Q4 2012 Earnings Call Transcript
Transcript Call Date 03/06/2013

Operator: Good day, ladies and gentlemen and welcome to The Fresh Market's Fourth Quarter and Fiscal 2012 Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct the question-and-answer session and instructions will be given at that time.

I'd now like to turn the call over to Sean Crane.

Sean Crane - EVP, COO and Interim CFO: Thank you, operator. I'd like to welcome everyone to The Fresh Market's fourth quarter 2012 earnings call. I'm Sean Crane, Executive Vice President and Chief Operating Officer and Interim Chief Financial Officer of The Fresh Market. I'm joined on today's call by The Fresh Market's President and Chief Executive Officer, Craig Carlock; and Jeff Short, our Vice President and Corporate Controller.

Before we begin the discussion of our business results, I need to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statements found in our press release and SEC filings. Our fourth quarter earnings release and related financial information, including any non-GAAP or adjusted financial reconciliation tables are available on our corporate website under the Investor Relations section.

After our prepared comments, we will have time to answer questions. Please note that a replay of this call and the Q&A session will be available for 30 days on our website at

With that, let me turn the call over to Craig.

Craig Carlock - President and CEO: Thank you, Sean and good morning, everyone. You likely had a chance to review our press release issued this morning. With our remarks today we would like to recap our fourth quarter performance and provide color on the changing consumer activity we saw this holiday season. We will comment on our full-year fiscal 2012 results and share our outlook for fiscal year 2013.

Let's start with Q4. This morning, we reported fourth quarter earnings per share of $0.43 driven by consolidated sales growth of 15.3% and comp store sales of 1.9%. While our full year comp store sales finished within our plan and guidance range and while we were pleased with our execution during the holiday season, we were disappointed to see our comp store sales growth rate slow this quarter. Similar to other retailers, we saw a pronounced change in consumer behavior this quarter, which caused comparable store sales to come in below trend and contributed to softness in EPS.

To understand better what happened during the winter selling season, we conducted extensive analysis and looked at a broad cross-section of sales data. While we found little evidence of issues with our merchandising or execution during the quarter, we saw relative weakness in comparable sales that was consistent across geographies, categories and store vintage.

We tried to perform our analysis as objectively as possible and we recognize there are always things we can do better. However, our products, prices and promotions were relatively in line with our competition and on par with prior holiday seasons.

The fourth quarter was also our toughest year-over-year comparison for comp sales as we cycled the 7% increase from last year's fourth quarter. During our third quarter call, we communicated that this will present a headwind for us and we were also mindful that the strong momentum that we enjoyed early in the year could be challenged by macroeconomic and political uncertainties.

We entered the fourth quarter with momentum and year-to-date comp sales that exceeded 7%. What unfolded was a sharp and uncharacteristic decline in sales unlike anything we had seen before that was driven significantly by a drop in traffic. The drop was in spite of a robust and disciplined planning process in which we spent a tremendous amount of time and energy preparing for the winter holidays, including selecting unique seasonal products to build traffic and maximize sales. In response to this drop in traffic we moved quickly to address the slowdown tackling it in two distinct ways. We made a concerted effort to sell-through perishable and nonperishable seasonal product and minimize shrink and post-holiday markdowns. We did this by layering non-incremental promotions leading up to the Christmas holiday to drive traffic and to increase impulse purchases.

The holiday season epitomizes what The Fresh Market stands for; great service, a quality offering of foods and a pleasing environment in which to shop even with slowing sales growth we maintained our store staffing levels during the holidays to ensure our customers enjoy a great food shopping experience, one that would build loyalty and spur positive word-of-mouth publicity in our newest markets.

With respect to labor we are committed to upholding our company's standards protecting our brand and presenting our customers with the quality offering an exemplary service to which they have grown accustomed. Based upon our past experiences increasing store labor during the holidays is the right decision for our business. While we did not realize a failed outcome we had hoped for with higher in-store labor this quarter, our actions should serve as a clear indication that The Fresh Market is commitment to preserving a unique differentiator shopping experience for its customers. We will not sacrifice long-held standards to achieve short-term financial gains when that risks compromising the customer's experience and the values of our Company.

As I take a step back. I don't want one quarter's results to diminish what was otherwise an excellent year of growth, earnings and investment. For the full-year, our comp store sales grew 5.7% our third straight year of comp sales of 5% or better and our best year since 2006.

We opened 16 new stores the most in our Company's history and we successfully opened our first store in California truly giving us a national brand. Strong comp sales together with robust new store openings allowed us to generate 20% growth in consolidated sales. These sales combined with margin improvement and good cost discipline allowed EPS to grow 24.4% for the year and ROIC to increase to 25.9%.

Furthermore, we invested wisely in our future taking the steps necessary to accelerate growth. We continue to build our franchise within the real estate community and we now have the most robust pipeline of new stores in the history of our company. We inked several more deals in California and we are particularly excited about the multi-site deal we negotiated to enter Texas, the nation's second most popular state.

