Operator: Good day, ladies and gentlemen and welcome to The Fresh Market First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session with instructions following at that time. As a reminder, this conference is being recorded.
Now, I'll turn the conference over to your host, Mr. Sean Crane, Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer. Please begin.
Sean Crane - EVP, COO and Interim CFO: Thank you, operator. I'd like to welcome everyone to The Fresh Market's first quarter 2013 earnings call. I am Sean Crane, Executive Vice President and Chief Operating Officer and Interim Chief Financial Officer. Joining me on today's call is The Fresh Market's President and Chief Executive Officer, Craig Carlock.
Before we begin the discussion of our business results, I want 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 first 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 your questions. Please note that a replay of this call will be available for 30 days on our website at www.thefreshmarket.com.
With that, let me turn the call over to Craig.
Craig Carlock - President and CEO: Thank you, Sean and good morning, everyone. We are pleased to report first quarter earnings per share of $0.46, which represents near 15% growth from last year. Our solid financial results get the year off to a good start and reinforce our confidence in our full-year outlook. I was glad to see our business and customer traffic improved on of the sequential quarter basis. Net sales grew a solid 13%, driven by new store openings and comparable store sales of 3%. Customer traffic this quarter rose 60 basis points from a year earlier, even as we lapped one of the best traffic quarter's in our Company's history. This progress provides another confirming data point that the slowdown we experienced late last year was essentially confined to the two-month period of November and December.
Even though our performance was solid this quarter, we do not take lightly the pullback that we experienced in Q4. We are a disciplined Company and committed to thoroughly understanding our business and growing our customer base. We continue to expand, invest in people, and lever systems to evaluate our performance and better understand our customers.
Based upon the increase in traffic count and comp sales we believe our customers are more confident than they were in the fourth quarter, so today we are updating our fiscal 2013 guidance to increase comparable store sales to a range of 2.5% to 4.5%.
Let me now turn the call over to Sean for a deeper discussion of some of the key drivers this quarter.
Sean Crane - EVP, COO and Interim CFO: Thank you, Craig. We are proud of the sales and profit results we achieved this quarter, especially as we lapped last year's strong comp performance and continue to execute well. In the first quarter, The Fresh Market's diluted earnings per share rose 14.6% to $0.46 from $0.40 in the prior year's quarter. We realized this earnings growth, despite incurring higher than normal employee healthcare claim cost, and a previously disclosed increase in shared-based compensation expense.
Total net sales grew 12.9% this quarter with comparable store sales growth of 3%. Comp sales were driven by 240 basis point increase in transaction size and a 60 basis point rise in transaction count. Basket size benefited from a 1.6 percentage increase in average unit retail as well as a 0.8% increase in items per transaction.
This quarter we posted an acceleration in comp sales from Q4 and good growth from last year's very strong 8.2% which was the highest since the Company's IPO in 2010. Furthermore, on a two-year stack basis, comparable sales growth was 11.2% in the first quarter driven by a 6.3 percentage point increase in traffic and a 4.9 percentage point increase in transaction size. Our two year stack accelerated by 230 basis points on a sequential quarter basis.
Our newer stores, which are excluded from the comp set, opened at 85% productivity which continues to meet our expectations and is within our historical productivity range of 80% to 90%. Total square footage increased approximately 13% compared to last year to 2.8 million square feet at the end of the first quarter. Because of solid trend and as Craig mentioned provide us confidence as we assess our outlook for the full year. The Fresh Market's strong in-store experience, differentiated offering, and focus on executions continued to resonate with customers. We continue to test new promotional program and remained at about 20% of total sales about the same as last year.
Gross profit increased 14.8% to about $129 million and the gross margin rate increased 60 basis points to 35.3% during the first quarter. The increase in gross margin rate was driven primarily by expansion in merchandise margins. We continue to realize leverage on our buying as we purchase from more stores and benefit from disciplined inventory and supply chain management and we are happy with our in-stock position, forecasting and ordering, which allowed us to optimize sell-through in the first quarter, especially on seasonal product. Retail inflation was a bit over 2% this quarter and in line with our recent quarterly trend.
