Professor Kenneth Herbst says The Fresh Market serves its targeted audience well

IPO prospectus reveals Fresh Market’s financials, ambitious growth plans
Originally Posted on Friday, May 7, 2010 | By Matt Evans
Reposted from The Business Journal of the Greater Triad Area

Documents filed by The Fresh Market this week for its proposed $345 million initial public offering show the company is planning for a coast-to-coast push toward five times its current number of stores.

The Greensboro-based specialty grocer said in its IPO prospectus that it sees room for “at least” 500 The Fresh Market stores in the U.S. Right now, the company has 95 stores in 19 Eastern and Midwestern states.

Company officials, citing securities regulations, declined to comment on the IPO or growth plans. But in the prospectus, the company says continued growth will drive higher profitability.

“Our anticipated store growth will permit us to benefit from economies of scale in sourcing products and will allow us to leverage our existing infrastructure, corporate overhead and fixed costs,” the document says.

The SEC filing inviting The Fresh Market’s first outside investment gives the most complete picture to date of a company that was born in a single store on Lawndale Avenue in 1982 and has remained privately held by its founding Berry family until now.

Revenues increased from $728.4 million in 2007 to $861.9 million from 2007 to 2009, the prospectus says, with net income rising from $30.3 million to $49.2 million during that period.

In 2009, The Fresh Market had a gross profit margin of 32.1 percent. By comparison, the country’s biggest traditional grocer, Kroger Co., has gross margins of about 23 percent.

There are particular market segments The Fresh Market targets, and it serves those customers well, said Kenneth Herbst, an associate professor of marketing at Wake Forest University. Groceries there may not be cheap, but the stores are intimate and friendly with attractive wood floors and soft lighting, and they offer a unique mix of merchandise.

“I think The Fresh Market will continue to be the smaller neighborhood market to which market segments flock for what they may perceive are higher-quality goods and services,” Herbst said.

Other industry analysts are more skeptical of the grocer’s ability to keep up its planned rate of expansion or reported profitability.

Wisconsin-based grocery analyst David Livingston said the company’s profits are likely being juiced by rapid expansion, but not all the new stores will do well over time and bad location picks can be costly.

Location matters

Last year, The Fresh Market closed down its store in Grand Rapids, Mich., after less than two years in operation. The company recorded $4.4 million in closure and exit costs for all of 2009.

Sales at all “comparable stores” — those open for 16 months or more, including those remodeled or relocated from nearby — fell by 1.1 percent in 2009 and 1.5 percent in 2008, after having grown by 4.5 percent in 2007, the SEC filing says.

“Their first group of stores closer to home has done well,” Livingston said. “But expanding in places like Michigan and Wisconsin, they’re getting pretty far out there and they haven’t been taking the best locations.”

The challenge of finding and securing workable locations will only get harder, Livingston said, and it “could be suicide” to try to expand to 500 locations nationwide.

The planned IPO would complete a process pursued haltingly by the company starting two years ago, when the Berry family retained investment bank Goldman Sachs to help it explore outside investment opportunities.

A few months later, then-CEO Brett Berry said his family had decided not to pursue any sale of ownership. In early 2009, Brett Berry and Chief Financial Officer Michael Barry, his brother-in-law, both stepped aside from their management positions, handing the reins to nonfamily members for the first time. The Fresh Market’s current CEO, Craig Carlock, had been chief operating officer.

According to the SEC documents, proceeds from the IPO will go directly to the family members who are selling their shares, not to The Fresh Market for its own corporate use. But the Berrys are not cashing out of their family business entirely. Even after the sale, the prospectus says they will still “have substantial control over us” including sufficient ownership to control the election of directors or settle any matter that would be up for a vote by shareholders.

It makes sense for the company’s long-time owners to sell off a good chunk of their interest now, since the period of fastest growth may be behind them, Livingston said.

“They’re kind of on their way out” he said of the Berrys, as evidenced by the new management team. “If the owners want to get some cash out of their company, this is one way they can do it.”

The Fresh Market is the second IPO filing this spring for Triad grocery-related retailers. In March, Winston-Salem-based Primo Water filed its intention to sell up to $60 million worth of stock.