Our new stores all on average meeting our return standards which gives us confident as we prepare to add a record number of new units in fiscal 2013, with respect to our investment in people our recruiting, training and management development systems served us well and we're extremely pleased with our field management from top to bottom and their ability to operate our concept consistently and excite customers. Quite frankly, the business has never had more momentum and energy than it does today and our people have never been more excited with the growth and opportunities facing the Company. Put simply, The Fresh Market remains a high-growth differentiator retailer with a tremendous opportunity in front of it.

Let me turn the call over to Sean to provide additional color on our fourth quarter and full-year results.

Sean Crane - EVP, COO and Interim CFO: Thank you, Craig. As Craig noted fiscal 2012 was a record year for The Fresh Market with strong comp sales above our historical average. The quarters were more volatile than they have historically been with robust comp sales growth early in the year and relative softness in the fourth quarter as we lap last year’s strong performance and saw a rapid change in consumer spending, which we believe is related to an uncertain economic outlook.

In all, we managed our resources well, realized 20% sales growth in fiscal 2012 and EPS growth in excess of 24%. For the full year, new store openings and a strong 5.7% sales comp helped us grow earnings per share to $1.33 compared to $1.07 in fiscal 2011.

For the fourth quarter, The Fresh Market’s diluted earnings per share were $0.43 compared to $0.38 in the prior year’s quarter. Total net sales grew 15.3% during the quarter with comparable store sales growth of 1.9%. The increase in comp sales was driven by average transaction size, which rose 2% and was fractionally offset by a slight decline in transaction count. Basket size benefited from an increase in average unit retail.

We successfully cycled particularly strong comp sales from a year ago of 7%. On a two-year stack basis, comparable sales increased 8.9% in the fourth quarter, driven by a 3.3 percentage point increase in transaction size and a 5.6 percentage point increase in transactions. Our two-year stack decelerated by 220 basis points on a sequential quarter basis, reflecting the muted holiday sales environment which restrained traffic count.

Total sales for fiscal 2012 increased 20% to $1.33 billion and comparable sales increased 5.7% to $1.14 billion. The comp sales increase was driven by a 3.4 percentage point increase in the number of transactions and a 2.3 percentage point increase in transaction size. Total square footage increased approximately 14% compared to last year to 2.71 million square feet at the end of fourth quarter. Our merchandising and promotional programs continue to resonate with our customers. This holiday season we made a concerted effort to hold important retail protein prices flat to last year and also layered in weekly promotions, which resulted in a promotional cadence and sales of 21% similar to last year with limited impact to merchandise margin.

Total gross margin dollars increased 16.5% to about $126 million and the gross margin rate increased 30 basis points to 34% during the fourth quarter. The increase in gross margin rate was driven by expansion in merchandise margin despite cycling a 30 basis point benefit from the $1.4 million initial impact of gift card breakage recognized last year. In addition, we realized leverage in occupancy cost and a decrease in LIFO expense this quarter. We were able to leverage purchasing power and supply chain expenses to offset higher protein and other costs and further increase our online merchandise margin.

For the year total gross margin dollars increased 23% to $451.7 million and our gross margin rate increased 90 basis points to 34%. This increase was attributable to increased merchandise margin and leverage in occupancy cost. For the quarter selling, general and administrative expenses increased 19.5% to $82.4 million. As a percentage of sales, SG&A expense increased 80 basis points from last year to 22.3%. This increase was primarily attributable to a rapid decrease in comp sales and a rise in late year hiring in anticipation of next year store opening schedule.

With respect to store labor, though deleveraging is painful in the short term, we do not cut labor abruptly, preferring instead to trim labor with sales while maintaining service levels and protecting our brand.

In Q4 we also benefited from a reimbursement from storm related expenses incurred in Q2 and lower pre-opening cost, which help mitigate some of the increase in SG&A. During the quarter, we opened two new stores compared to six in the prior year's fourth quarter.

Of note we made significant progress in building out our assistant store manager development program during the fourth quarter in light of continued acceleration of new store openings, including opening four stores in Houston in 2013, we made an incremental step change to our formal assistant store manager training program. This change increases our average assistant store managers per store by approximately 10% and positions us well for new store growth in the coming year as we promote all store managers from within.

For fiscal 2012, SG&A expenses increased 22.8% to $303.5 million, or approximately 50 basis points to 22.8% of sales. The increase in expense was primarily attributable to higher store level compensation cost and incremental expenses associated with the Company's share-based compensation program.

For the full-year, each new store contributed on average 27 weeks of revenue, compared to 20 weeks of revenue in fiscal 2011. This is important to note as we look forward to fiscal 2013 which will have fewer average weeks of revenue per new store, despite a larger number of new stores. This is attributable to the cadence of new store openings, which will be weighted towards the back half of the year. We expect this headwind to operating earnings will become a tailwind as we move into fiscal 2014 and realize the full earnings power of our 2013 vintage stores.