For the quarter, selling, general and administrative expenses increased 15.6% to $81.5 million. SG&A expense as a percentage of sales increased 50 basis points from last year to 22.2%. This increase was primarily attributable to a sharp rise in employee healthcare claim cost, which was significantly higher than our historical experience and expectation. We also incurred higher store management headcount associated with new store openings that will occur later this year and an incremental layering of expense related to share based compensation.
Depreciation expense this quarter totaled $12.3 million, a rise of 16.7%, reflecting our rapid unit expansion over the past 12 months. Operating income for the first quarter increased 13.8% to $35.4 million, while operating margin increased 10 basis points to 9.7%. The primary driver of this increase in operating margin this quarter was a higher merchandise margin, which fully offset an increase in healthcare claims cost. We gained incremental benefit from various state and federal tax credit opportunities, which contributed to a slight decrease in our effective tax rate to 37.1% in the first quarter.
Moving to the balance sheet and cash flow statement; this quarter, the Company generated $45.9 million in cash flow from operations and invested $17.2 million in capital expenditures; $13.7 million, approximately 80% of these capital expenditures related to new and remodeled stores as we continue to expand our brand and enter new markets. During the quarter, we opened two new stores and currently operate 131 stores in 25 states. We finished Q1 with a cash balance of approximately $11 million and total debt outstanding of $15 million. Despite accelerating our growth, this is a reduction in debt outstanding of $24.1 million versus the corresponding period last year. At quarter-end the Fresh Market had availability of $147.1 million under its revolving credit agreement.
Average inventory on a FIFO basis per store at the end of the first quarter increased 5.5% compared to the corresponding period last year. The increase resulted primarily from inventory investments we are making in new and growing product categories to support our overall sales growth. Cost inflation this quarter was a bit more than 2%.
Given our continued improvement in earnings performance and our disciplined approach to asset utilization, our key financial return metrics remained strong. On a trailing four quarter basis, the Company's return on asset was 18.4%, return on invested capital was 25.6%, and return on equity was 30.2%.
With that I'll turn the call back over to Craig.
Craig Carlock - President and CEO: Thanks, Sean. As I reflected on the quarter we made significant progress between capital investments, new hires and extending our business analytics capabilities. We had a very productive quarter and executed well on all fronts. Our new store pipeline remains robust and I am particularly happy about how our team has performed in the face of a transition in leadership. Our new store construction is going very smoothly and we are making strong progress in signing new leases to ensure record store growth this year and next. We opened two stores this quarter; one in Charlottesville, Virginia and another in Aiken, South Carolina. Both are trending as we expected and we remain on track to open 19 to 22 new stores this fiscal year.
In the second quarter, we have broken ground on a number of new projects are in a final stages of work on new stores in Palo Alto, Pittsburgh and Houston to name a few. Our Palo Alto location will open next week and we are excited to open a second store in California. Similarly, we are on track to open our four Houston stores in the second and third quarters.
I want to remind you that the majority of our stores this fiscal year will open in the third and fourth quarters. While these openings will accelerate our square footage growth to 15% or more this year, the timing of these openings will provide an expense headwind. We will carry incremental costs related to headcount, dead rents and preopening expenses, but we will receive relatively little revenue benefit this year from these new stores. We anticipate a more balanced opening schedule in fiscal 2014, and believe that our new store openings in the second half of this year will serve as a tailwind to both sales and profits next year.
Last week we announced that Jeff Ackerman will join The Fresh Market as our new Chief Financial Officer. Jeff will start with us on June 3, and I am excited to have his leadership and strong business planning skills to complement our executive team. He is a great fit for our culture, brings a strong consumer background, and we look forward to his joining us next week.
As some of you may know, we added to our business analytics capabilities about a year ago with a $2 million investment that upgraded our business intelligence platform. With the first quarter, we're now cycling on the initial metrics captured by this system, and we are beginning to measure sales and assess our business operations with a level of sophistication and timeliness that we previously lacked.
