10-Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 26, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-34940
 
THE FRESH MARKET, INC.
(Exact name of registrant as specified in its charter)  
 
Delaware
56-1311233
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
 
628 Green Valley Road, Suite 500
Greensboro, NC
(Address of principal executive offices)
27408
(Zip Code)
 
 
(336) 272-1338
(Registrant’s telephone number, including area code) 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).    Yes  ¨    No x
 
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of August 10, 2015 was 48,605,268 shares.
 
 
 
 
 



Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements in addition to historical information. We use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “looking forward,” “may,” “plan,” “potential,” “project,” “should,” “target,” “will” and “would” or any variations of these words or other words with similar meanings to identify such forward-looking statements. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may relate to such matters as our industry, business strategy, goals and expectations concerning our market position, future operations, future performance or results, margins, profitability, capital expenditures, liquidity and capital resources, interest rates and other financial and operating information and the outcome of contingencies such as legal and administrative proceedings.
 
The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot guarantee that the results and other expectations expressed, anticipated or implied in any forward-looking statement will be realized. The following are some of the factors that could cause actual future results to differ materially from those expressed in any forward-looking statements: changes in accounting entries and adjustments at the close of a fiscal quarter; unexpected expenses and risks associated with our business; our ability to remain competitive in the areas of merchandise quality, price, breadth of selection, customer service and convenience; the effective management of our merchandise buying and inventory levels; the quality and safety of food products and other items that we may sell; our ability to anticipate and/or react to changes in customer demand; changes in economic and financial conditions, including U.S. fiscal and monetary policy, and the resulting impact on consumer confidence; other changes in consumer confidence and spending; unexpected consumer responses to promotional programs; unusual, unpredictable and/or severe weather conditions, including their effect on our supply chain and our store operations; the effectiveness of our logistics and supply chain model, including the ability of our third-party logistics providers to meet our product demands and restocking needs on a cost competitive basis; the execution and management of our store growth, including the availability and cost of acceptable real estate locations for new store openings, the capital that we utilize in connection with new store development and the anticipated time between lease execution and store opening; the mix of our new store openings as between build to suit sites and second-generation, as-is sites and as between existing markets and newer markets; the actions of third parties involved in our store growth activities, including property owners, landlords, property managers, contractors, subcontractors, government agencies, and current tenants who occupy one or more of our proposed new store locations, all of whom may be impacted by their financial condition, their lenders, their activities outside of those focused on our new store growth and other tenants, customers and business partners of theirs; impairment of recorded goodwill and other long-lived assets; global economies and credit and financial markets; our ability to maintain the security of electronic and other confidential and/or personal information; serious disruptions and catastrophic events; competition; personnel recruitment and retention, including the outcome and costs of the current CEO search being conducted as part of our previously announced leadership change; acquisitions and divestitures, including the ability to integrate successfully any such acquisitions; information systems and technology; commodity, energy, fuel and other cost increases; compliance with laws, regulations and orders; changes in laws and regulations; outcomes of litigation and proceedings and the availability of insurance, indemnification and other third-party coverage of any losses suffered in connection therewith; tax matters; numerous other matters of national, regional and global scale, including those of a political, economic, business, and competitive nature; and other factors, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements. You should bear this in mind as you consider forward-looking statements.

Any forward-looking statement made by us in this Form 10-Q speaks only as of the date hereof. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws. You are advised, however, to consult any further disclosures we may make in our future reports to the Securities and Exchange Commission, on our website, or otherwise.  



The Fresh Market, Inc.
 
