eliminating non-value-added tasks to better serve customers; and, at a couple of stores, testing incremental labor-hour investments.

Regarding pricing, Ackerman said The Fresh Market intends to be competitive on like-for-like items and charge a price commensurate with value on differentiated products.

Asked if customers recognize the company’s pricing strategy, Crane said they do if they shop the stores on a regular basis.

“We invested pretty heavily this quarter in produce prices, but we saw a sequential deflation in produce of 600 basis points. So customers need to shop the store a few times to really start to feel the improved pricing. There’s also a little bit of a headwind [because] our research indicates that even if we are equally priced, there is a price perception issue because of the premium attributes of the [store] experience.

“So we have to keep finding ways not only to invest in price but also to communicate it better. Once we find that balance, we can start to make those investments.”