Fresh Market Abandons California as Earnings Sprout Higher

Source: Fresh Market.

The grocery industry has always been competitive, but as shoppers focus more on high-quality food items, rivalries among grocers have gotten even tougher. The Fresh Market came into a space that Whole Foods Market had dominated for years, and when Whole Foods faltered last year, some believed that Fresh Market would pick up the slack.

Coming into Thursday afternoon's financial report, Fresh Market shareholders were nervous about the resurgence of Whole Foods and its potential impact on growth. Even though Fresh Market's results were fairly impressive, the big news from the grocer came from its strategic decision to close its operations in California. Let's dig into Fresh Market's report to see what the grocer sees in its future for the rest of the year and beyond.

Dishing out higher profitsFresh Market's results showed the company's ongoing growth. Revenue climbed 12.8% during the quarter, to $480.5 million, which was only a bit less than the $483 million in sales that investors had looked to see. Comparable-store sales rose at a 3% pace, showing the impact of Fresh Market's ongoing expansion efforts. After adjusting for one-time charges, earnings of $0.55 per share were up 41% from year-ago levels, and better than the $0.51 per share that marked the consensus among investors.

Source: Fresh Market.

Looking more closely at the details of the report, Fresh Market did a good job of making the most of its business opportunities. Gross margin improvement helped drive the company's earnings growth, even though rising food costs ordinarily would have weighed on its ability to maintain profit margins. Moreover, efforts to use better promotional and marketing practices, including direct mail, sent customer traffic figures up 3.7%.

Interim CEO Sean Crane spoke favorably about Fresh Market's results. "We remain focused on our key growth strategies," Crane said, "including opening new stores in our core markets and continuing to increase shopper frequency." Crane believes that smarter pricing behavior and better marketing campaigns also helped Fresh Market grow.

Out of CaliforniaPerhaps the biggest shock from the report came from Fresh Market's new strategic initiative, in which the company said that it has decided to close its California operations in favor of better opportunities for growth. Already, Fresh Market had said that it expected to focus its efforts on the eastern part of the U.S., and the company said that it believed that "organic store growth was going to be slower than anticipated," thereby driving the strategic move.

Source: Fresh Market.

Impairment charges and expenses related to the store closures added up to $8.7 million during the fourth quarter, and closing Fresh Market's stores in Palo Alto, Santa Barbara, and Laguna Hills will force the company to take additional charges of $20 million to $26 million. The company expects that the moves will be complete by the end of March.

Even with that news, though, Fresh Market is upbeat about its future. For the coming fiscal year, the company expects to open 19 new stores in or near existing eastern U.S. markets. Fresh Market anticipates sales growth of 9% to 11%, with comps rising 2% to 4%. Earnings guidance for $1.77 to $1.85 per share is in line with what investors had expected, even if revenue growth will be a bit slower than the consensus projection.

One area that remains unresolved is the status of Fresh Market's leadership changes. In January, the company appointed Crane to the interim CEO job, as previous CEO Craig Carlock had left the company. At that time, founder and Chairman Ray Berry assured investors that the transition would result in "finding the right candidate to lead The Fresh Market through its next phases of growth." Yet the release didn't indicate any specific progress on the executive search process.

Fresh Market shareholders applauded the news, sending share prices up 3.5% in the first half hour of after-hours trading following the announcement. Certainly, with competitive pressures especially tough in the California market, retreating to concentrate on its strongest areas makes plenty of sense for Fresh Market.

The question, though, is whether it can demonstrate a true competitive advantage over Whole Foods in its most promising markets. As Whole Foods bounces back and finds its footing once again, Fresh Market's new executive team -- whoever it turns out to be -- will have a big challenge to overcome.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Whole Foods Market. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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