Form 10-Q
For the Thirteen and Twenty-Six Weeks Ended July 26, 2015
Table of Contents
 
PART I – FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (unaudited)
 
 
 
Consolidated Balance Sheets as of July 26, 2015 and January 25, 2015
 
 
Consolidated Statements of Comprehensive Income for the thirteen and twenty-six weeks ended July 26, 2015 and July 27, 2014
 
 
Consolidated Statements of Stockholders’ Equity for the twenty-six weeks ended July 26, 2015 and the fifty-two weeks ended January 25, 2015
 
 
Consolidated Statements of Cash Flows for the twenty-six weeks ended July 26, 2015 and July 27, 2014
 
 
Notes to Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II – OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
Signature



Part I. Financial Information

Item 1. Financial Statements
The Fresh Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
(unaudited)
 
July 26,
2015
 
January 25,
2015
Assets
 
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
73,384

 
$
48,486

Accounts receivable
10,736

 
12,442

Inventories
59,003

 
61,237

Prepaid expenses and other current assets
5,055

 
4,633

Income tax benefit
4,390

 
622

Deferred income taxes
8,118

 
6,957

Total current assets
160,686

 
134,377

Property and equipment, net
404,911

 
392,194

Deferred income taxes
5,484

 
1,452

Other assets
7,452

 
9,429

Total assets
$
578,533

 
$
537,452

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
48,106

 
$
45,592

Accrued liabilities
75,147

 
74,641

Total current liabilities
123,253

 
120,233

Capital and financing lease obligations
32,876

 
33,337

Closed store reserves
10,377

 
10,187

Deferred income taxes

 
929

Deferred rent
14,630

 
13,797

Deferred lease incentives
15,096

 
14,117

Other liabilities
16,544

 
16,065

Total noncurrent liabilities
89,523

 
88,432

 
 
 
 
Commitments and contingencies (Notes 2 and 8)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock – $0.01 par value; 40,000,000 shares authorized, none issued

 

Common stock – $0.01 par value; 200,000,000 shares authorized, 48,534,274 and 48,392,201 shares issued and outstanding as of July 26, 2015 and January 25, 2015, respectively
484

 
483

Additional paid-in capital
126,857

 
122,526

Retained earnings
238,416

 
205,778

Total stockholders’ equity
365,757

 
328,787

Total liabilities and stockholders’ equity
$
578,533

 
$
537,452


See accompanying notes to consolidated financial statements.


1


The Fresh Market, Inc.
 Consolidated Statements of Comprehensive Income
(In thousands, except share and per share amounts)
(unaudited)
 
 
For the Thirteen Weeks Ended
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
Sales
$
442,095

 
$
422,227

 
$
904,136

 
$
853,229

Cost of goods sold (exclusive of depreciation shown separately)
293,098

 
278,512

 
594,581

 
561,348

Gross profit
148,997

 
143,715

 
309,555

 
291,881

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
103,610

 
99,404

 
208,737

 
198,267

Impairments and store closure costs
67

 
9,909

 
14,261

 
16,609

Depreciation
16,818

 
15,276

 
32,922

 
30,302

Income from operations
28,502

 
19,126

 
53,635

 
46,703

Interest expense
992

 
1,124

 
1,968

 
2,221

Income before provision for income taxes
27,510

 
18,002

 
51,667

 
44,482

Tax provision
10,038

 
6,612

 
19,029

 
16,521

Net income and comprehensive income
$
17,472

 
$
11,390

 
$
32,638

 
$
27,961

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic and diluted
$
0.36

 
$
0.24

 
$
0.67

 
$
0.58

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
48,526,755

 
48,282,994

 
48,484,425

 
48,274,868

 
 
 
 
 
 
 
 
Diluted
48,656,474

 
48,441,288

 
48,636,420

 
48,429,497

 
See accompanying notes to consolidated financial statements.