Depreciation expense for the fourth quarter totaled $12.6 million compared to $9.8 million in the corresponding period in 2011. For fiscal 2012, depreciation expense totaled $45.7 million or 3.4% of sales, a slight increase to the last year's rate of 3.3%, driven by continued acceleration in new store growth. Operating income for the fourth quarter increased 5.3% to $30.8 million, while operating margin decreased 80 basis points to 8.3%. For the year, operating income increased 22.4% to $101.5 million, while operating margin increased 10 basis points to 7.6%.

The primary driver of the decrease in operating margin for the fourth quarter was higher compensation costs and an increase in depreciation expense, partially offset by improvement to gross margin despite the $1.4 million impact of initial gift card breakage last year. For the full-year, the operating margin benefited from an increase in gross margin rate. Our effective tax rate in the fourth quarter of fiscal 2012 was 32.1% and our effective tax rate for the full-year was 35.9%. We benefited from tax credits associated with the American Taxpayer Relief Act of 2012 and from our charitable food contributions that got off the ground at the end of the first quarter of 2011.

Moving to the balance sheet and cash flow statement, this quarter the Company generated $15.5 million in cash flow from operations and invested $18.4 million in capital expenditures. $13.7 million of these capital expenditures related to new relocated and remodeled stores as we continue to grow the chain. For the year, we generated $91.9 million in cash flow from operations and invested $81.1 million in capital expenditures, with $69.1 million spent on real estate activities.

During the fourth quarter we opened two new stores at the end of the quarter, operated 129 locations in 25 states. For the full year we opened a total of 16 new stores, a record for the Fresh Market. The Company continued to generate strong cash flow finishing fiscal 2012 with a cash balance of $8.7 million and total debt outstanding of $42 million. Despite accelerating our growth, this is a reduction in debt outstanding of $22 million versus the corresponding period last year. Availability under the Company's revolving credit agreement was $120.1 million at year-end.

Average inventory on a FIFO basis per store at the end of fiscal 2012 increased 2% compared to the corresponding period last year. The increase resulted from commodity cost increases in certain departments, such as meat and produce, as well as increased inventory investments in new product assortments and faster growing categories to support our overall sales growth.

Given our continued improvement in earnings performance and our disciplined approach to asset utilization, our key financial return metrics remain strong. On a trailing four quarter basis, the Company's return on assets was 18.4%, return on invested capital was 25.9%, and return on equity was 32.4%, as described in more detail in this morning's press release. We remain very proud of our returns and in fact it's because our returns are so strong that we remain so confident about our store expansion plans.

With that I'd like to turn the call back over to Craig.

Craig Carlock - President and CEO: Thanks Sean. As we look to fiscal 2013 and beyond, we are enthusiastic about our business and prospects for growth. We anticipate earnings per share in a range of $1.51 to $1.58, which equates to growth of 14% to 19%. A significant thread that runs through our fiscal 2013 forecast and into our fiscal 2014 is that our store openings will be later in the fiscal 2013 year than they were in fiscal 2012. This store opening cadence will dampen 2013 EPS growth by about 2 percentage points.

To build up to our EPS guidance, let me start with sales and unit growth. We are extremely excited about our pipeline and our store openings. We continue to accelerate store openings and believe the 500 stores is a reasonable indication of market opportunity for The Fresh Market in the United States. Our small box format provides us with tremendous flexibility as we evaluate new markets and developments. The Fresh Market has built a reputation within the real estate marketplace for its scalable format and desirable clientele that makes us a sought after tenant and allows us to be opportunistic in our expansion.

Our new store pipeline remains robust and we are committed to achieving a long-term new store unit growth rate of 15% per year. We currently have signed leases for 30 stores to open in fiscal 2013 and beyond. In addition to this lease activity, we are extremely excited about the deals on which our real estate team is currently working. For the coming fiscal year, we plan to open between 19 and 22 new locations including two in the first quarter, four to six in the second quarter and 13 to 15 in the second half of the year. This translates into new unit growth between 15% and 17%. Stores will open in a blend of existing and new markets, including Palo Alto in Santa Barbara as we expand our footprint on the West Coast.

As we noted in our press release this morning, we expect the majority of our store openings in fiscal '13 to occur in the second half of the year. Therefore, we will realize fewer average sales weeks from our 2013 vintage of stores than we did in fiscal 2012. As we look at our store opening schedule, we expect on average approximately 20 weeks of earnings from our new vintage of stores compared to approximately 27 weeks in fiscal 2012. This will serve as a headwind to profit growth in fiscal 2013, but we expect this to be a tailwind for us in fiscal 2014 as we benefit from our full-year of production from all of these stores.

Turning to comparable store sales, January was somewhat better than the holiday period. So we head into the new fiscal year with more stable comparable store sales and positive customer count. That said, we think it’s prudent to adopt a conservative view that reflects our fourth quarter performance and ongoing uncertainty with the macroeconomic climate. With those points in mind, we are planning on comp sales in a range of 2% to 4%.