Today, uniform coding allows us to run advanced analytics across product categories, geographies, and store vintages to better spot sales trends, product affinities, and promotional opportunities. At a high-level, this information allows us to review transaction level detail to better understand the basket, in-store performance and merchandising, as well as marketing opportunities. Information is both timely and actionable, and has already augmented our gross margin through better promotional cadence, labor scheduling, and inventory management.
For a growing company like ours, these tools are meaningful and add discipline to our operations. Not only do they simplify data access and streamline processes, but they also make our employees more efficient as they spend less time crunching numbers and more time analyzing them. While we are still early in leveraging our business intelligence system, we expect this platform will provide us with a solid set of tools by which to advice our merchants and enhance our productivity throughout the Company.
In closing, let me say that I am happy with the strong progress we are making as we grow our business and build our brand. We achieved solid results this quarter and enter the second quarter positioned to deliver upon our financial guidance and realize strong double digit square footage growth.
With that I will now open the call to your questions.
Operator: Jason DeRise, UBS.
Jason DeRise - UBS: Just wanted to ask a couple of follow-ups on the new store productivity. Could you maybe share just how that's varying across your different regions as you've been expanding out from your core base? Maybe updating, how it's going in California, how it's going in any of the new stores in the Northeast, for example, that are still in the comparable base? Then, also obviously, you had very strong strength in the core markets, you got some very strong openings in Florida, how are those still doing?
Craig Carlock - President and CEO: We think about our store returns and our new store productivity in classes, and we are at 80% to 90% productivity levels right now. We report right in the middle of that range, that's the range we've been predicting and forecasting we feel very comfortable with. With respect to Roseville; Roseville is off to a fine start, it is well within the range of what we see when we open new stores. We've got Future Stores coming quickly really in the Sacramento area. We're looking forward to openings in Fair Oaks and help grow later in the year, and we've got Palo Alto opening next week. So, we are excited about California. We are committed to Sacramento and Roseville, and we feel good about 80% to 90%, which is where we have been historically.
Jason DeRise - UBS: When you guys are picking your locations, I know you guys are looking at demographics and where your potential shoppers may be coming from. Are the shoppers in California the ones that you expected or are you pulling from further away? I mean, is there any insight that you have on that?
Craig Carlock - President and CEO: I don't think that we've seen anything different or remarkable about our opening in Sacramento and Roseville compared to what we've seen in other new markets. We go into new markets and people come in, they try the store, they enjoy the food. We are a shopping store that provides convenience and service and quality and intend to be shopped by folks who live in the immediate areas, and then over time we build up to little bit longer drives, reputation builds. So, I feel like it is right down the middle of what we've seen in other areas.
Jason DeRise - UBS: One last follow-up on California. Is there anything different about the mix of the products that are being purchased? Have you had to make an adjustment in assortment already, or any color you can add on that?
Craig Carlock - President and CEO: No real dramatic changes to our mix or to our assortment. We carry very high quality perishable items, and those items tend to be well received by customers wherever we go. So, what people appreciate is freshness, cleanliness, size, color, taste, flavor, and that's what we are providing everywhere we open our stores. So, no real changes, nothing that's making us alter our thinking about our assortment. Now, we often bring in local items, and to the extent we can source local items whether they are perishable like in produce or whether they are non-perishable like in the grocery department, we'll do that, but those are items that provide a visibility to our desire to be part of the community. So, we'll certainly do that, but those don't make a large portion of the sales.
Operator: Stephen Grambling, Goldman Sachs.
Stephen Grambling - Goldman Sachs: I guess one quick follow-up to Jason's question, which would just be on the new store productivity. Should we be expecting higher new store productivity from some of the upcoming openings in Palo Alto or Houston just to generate similar returns to the existing store base?