2


The Fresh Market, Inc. 
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
(unaudited)
 
 
Common Stock, $0.01 par value
 
 
 
 
 
 
 
Common Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Total
Stockholders’
Equity
Balance at January 26, 2014
48,260,804

 
$
483

 
$
113,029

 
$
142,753

 
$
256,265

 
 
 
 
 
 
 
 
 
 
Exercise of share-based awards
88,108

 

 
1,938

 

 
1,938

Issuance of common stock pursuant to restricted stock units
22,729

 

 

 

 

Issuance of common stock pursuant to employee stock purchase plan
5,056

 

 
170

 

 
170

Vesting of restricted stock awards, non-employee directors
11,374

 

 

 

 

Vesting of executive restricted stock awards
4,130

 

 

 

 

Withholding tax on restricted stock vesting

 

 
(468
)
 

 
(468
)
Share-based compensation

 

 
7,533

 

 
7,533

Tax benefit related to exercise of share-based awards

 

 
324

 

 
324

Net Income

 

 

 
63,025

 
63,025

 
 
 
 
 
 
 
 
 
 
Balance at January 25, 2015
48,392,201

 
$
483

 
$
122,526

 
$
205,778

 
$
328,787

 
 
 
 
 
 
 
 
 
 
Exercise of share-based awards
109,948

 
1

 
2,548

 

 
2,549

Issuance of common stock pursuant to restricted stock units
16,786

 

 

 

 

Issuance of common stock pursuant to employee stock purchase plan
2,283

 

 
78

 

 
78

Vesting of restricted stock awards, non-employee directors
11,218

 

 

 

 

Vesting of executive restricted stock awards
1,838

 

 

 

 

Withholding tax on restricted stock vesting

 

 
(993
)
 

 
(993
)
Share-based compensation

 

 
2,608

 

 
2,608

Tax benefit related to exercise of share-based awards

 

 
90

 

 
90

Net Income

 

 

 
32,638

 
32,638

 
 
 
 
 
 
 
 
 
 
Balance at July 26, 2015
48,534,274

 
$
484

 
$
126,857

 
$
238,416

 
$
365,757

 
See accompanying notes to consolidated financial statements.

3


The Fresh Market, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
Operating activities
 

 
 

Net income
$
32,638

 
$
27,961

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
33,016

 
30,406

Loss on disposals of property and equipment
5,606

 
1,791

Share-based compensation
2,608

 
3,703

Excess tax (benefit) shortfall from share-based compensation
(90
)
 
157

Deferred income taxes
(6,122
)
 
(16,280
)
Change in assets and liabilities:
 

 
 

Accounts receivable
1,706

 
1,222

Inventories
2,234

 
(831
)
Prepaid expenses and other assets
1,464

 
(1,488
)
Income tax benefit
(3,768
)
 
837

Accounts payable
2,514

 
(2,021
)
Closed store reserves
4,115

 
16,302

Accrued and other liabilities
1,485

 
6,454

Net cash provided by operating activities
77,406

 
68,213

 
 
 
 
Investing activities
 

 
 

Purchases of property and equipment
(54,343
)
 
(40,363
)
Proceeds from sale of property and equipment
692

 
92

Net cash used in investing activities
(53,651
)
 
(40,271
)
 
 
 
 
Financing activities
 

 
 

Borrowings on revolving credit facility

 
118,133

Payments made on revolving credit facility

 
(139,833
)
Payments made for debt issuance costs

 
(441
)
Payments made on capital and financing lease obligations
(580
)
 
(292
)
Proceeds from issuance of common stock pursuant to employee stock purchase plan
78

 
95

Excess tax benefit (shortfall) from share-based compensation
90

 
(157
)
Payments made on withholding tax for restricted stock vesting
(993
)
 
(155
)
Proceeds from exercise of share-based compensation awards
2,548

 
162

Net cash provided by (used in) financing activities
1,143

 
(22,488
)
 
 
 
 
Net increase in cash and cash equivalents
24,898

 
5,454

Cash and cash equivalents at beginning of period
48,486

 
11,745

 
 
 
 
Cash and cash equivalents at end of period
$
73,384

 
$
17,199

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for interest
$
1,855

 
$
2,147

 
 
 
 
Cash paid during the period for taxes
$
28,955

 
$
32,304

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Property and equipment acquired through capital and financing lease obligations
$
51

 
$
5,896

 
See accompanying notes to consolidated financial statements.