2013 will also be a year of building our franchise and one great way we do this is by enhancing our private label program. This program promotes our corporate values and brand and adds to both sales and gross profits. Our private label program and its penetration particularly in our grocery, dairy and frozen departments continue to grow. In the fourth quarter, private label penetration in these three departments exceeded sequential quarter and year ago levels. Across the store, we launched nearly 130 new private label products in fiscal 2012 and we redesigned over 100 other products, bringing our private label offering to over 1,000 SKUs. In fiscal 2013, we anticipate introducing 100 new products in this offering.

Turning to inflation, we are forecasting a moderate level of cost and retail inflation in fiscal 2013. We have historically been quite successful in mitigating most cost increases through a growing purchasing power at vendors, ongoing supply chain improvements, and various shrink reduction initiatives. We are currently meeting with many of our vendors to discuss their cost and promotional programs for the new year and we are encouraged by our negotiations so far.

As I mentioned in my opening remarks, as we accelerate store openings, we're also ramping up our internal resources. For instance, we have added many new positions to our office infrastructure and increased the average number of assistant store managers per store to ensure that we are able to satisfy the demand for in-store and regional management as we accelerate unit growth. Within real estate and development, we've also added several positions to manage construction schedules and due diligence, which will support our new store pipeline.

A second implication of ramping up store openings relates to dead rent expense. We expect more dead rent expense relative to last year as our growth rate increases. This effect will be modest in the first quarter and more pronounced during the rest of the year. In the fourth quarter we will incur dead rent from early 2014 new stores.

One final comment on dead rent. Because we expect our store opening schedule to be back-half weighted in fiscal 2013, this will result in dead rent expense that is masked with relatively fewer sales weeks and earnings dollars. We also anticipate incremental preopening expenses early in the fiscal year. Similar to dead rent expense, revenue to offset these outlays will occur in the second half of the fiscal year.

Turning to SG&A, we remain focused on ways to improve efficiency and make the most of our store labor and operating investments. We continue to refine store labor tools and make investments in those departments and individuals to drive the best return. This work should allow us to better match our production and staffing to our daily customer flows, while increasing the interaction between our employees and customers, which we believe enhances the customer's shopping experience and drives repeat traffic and positive word-of-mouth publicity. We expect to realize modest SG&A leverage in fiscal 2013. We have solid top line growth and various margin and expense initiatives, we expect that our operating margin can improve by another 10 basis points to 7.7% in fiscal 2013. This expansion will depend on the macroeconomic environment and how consumers respond to existing financial uncertainty.

We remain conservative on our outlook for the effective tax rate and do not believe the benefit we saw in fiscal 2012 will repeat itself. Taking into account our current sales and operating margin forecasts and anticipated tax rate of approximately 37%, we expect our net income will grow at 14% to 19% rate with diluted earnings per share in the $1.51 to $1.58 range. Let me add that we expect earnings in the second half of the year to exceed that of the first half, similar to the pattern we experienced in fiscal 2011.

Finally, we expect our capital investments in fiscal 2013 to accelerate to a range of $130 million to $150 million with new and remodeled stores making up nearly 90% of the total projected capital. We continue to make progress on our search for a new Chief Financial Officer and have engaged in national firm to help us with this effort. The selection of a new CFO is important to me, who will set the tone for our finance team and support the strong culture and discipline at The Fresh Market.

We have made good progress in meeting with candidates and hope to have more to share on this matter by mid-year. In all, I'm proud of the strong progress we've made this year and how we are positioned to accelerate growth in fiscal 2013. I'm also proud that we displayed a commitment to our brand, our customers and our communities in the face of a volatile fourth quarter, where the easy thing to do would have been to potentially compromise our long-term value proposition.

From our corporate office to our 130 stores, we are fortunate to have a dedicated team of more than 10,000 employees that strive for perfection, service, and uncompromising customer satisfaction.

Thank you. Operator, we will now open the call for questions.

Transcript Call Date 03/06/2013

Operator: Mark Wiltamuth, Morgan Stanley.

Mark Wiltamuth - Morgan Stanley: Just wanted to ask on your growth outlook, are you including some overhead investments for the West Coast expansion? And also, is there also a drag from ongoing stock-based compensation expense or have you lapped out of that at this point?

Craig Carlock - President and CEO: Okay. The first question on the overhead investments associated with California. I would say we have investments included in the outlook and to some extent included in the actuals for hiring field personnel in the HR function and the store management function and in supervision, so we’ve got those investments that are being made now. Those will support California and in Texas and few other places. So that’s going on and definitely included in the outlook. The stock-based compensation, we have not lapped. We will be entering the third year the four-year program, so there is a headwind until you get to steady state. We’ll hit steady state in fiscal year 2015.