Craig Carlock - President and CEO: I think that that's not how we think about it. We think about, hey, we are going to open 19 to 22 stores, some will surprise us on the upside, some will surprise us probably on the downside, on average we ought to be in the 80% to 90% range. We just don't have the precision to forecast the sales the way you are describing, and so we think about this. And I don't think any retailer does. So, we think about this in the 80% to 90% range is how we think about things.
Stephen Grambling - Goldman Sachs: Then on guidance. Are there any special items in the back half that are keeping the EPS guidance in line, despite the bumped comp and seeming encouraging tone?
Craig Carlock - President and CEO: No, there really aren't any unique items. What we would say how I'm thinking about this is we feel better about sales than we did 90 days ago, so we bumped the sales forecast up. But we still have three quarters of the year left. We need to open, that 17 to 20 of our 19 to 22 stores. We need to get them open on time. We need to see what their sales levels are. We need to better understand product cost. So, in my view, the things that provide for a guidance range still exist and that's why there's really no reason to change that range.
Stephen Grambling - Goldman Sachs: Then last one before I get to the floor. On the holiday you mentioned that you've had some time to digest and analyze the weakness that you saw. Can you maybe give us a sense for what you believe drove the change then? Then also maybe discuss how you would either adjust processes going forward to flex to that kind of environment?
Craig Carlock - President and CEO: I think we've wanted to say that we came into the fourth quarter with over 7% year-to-date comps. So, we had a great deal of momentum. And the first week of November you know with the hurricane and the second week there was an election, we saw our sales pattern change as people began to focus on potential changes to income tax rates and potential changes to their own personal situations. As there was certainty around those things in early January, our sales pattern improved and is continued to be steady and stable since that point. So I feel like, we've essentially isolated our pattern into a November December timeframe. I don't know that we should put together extensive plans to deal with unforeseen macroeconomic events. It will be nice to have them from time to time, but I think our effort is better spent preparing for day to day execution and so that's what our focus is on.
Operator: Ben Brownlow, Raymond James.
Ben Brownlow - Raymond James: You touched on product inflation being up around 2%. Can you comment on what you are seeing trending into the second quarter and relate that to your pricing strategy or any planned price investments going forward?
Craig Carlock - President and CEO: The nice thing about filling across a broad range of products and product categories is if you have inflation in one area, for instance, produce you might be able to offset your promotional activity and your other drivers of customer traffic in other parts of the store. And so the inflation we are seeing is manageable and we are able to in some cases pass it on and in some cases save it off through price negotiations in some cases benefit from better contracts when we buy in some parts of the store to absorb it in other parts. So, that's how we approach it. Does that answer your question?
Ben Brownlow - Raymond James: It does. Just one follow-up, the annual share-based comp can you specifically break that out?
Craig Carlock - President and CEO: What we try to say is as we went public our Board of Directors and Compensation Committee put together programs that essentially kicked-off in 2011 and those were – it take four full years to get to kind of lapping the initial kick-off of those programs and as a ballpark number those programs are adding about $2 million per year in expense for the years 2011 through the year 2014. So, when you get to 2015 – I am not saying, you've essentially lapped the beginning of the program.
Operator: Kelly Bania, Bank of America Merrill Lynch.
Kelly Bania - BofA Merrill Lynch: I was wondering if you could touch on the investments. You mentioned I think in some faster growing categories and new products, assortments and any color on what those are and how those plans are for the rest of the year?
Sean Crane - EVP, COO and Interim CFO: This is Sean. We've made some investments in some new categories like the health and beauty and we continue to expand grocery so where we might do small remodels in the store and expand the footprint on our grocery department as we continue to work on expanding our private-label and those are some high growing categories for us. The other part of the growth was again a little bit of the cost inflation. But as we look out for the year, we expect to probably continue in that same range that we currently are.
Kelly Bania - BofA Merrill Lynch: Then just another one on the customer analytics that you mentioned I think you said that it may be helped the gross margin already, but just curious on any early insights that you may share with us as you kind of dive deeper into that formation and plans on how you can use that further in the next couple of years?
Craig Carlock - President and CEO: Well, I think, the first point is that this helps us understand sales quickly and better than we did before, both what's selling in particular stores, what's being sold together, what's being sold within baskets and so those were the kinds of things that help us get us a sense of how people are shopping and what they are buying. It's very useful to us when we put together promotion plans to know what items are in baskets and what items are not. So, that's been the primary use, is better promotion effectiveness. When you know for promote an item is contained in a basket and you know what other items are contained in those baskets then that's very useful.
Operator: Sean Naughton, Piper Jaffray.
Sean Naughton - Piper Jaffray: Just a follow-up on the guidance you talked about the back half in the release being a little bit stronger than the first half. Is there any takeaway there? Anything we should think about of that comment in terms how you're planning Q2 and a year-over-year dynamics there that may be affecting comparability?
Craig Carlock - President and CEO: I would say that the waiting is slightly heavier in the back half than the first half, but because of how this quarter turned out, they're more evenly weighted at this point than we thought they would be 90 days ago. I don't think there is any takeaways though, what you're seeing is just hey we're opening a bunch of stores in the second half the year, so the first half of the year, we've got investments in getting store management ready, dead rents, preopening expenses, those kinds of things, but no real revenue to offset that, and you get to the latter part of the year and then stores get opened, and the cost and sales revenues balance or matchup quite a bit better.
Sean Naughton - Piper Jaffray: Then on the SG&A front. You talked about a pretty sharp rise in employee claim cost. Is this something that we should think about as something that could impact SG&A moving forward, some potential deleverage there or do you still expect that is a line item that could potentially leverage for this year?
Sean Crane - EVP, COO and Interim CFO: I don't think healthcare claims cost will be an item where we would see leverage. We did see a significant increase in the claims of high dollar claims. As we look ahead, although this was a significant increase we are anticipating that there will be some increase. We are hopeful that it doesn't continue at the current rate, but we do see a little bit of a headwind there.
Sean Naughton - Piper Jaffray: Just the consolidated SG&A maybe a little bit of a headwind due to some of these unforeseen thoughts when you started the year?
Craig Carlock - President and CEO: A little bit compared to when we started the year, yes.
Sean Naughton - Piper Jaffray: And then just lastly on the merchandise margin front. Are guys seeing better rates on individual items or are you getting any benefits from mix within the store or is it really just the combination of both. Any color there would be really helpful as you guys did have another very impressive quarter on that line item?
Craig Carlock - President and CEO: The primary drivers of our merchandise margins improvements where we are still benefitting from our specialty grocery contract improvements and we will have cycled off that so we won't see that benefit in Q2 year-over-year. We continue to leverage these analytical tools to better manage our inventory, reducing our strength as we continue to test new promotions. We are finding interesting ways to continue to drive traffic, while also reducing shrink because we're getting better turns and then just given our growth and adding stores and leverage that we are getting from that and as we negotiate with our vendors that continues to provide us a great tailwind.
Operator: Ken Goldman, JPMorgan.
Priscilla Tsai - JPMorgan: Hi, this is Priscilla Tsai in for Ken today. So, just besides from the improved consumer purchasing behavior after the holiday, is there anything you can speak to about any pricing or marketing initiatives you did specifically to improve traffic during the quarter?
Craig Carlock - President and CEO: I'd say we continue to test and learn about promotions that are targeted, targeted by day of week, in some cases targeted towards new store markets, but nothing radical. I would say we want – we've always run promotions, we've always been testing and learning, and that's how I like to think about what we're trying to do.
Priscilla Tsai - JPMorgan: (indiscernible) any like elevated promotional level this quarter versus last?
Craig Carlock - President and CEO: No, I think about 20% of our sales were on promotion this quarter and that's been a fairly steady statistic. I think we have tried -- again, we have tried some things on Tuesday's a couple of years ago. We've tried things on Saturdays early this year and now we're trying some things on Fridays through the weekend. But this is what I would call the normal set of good curious kinds of things that are -- we ought to be doing to see how our customers respond and what can generate incremental traffic.