Mark Wiltamuth - Morgan Stanley: Given the difficult year-ago (share) in the first half, should we be thinking something around 1% comps in the first half of the year given the two-year stack that you just posted?

Craig Carlock - President and CEO: I appreciate the question. I really think we ought to just say we've taken a look at current business momentum and our outlook's 2% to 4% for the year. That's really all I think I can say.

Mark Wiltamuth - Morgan Stanley: And is it fair to say your January comp is the best out of the quarter?

Craig Carlock - President and CEO: I think we feel like we had a sudden slowdown early in the quarter (that carried) through the holiday and then we came out a little bit better in January.

Operator: Phil Teroplilli, Longbow Research.

Phil Teroplilli - Longbow Research: Just first question on comparables, you mentioned earlier about a cautious consumer, but are you seeing any changes in terms of competitive activity in any of your markets or maybe competing stores opening nearby that's affecting you?

Craig Carlock - President and CEO: I think the marketplace is extremely competitive. I think we do have competitors that are – and they are very public about how they're going to market and what they're trying to do. So I feel like it is competitive, but I don't think anything changed in the fourth quarter with respect to our competition, nor frankly did we see any change in our own performance relative to where our competition exists and where it doesn’t.

Phil Teroplilli - Longbow Research: Just what's your assumption for inflation embedded in that comparable guidance for this year?

Craig Carlock - President and CEO: We think about cost inflation as we think about our LIFO reserve, and we're using approximately 2%. I think it's…

Phil Teroplilli - Longbow Research: Okay.

Craig Carlock - President and CEO: Okay.

Operator: Mark Miller, William Blair.

Mark Miller - William Blair: Craig, I know you talked about the product and prices being on par with competition, but do have any concerns that perhaps you haven't done enough to shore up the value proposition? The company's had a real strong series of gains in gross margin. So I was wondering if there are any considerations to being more aggressive on price if not reality but just to change perceptions.

Craig Carlock - President and CEO: Well, I think a couple of points. The first one is we are proud of the margin gains, but I'd tell you that we feel like most of those gains are coming from improvements in the deals we strike with the growers, producers and manufacturers of the food and then also distribute the food and then they shrink reduction initiatives that we've talked about. So we do not feel like we're improving our margins at the expense of our price, so I'd also tell you we really held the line on protein prices in the fourth quarter and while we actually did fine on margins in the fourth quarter in the merchandise margin line, we really held the line on protein prices. And then the last point I make is, we talk to customers all the time, we view focus groups, either formally or informally, we enter stores and price is not the top of the list of attributes. The folks we talk to on quality, they want service, they want cleanliness, they want short lines and then we monitor prices very regularly across the broad spectrum of competitors. So we think about it, we ask ourselves a very question you are asking, but we haven't reached the conclusion that that's an issue for U.S.

Mark Miller - William Blair: Another question is regarding the investments you are making, so expansion to California but also the stock comp expense. Can you provide some color around what the store operating expenses are as a percent of sales and how much delevers there was on this side. I'm just trying to get a handle on what you actually need for comps to build to leverage expenses at the store level?

Craig Carlock - President and CEO: I'm struggling to come through for you with an answer, make sure I understand the question. Can you say it again?

Mark Miller - William Blair: Well, I mean, to Mark’s earlier question about investments the Company making to facilitate the expansion at West, plus you’ve got the step-up in the stock comp expense. I’m just trying to understand aside from these factors, what the expense growth is at the store, and basically what does the Company need for comps to be able to leverage on a four-wall basis?

Craig Carlock - President and CEO: Our unit economics remain sound and returns remain good. I am hard-pressed to be able to separate out the elements you are talking about right now. In other words, the unit economics are good. We’re making investments in the system managers and personnel to support our stores, but we are not – I don't think we are at a position or sort of not thinking we’re going to start deleveraging in your basic stores.

Sean Crane - EVP, COO and Interim CFO: The investments and costs that we have made in California are not material or are not causing deleverage on our comp stores or our consolidated stores from a store expense perspective.

Mark Miller - William Blair: But just to be clear, I mean, with the rising operating expense as a percent of sales, at this level of comp rate, expenses are higher as a percent of sales on a four-wall basis, correct?

Sean Crane - EVP, COO and Interim CFO: Yes, and that was just the fourth quarter and primarily derived from store labor expense, which we talked a little bit about in the opening remarks. When we had this sudden decrease, just we had the decrease in comp sales, but sales in the absolute are still growing as we go into the holidays, so we continue to make our investments in labor. While we better managed overtime, we were able to pull that back significantly, but we still made substantially the same investments in labor and that's what caused the deleverage in Q4. I would not make that assumption into 2013.

Operator: Stephen Grambling, Goldman Sachs.

Stephen Grambling - Goldman Sachs: Just one quick follow-up on that line of questioning, which is just maybe another way to ask the question is what is the kind of core store growth rate and expenses excluding the growth initiatives?