Priscilla Tsai - JPMorgan: Then I was wondering just as a follow-up to the previous SG&A question. So, are you still expecting modest leverage this year? And what level of comp do you think is necessary to achieve leverage going forward?
Craig Carlock - President and CEO: If we're looking at just SG&A and if there is wage rate inflation of 2%, most of SG&A is variable cost and with wage inflation of 2% and other items you need close to 2%, comp sales to get leverage.
Operator: Shane Higgins, Deutsche Bank.
Shane Higgins - Deutsche Bank: Can you guys just speak to how sales trended throughout the quarter as the quarter progressed?
Craig Carlock - President and CEO: It was very steady through the quarter, nothing remarkable, no remarkable months.
Shane Higgins - Deutsche Bank: It sounds like the week to week sales volatility was a lot lower than what you guys experienced in the fourth quarter?
Craig Carlock - President and CEO: I would say that the months were steady in the first quarter and that is a little bit different than the fourth quarter, where November and December were more difficult than January.
Shane Higgins - Deutsche Bank: Can you guys just talk about the return metrics? I see that they've come down a little bit year-over-year. Is that a function of going out to California where the real estate and the stores are little bit more expensive?
Craig Carlock - President and CEO: I might characterize that it has been fairly steady since we've started reporting them, and the one we – we pay attention to all of them, but the ROIC has been around 25 to 26 every quarter we've reported. So, we feel like the returns are healthy, we're very proud of them.
Shane Higgins - Deutsche Bank: So, we should expect that kind of level going forward?
Craig Carlock - President and CEO: I don't think we guide ROIC. But I think you can expect us to do real estate deals that are good returns, but well in excess of our cost of capital.
Operator: Mark Miller, William Blair.
Mark Miller - William Blair: Building on that question and also integrating an earlier one, on the new store productivity. So, as you are going into markets that have denser population, more expensive real estate presumably, shouldn't the new store productivity be higher or towards the high end of the 80% to 90% range, and if in doing so you are just saying it be the same, wouldn't that imply that return on capital would go down?
Craig Carlock - President and CEO: I think I understand the question and my assessment is that as we move into new markets, it is frankly too soon to tell. We've opened some stores in our home base where we have great brand equity, great recognition, and we have great sales. We've also opened some stores in our home base where we have great brand equity – and we have not so great sales, and then we go into newer markets, whether it is New England or whether it’s Chicago or California, and I expect the same thing, we are going to have some that exceed our expectations and some that are diminished. I wish and what my conclusion – let me say it this way, my conclusion from that is that brand equity and new markets is one variable, but there are many other variables, for instance, co-tenancy, traffic counts, parking, visibility, the level of competition in the area. So, all of those things are as important and taken together perhaps more determinative than just, hey, there are new market in the dense area. So, it is a very tricky answer, but the one I gave I think is the honest one, which is we see a range of sales volumes when we open new stores. And I am unwilling to say that in high density areas are going to do better or in new markets you might do worse. It really isn't that straight forward. But what we can say is, hey, if we open stores, we are getting tremendous returns on average. We are going into these markets and people enjoy the food. They enjoy the shopping experience. They are glad to have us come. And so it gives us confidence that the concept is portable and people enjoy the offering that we provide. So, that's how we see it, Mark. I know that's maybe a little counterintuitive, but that really is how we see it.
Mark Miller - William Blair: I understand there is many dimensions, maybe just one follow-up to this. I think there is a perception that your incoming cost of real estate is significantly higher going forward. Can you just provide any perspective around how much more per square foot you might be paying this year and coming years relative to where we've been, is it meaningfully changed?
Craig Carlock - President and CEO: So, we certainly have some deals that are more expensive, but we continue to open stores; we had some deals that are a little less expensive than average. I don't think the average has meaningfully changed.
Mark Miller - William Blair: I'm sure both you and Jeff – sorry, you and Sean are excited about Jeff joining here. Can you just maybe share with us what about his background or experience are most important and really what are the top properties you have for him as he joins?