Sean Crane - EVP, COO and Interim CFO: I think for 2013 and Craig mentioned it in his remarks, from a SG&A perspective we expect flat-to-slight leverage in 2013.

Stephen Grambling - Goldman Sachs: Okay. And then I guess another question to follow up on some of the comments earlier. Just are the promotions still going on in January and did you actually see the traffic improvement that I think you referenced in January as a direct response to those promotions? So those will be kind of ongoing or do you feel like you had to work through your inventory to get out of the holidays and maybe the hotter promotions or incremental promotions are going to wane?

Sean Crane - EVP, COO and Interim CFO: I referred to activity in the holiday period, primarily November, December to just ensure that we sold further perishable and seasonal product that we had in stock. In January like every other month though we're going to run and try and experiment with promotions and so you would have seen us experimenting with promotions, but that's normal course that wasn't related to activities in November and December.

Stephen Grambling - Goldman Sachs: And then one last one if I may, just on the new store timing, I may have missed this, but was there any reason why the schedule has been pushed back, I know that you have been talking about trying to get the openings to be a little bit more consistent. So, is there anything that drove to be pushed back later in the year.

Craig Carlock - President and CEO: I wouldn't characterize it as pushback because that suggest we chose to do this. What I'd say is when we negotiate deals we have very high standards and we don't sign those leases until or set aside with the deal, the terms of the deal and a number of other points. and so there is an element of that how this year round up. I think we are a high growth retailer and there is a little bit of lumpiness in our openings. We benefitted in 2012 from somewhat earlier in the year openings in next year. Well, that’s not the case.

Operator: Ken Goldman, JPMorgan.

Ken Goldman - JPMorgan: I have two questions, first you talked in the past how you don't necessarily have a lot of data on your customers, that you don't want to attract customers' pictures because they hold a loyalty card, but rather because of the attractive value of your products. And today you are talking how you frankly aren't really sure about what happened over the holidays and how you can't necessarily draw conclusions yet about whether your prices are right. And frankly perhaps a little bluntly this concerns me, because it perhaps suggest you aren't necessarily able to diagnose the problem. And until you know what the problem is you can't fix it. So, I'm curious if this sudden concern that came up in the fourth quarter has perhaps incented you to rethink maybe the amount you know about your customer and so as your data analysis or is that not the right way to look at it?

Craig Carlock - President and CEO: We appreciate the question and the concerns. I mean, I think we have a view that we were comping very, very well. We experienced a decline. I think there has been a lot of evidence of other retailers commenting somberly about changes during the holidays. We are curious about some of the items you mentioned, but we are not going to have knee-jerk reaction.

Ken Goldman - JPMorgan: I mean, to me that frankly says that this can happen again, right, and that adds a little bit of uncertainty to the stock that wasn’t there before...

Craig Carlock - President and CEO: One thing I'd say is that is we – our business in the holiday period, the way we understand the data would be that we are more seasonally affected, and so we have a higher rate of attraction of seasonal customers than perhaps conventional food retailers. And so we do think our seasonal customer was disrupted somewhat in the fourth quarter.

Ken Goldman - JPMorgan: Then second question, you talk about 2012 being a great year and overall things grew pretty well and you pointed out that you’ve only had one rough quarter, but you are also guiding to what is a significant slowdown in your comps. So why should take that in stride? Isn’t this a genuine structural change in your growth rate that you are pointing us to when you talk about only 2% to 4% ID sales? I know Craig you have a difficult comparison, but you are still guiding to a full-year of slowing growth. So, if not just one period, I'm not sure why you aren’t suggesting that a slowdown like this needs perhaps some stronger reaction rather than just stay the course.

Craig Carlock - President and CEO: I think our view is that over the long haul, we expect the comp in the 3 to 5 range, but based on the trends we saw in the fourth quarter, we should come out of the gate more conservatively in the 2 to 4 range. I wouldn't characterize this as a structural change.

Operator: Shane Higgins, Deutsche Bank.

Shane Higgins - Deutsche Bank: So you're looking for some operating margin improvement on the year, Craig. How should I think about gross? Is your margin expansion really going to come from SG&A leverage or do you guys anticipate some gross margin improvement as well?

Craig Carlock - President and CEO: I think our point on the year would be we expect our operating margin to change very little or move upward. I think our gross margin and SG&A margins will also be relatively stable. In our view the story for next year won't be a margin story. The pipeline is good. We're going to open 19 to 22 stores that are going to fall late in the year, but the fact that this concept can succeed in so many different places is what we're most excited about.

Shane Higgins - Deutsche Bank: And just one last one. So you guys are ramping up your CapEx quite a bit this year. Are you guys going to have the operating cash flow to support that or are you guys going to have to dip into the revolver?

Craig Carlock - President and CEO: Well, the revolver has a balance as it is now, and so I don’t think you're expecting to see the revolver change much, if that's what you're getting at.

Shane Higgins - Deutsche Bank: Yeah, yeah, I was just wondering if you guys expected to finance your CapEx through operating cash.