Craig Carlock - President and CEO: Yes. We're fairly excited to have Jeff start next week. He has been a public company's CFO for several years, and so that's very exciting. He has seen a broader range of industry, so we'll benefit from that experience. We've found, as we met folks from around the country, that Jeff had a good operational mindset and that will be very useful to us. I think job one, priority one is to come in and get to know specialty grocery retail, and get to know, I'd say, the model which would be heavily influenced by real estate in growth and get up to speed with the dynamics of unit growth, the way that – you're all familiar with it and the way we think about it.
Operator: David Magee, Suntrust Robinson Humphrey.
David Magee - Suntrust Robinson Humphrey: Just a couple of follow-up questions, at the risk of beating a dead horse. On the new stores in California. What is your experience so far with the cost structure i.e., distribution and others that you're seeing so far? And over time do you see new opportunities to become more efficient than you might be this year out on the West Coast?
Craig Carlock - President and CEO: I do think that over time we'll become more efficient because we learn things and because when your multiple stores go in that direction that will be slightly more helpful, but we've made adjustments to our delivery -- order and delivery schedule before we ever open that store to keep the costs in line with cost on the East Coast. So, we've sourced what we could in California and that would be the most highly perishable items. We've gone to two deliveries a week instead of three and then we've made sure to the extent we can that we're not paying for the freight or the empty truck or we're sharing rewards of a full truck on its way back from California. So, we've been concentrating on that freight piece and then the frequency and delivery, and then sourcing what we can locally. And you put all that together the cost structure is in line with the East Coast.
David Magee - Suntrust Robinson Humphrey: Secondly, I apologize if you touched on this already, but the average ticket size year-to-year sort of flattened out a bit relative to trend line. Is that just sort of a noise level thing or is there any factor that you end up behind that?
Craig Carlock - President and CEO: I think we're within the range of sort of the quarter gyrations of that number. I like to phrase noise level and I'm happy with that characterization.
Operator: Kate Wendt, Wells Fargo Securities.
Kate Wendt - Wells Fargo Securities: I am wondering if you could talk a little bit about how your more mature stores are comping given that the ramp in some of your newer stores driving portion of the overall comp.
Craig Carlock - President and CEO: In mature stores the – my struggle is that I just struggle to paint a broad brush on anything. But I would just say that if we have store that aren't affected by competition or housing developments that are coming in or markets that are sort of steady state I think we have said all along, hey, we expect the comp in the 3 to 5 range over the long haul. We expect our matures stores to be at the bottom of that and you get the new store tailwind and then you get to the 3 to 5 and I think we are right in line with that. I wouldn't just give view on that anyway.
Kate Wendt - Wells Fargo Securities: Just following up on Sean's question coming off of a nice quarter as merch margin expansion I am wondering how you are thinking about your ability to (lap) the 137 days when increasing gross margin you saw in Q2 of last year?
Craig Carlock - President and CEO: I think that our per operating margin is relatively flat versus last year. We don't foresee the same degree of beat going forward as we had in the first quarter and so that would be how we think about it, but the fundamentals that created the better gross margin will remain. I mean we negotiated better deals. We fill up trucks. We get lower unit cost; you get those kinds of things. But Sean mentioned that we cycle on the specialty grocery contracts and so that will reduce the year-on-year improvement.
Kate Wendt - Wells Fargo Securities: Then just finally, you just recently touched on how your longer term guidance is 3% to 5% comp, obviously, you are getting back to that point. How do you think about the trade-offs between sales and margins in this scenario, in terms of prudentially promoting or investing more in price to drive comps back into the mid or high single-digit range that you were seeing previously?
Craig Carlock - President and CEO: I appreciate that question. I would say we do – that is exactly how we think about it is there is a balance between comparable store sales and getting money to the bottom line and what we're interested in is building long-term relationships with our customers and getting long-term profit dollars to the bottom line. So, I would say, in general, we want to know that our promotions generate profit dollars and we are very disciplined about watching for that.
Operator: Chuck Cerankosky, Northcoast Research.
Charles Cerankosky - Northcoast Research: Craig, as you look at the store openings in the second half of the year, there is a lot going to open in the second half versus the first half. Any comment on where you might hit within that range? And what obstacles might be out there that are different this year; whether it's some of the geographies you're entering or running into the latter part of the calendar where winter might play a role?
Craig Carlock - President and CEO: We think we'll have 19 to 22, and I think the second half, in total, we're talking about 13 to 15 new stores. I don't know that we're expecting difficultly. I think what we expect is that this is quite a bit of organic growth and we have prepared ourselves for it, we've hired people, we've used outside firms when appropriate, general contractors and the folks that help us get the stores built. We've trained our people. So, we feel very ready, very prepared. The only difficulties that frankly we worry about are things that, like all retailers have some things beyond their control. Sometimes, municipalities or others take actions that, that accelerates our opening or delay our opening. So, there are some things that are little beyond our control. But as far as press market being ready and doing its part, this is what we prepare ourselves for every single day.
Charles Cerankosky - Northcoast Research: Retail inflation was you said right around 2% in the first quarter. How you're thinking about it as the year goes on especially in the second half?
Craig Carlock - President and CEO: Well, I think we continue to see something moderate, that's probably a reasonable number. The protein categories in recent weeks have spiked up a little bit. So we're keeping a close eye on those. But it's soon to change the full year outlook.
Charles Cerankosky - Northcoast Research: And a follow-up on the earlier question about logistics and distribution. As you move into Texas, what might be some of the changes there or enlargements of your total sourcing capability?
Craig Carlock - President and CEO: Whenever we enter a new market and have the benefit of truck routes that are new and different, we ask ourselves what can we source perhaps to get a good backhaul and so that would be something we would be doing and we have actually taken trips and met with vendors, not to so much change our distribution pattern, but to change call it the imbalance sourcing pattern back toward Atlanta.
Operator: Jason DeRise, UBS.
Jason DeRise - UBS: I am wondering if you can provide some commentary about the competitive dynamic out there, maybe just focusing on the various specialty, your fresh and natural and organic players throughout the regions. Are you seeing anything different in what they are doing as you open up stores? Are they changing how they compete with you as you become larger and…
Craig Carlock - President and CEO: I think, I would say it's exceptionally competitive. I think that you're aware of the competitors. They are very good. We've got a couple who once gone public -- once announced plan to go public. So, I think that increases the competition we have. One that was a private equity firm, I don't know, a year ago. So a lot is going on capital funneling into the specialty foods marketplace. But the reason it's funneling in is because customers are aware of and appreciating new and better ways to shop. So, I think, we are all benefitting from that call it secular trend and so we are in a good position to benefit from that trend. We are going to do everything we can to take advantage of it. But I would also point out that each of us competes on a little bit different platform some compete on natural and specialty, some compete on price, some competes in heavily urban and metropolitan areas, some are more produce oriented, some of more non-perishable oriented. So, none of us is doing the exact same thing in the exact same way, at the exact same price points. So, I continue to believe that we – there is enough customers out there to really support everybody.
Jason DeRise - UBS: Just to follow-up on that. I know we talked about it in the past, but I get this question a lot so I want to ask it again. When you are in the same market with multiple of these competitors does that work in your favor or against you?
Craig Carlock - President and CEO: I would say with respect to the largest specialty competitor (that's usually) who folks are asking about. We have a very similar sales level whether we are in the market with the largest or whether we are not and what that speaks to is that trade areas that are big enough and good enough for both of us support sales levels for both of us. So, we don't like to be too close to any specialty competitor like we are few miles away, but we can certainly be in the same trade area.
Operator: There are no further questions at this time. I'd like to turn the call over to management for any closing remarks.
Craig Carlock - President and CEO: Thank you all for participating in our call today. We look forward to speaking with you in August when we talk about our second quarter earnings. Have a great day, everybody.
Operator: Ladies and gentlemen, thank you for participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.