Craig Carlock - President and CEO: I think very much most of it. I don’t want to say all of it, but the vast majority.

Operator: Karen Short, BMO Capital Markets.

Karen Short - BMO Capital Markets: Just a couple questions on the comp and the cadence. I guess you say that January improve and obviously I understand what was going on for you in the holiday, but that's definitely inconsistent with what other retailers appear to be saying. So, I mean is that the function of the tweaks you made in December or anything else you can point to there?

Craig Carlock - President and CEO: Our view is that we – this is where we feel good about how we delivered the concept in December. So we had great product with great prices, we're appropriately staffed and it's not uncommon at all for us to come out of the holiday period with this strong first quarter, whether that's in new stores or existing stores.

Karen Short - BMO Capital Markets: So, comps ended the first quarter now, are they still in positive territory, I mean I understand you are up against very tough compare, so it wouldn't be – there weren't necessarily need to be positive to maintain your two year turn sequentially, if you could just give some color there?

Sean Crane - EVP, COO and Interim CFO: Well, I think we had positive comps in the fourth quarter, we are guiding towards positive comps for the year.

Karen Short - BMO Capital Markets: And then the last question is, if you said that I missed it. What was the negative impact on your gross margins from holding prices on protein? Do you have basis point kind of number you can give?

Craig Carlock - President and CEO: We didn't quantify or break out the effect of holding an outstanding (indiscernible), very competitive (hopefully they will be been generally) very competitive. We simply said that in response to how we thought about our prices, we made a concerted effort to be very competitive and absorb some of the cost pressure. We also said that our margins and merchandised margins improved slightly in quarter despite holding the prices on protein.

Karen Short - BMO Capital Markets: And then, you normally give kind of the percent of products sold on sale you have in some quarters here and there, so, it's kind of in that 17%-ish range. Do you have that number handy for this quarter?

Sean Crane - EVP, COO and Interim CFO: We’ve kind of changed how we calculate that as 21%-ish. It was probably about 20 basis points more than prior year based on the new calculations. So year-over-year, it was very close.

Operator: Andrew Wolf, BB&T Capital Markets.

Andrew Wolf - BB&T Capital Markets: I want to follow-up, Craig to your answer to Karen’s question. The way I heard you saying January got better than the holiday period and I just sort of assume, forget the two year and all of that that matters, the way you said it, it made me think February is probably going okay and you’re positive. And I think that’s an important thing to just answer if you could, because at least my takeaway and I think other peoples’ impression would be, if you said, hey, things got better in January that kind of extended into the year especially if you’re setting guidance of 2% to 4%.

Craig Carlock - President and CEO: I think we’ve never commented ever on inter-quarter, and it’s very tempting, but we just haven’t commented three four weeks into our quarters how we’re doing. I’m not thinking that that would be helpful. So what I would just say is the guidance you have is 2% to 4% and it’s informed by January and what we know so far.

Andrew Wolf - BB&T Capital Markets: On the gross margin, did it have sort of a cadence, if you will, during the quarter that kind of matched the sales? Did the gross margin get better as the sell-through got better? I understand your main explanation is the way you want to market on protein, but was there more shrink upfront and having to clear merchandise out when the – before the shrink came and that kind of thing in the slower period?

Craig Carlock - President and CEO: I think we would say we feel good about how we manage the product sell-through, manage the margin. The thing that's tricky when sales come in less than you think they'll be is managing the labor, frankly, because the sales through December call it are rising in the absolute, even if they're not as high on a percentage change as you might have wanted or forecasted. So for us, I would say, the merchandise margin, gross margin was fine. Managing labor appropriately was more difficult.

Sean Crane - EVP, COO and Interim CFO: And just to add a little perspective there, our holiday volume compared to a non-holiday week literally doubled. So the labor implication there, we just can't miss labor. We have to deliver the experience. Although the basket size increases significantly, most of that doubling of volume is attributable to an increase in traffic. So customers who shop us infrequently, who shop us for special occasions, they've grown accustomed to the food, the service, everything that they love about the Fresh Market and shop us infrequently. They come for those special occasions and we have to deliver. And to Craig's earlier point, when we deliver well and execute in store, in our newer stores we beat our internal forecast coming out of the holiday, and we attribute that to executing well in the stores. So labor was the delever point here. Margins were fine. It really was just store labor.

Andrew Wolf - BB&T Capital Markets: Have you looked at – Craig, you said things are good on execution and (I heard you), but what about marketing execution. I know your certain promotional tools, mainly around the holidays, like the holiday mailer. Are you satisfied that the marketing part of it and the promotional part of it wasn't part of the reason that you had the slowing in traffic?

Craig Carlock - President and CEO: We had better execution on the mailing frankly than we did a year ago. We got two places that was going at the right time better than it did a year ago. I really do feel like products we have, the prices, the execution of store folks of marketing was on par. I thought we say, gosh, the things we learn ever year surely are the things that we think we could do better, yes. But we didn’t find something that explain the sudden drop in traffic. See, where I would think we perhaps made some mistakes is that the traffic stayed the same, but people didn’t buy things, then I'd worry about our prices then I'd worry about our execution or displays or signs. But if there’s a sudden drop in traffic, it’s a very hard to affect here was a mistake.

Andrew Wolf - BB&T Capital Markets: No, I was just checking maybe because I know this is the one period where you direct mail a lot. I was just checking on that. Just two kind of housekeeping's and I’ll go. I heard something about the second quarter cost. Did you get like insurance settlement or something that helped the quarter within financial statement?

Sean Crane - EVP, COO and Interim CFO: Yeah, we had a storm that happened in the second quarter and we got the reimbursement from insurance in the fourth quarter.

Andrew Wolf - BB&T Capital Markets: Is that – can you say how much that amount was.

Sean Crane - EVP, COO and Interim CFO: I don’t think I want to comment on that level of detail. It wasn’t a huge amount, but it was worth noting.

Andrew Wolf - BB&T Capital Markets: Lastly, on the Texas stores, are they either in the CapEx or in the P&L or certainly more in regards to the P&L, are they – or do they not flow until you kind of open them.

Craig Carlock - President and CEO: So I would say they’re certainly in the CapEx and they’re certainly in the guidance both sales and the anticipated that rent and the anticipated staffing requirements.

Andrew Wolf - BB&T Capital Markets: But in Q4, did they affect the Q4 financials because I assume they’re not open yet. The accounting rules like to keep those expenses up.

Craig Carlock - President and CEO: To the extent we’ve hired a system manager as part of our need to staff the 19 to 22 stores that are in the Q4.

Andrew Wolf - BB&T Capital Markets: I don’t know if you want to comment and – but I know your stores open profitable and that’s sort of how you are speaking about guidance, but do you anticipate that also in Houston?

Craig Carlock - President and CEO: Yeah, we have high expectations for Houston. It's great locations and great parts of towns. So I would say our expectations are – we are very optimistic. Our expectations are high. One thing I would point out about some of the staffing comments is we are effectively changing the rate of growth of the Company, the rate of new store openings, and so there is this kind of phenomena we're staffing up and incurring those costs, incurring the training costs, incurring the dead rent expenses at a higher rate than we were a year ago and has an impact.

Operator: Ed Aaron, RBC Capital Markets.

Edward Aaron - RBC Capital Markets: Craig, maybe I misheard this in your prepared remarks, but I thought you said that you saw a sharp decline. I think your term was like unlike anything you had seen before. That just seems like kind of strong just considering what you and kind of the other (indiscernible) industry went through in the recession. Is that – did I hear that right?

Craig Carlock - President and CEO: You heard it right. I would say it was sharper and more sudden than anything we saw in 2008.

Edward Aaron - RBC Capital Markets: My other question was did you see any evidence of actual trading down within your stores in terms of moving to kind of lower tier product categories and so forth?

Craig Carlock - President and CEO: We look very carefully at that and we did not. I think our sales trend was explained more by traffic than behavior once people got into the store.

Operator: Kate Wendt, Wells Fargo Securities.

Kate Wendt - Wells Fargo Securities: Just wanted to follow up, not to harp too much on price, but is the stuff that you're seeing on traffic is in fact the consumer and that pressure continues? Even though you say your customer doesn’t value price as the number one priority, do you think that lowering prices or increasing the level or promotions to perhaps help you recapture traffic as the consumer is trading down?

Craig Carlock - President and CEO: We strive to provide great value where the quality and the price match up, but the question you ask is good and fair, and I will tell you that we test prices and test promotions regularly and frequently. And we test them in existing markets, we test them in new markets, and so testing and probing price is something that we want to be very open-minded about. So I'm very open-minded about your question. What I'm trying to suggest is you won't hear us say, we certainly have not reached a conclusion that we need to invest in price.

Kate Wendt - Wells Fargo Securities: Okay, got it. And then sorry if I missed this earlier (indiscernible) said it, but what level of comps do you think you need to leverage store labor going forward?

Craig Carlock - President and CEO: We're cautious about making that assumption because we have leveraged expenses. In 2008 and 2009 we had negative comps, so we feel like if we're thinking over an intermediate period of time, we are able to make adjustments to make sure we get the profit growth that we would like to achieve. And we did say 2% to 4% comps. We did say that we might see slight leverage in SG&A and store labor is one the largest components of SG&A.

Operator: Ladies and gentlemen that is all the time we have for questions today. I'd now like to turn the call back to over to Craig Carlock.

Craig Carlock - President and CEO: Thank you. Thank you all for participating in our call today. We look forward to speaking with you in May on our first quarter earnings call. Have a good day.

Operator: Ladies and gentlemen that does conclude the conference for today. Again thank you for your participation, you may all disconnect. Have a good day.