4


 The Fresh Market, Inc.
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
(unaudited)
1. Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of The Fresh Market, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended January 25, 2015. In the opinion of management, these unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods indicated. Interim results are not necessarily indicative of results that may be expected for a full fiscal year or future interim periods.
In certain instances, there are changes in the presentation of the consolidated financial statements to conform to the current year presentation.
The Company’s wholly-owned subsidiaries are consolidated and all intercompany accounts and transactions are eliminated upon consolidation.
The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in January. Each fiscal quarter consists of 13 weeks, with an additional week included in the fourth quarter for a 53-week fiscal year. The current fiscal year ending January 31, 2016 is a 53-week fiscal year and the fiscal year ended January 25, 2015 was a 52-week fiscal year.
The Company has determined that it has only one reportable segment. The Company’s revenues come from the sale of items at its specialty food stores. The Company’s primary focus is on perishable food categories, which include meat, seafood, produce, deli, bakery, floral, sushi and prepared foods. Non-perishable categories consist of traditional grocery, frozen and dairy products as well as bulk, coffee, candy, and beer and wine. The following is a summary of the percentage for the sales of perishable and non-perishable items:
 
 
For the Thirteen Weeks Ended
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
Perishable
67.5%
 
67.1%
 
66.5%
 
66.0%
Non-perishable
32.5%
 
32.9%
 
33.5%
 
34.0%

Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11 (Topic 330), Inventory: Simplifying the Measurement of Inventory. The amendments require an entity to measure in scope inventory at the lower of cost and net realizable value. The amendments do not apply to inventory that is measured using the last-in, first-out (LIFO) or the retail inventory method. ASU No. 2015-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU No. 2015-05 (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU No. 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of this guidance to have any impact on its consolidated financial statements and related disclosures.

5

The Fresh Market, Inc.
Notes to Consolidated Financial Statements - (continued)

1. Summary of Significant Accounting Policies (continued)
In April 2015, the FASB issued ASU No. 2015-03 (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU No. 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which amended the existing accounting standards for revenue recognition. ASU No. 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year; as a result, public entities would apply the new revenue standard to annual reporting periods beginning after December 31, 2017 and interim periods therein. Early adoption is permitted for all entities only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. The Company is currently in the process of evaluating the effect this guidance will have on its consolidated financial statements and related disclosures.
2. Long-Term Debt
 
The Company had no outstanding borrowings as of July 26, 2015 or January 25, 2015.
On June 12, 2014, the Company entered into an unsecured revolving credit agreement with Bank of America, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the several lenders party thereto (the “Credit Agreement”), which refinanced and replaced the Company’s prior senior unsecured revolving credit facility.
The Credit Agreement matures June 12, 2019 and is available to provide support for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions and issuance of letters of credit. While the Company currently has no material domestic subsidiaries, other entities will guarantee its obligations under the Credit Agreement if and when they become material domestic subsidiaries of the Company during the term of the Credit Agreement.
The Credit Agreement provides for total borrowings of up to $175,000. Under the terms of the Credit Agreement, the Company is entitled to request an increase in the size of the facility by an amount not exceeding $100,000 in the aggregate. If the existing lenders elect not to provide the full amount of a requested increase, or in lieu of accepting offers from existing lenders to increase their commitments, the Company may designate one or more other lenders to become a party to the Credit Agreement, subject to the approval of the Administrative Agent. The Credit Agreement includes a letter of credit sublimit of $60,000, of which $25,393 was outstanding at July 26, 2015 and $25,434 was outstanding at January 25, 2015. The beneficiaries of these letters of credit are primarily the Company’s workers’ compensation and general liability insurance carriers. The Credit Agreement also includes a swing line sublimit of $15,000.
At the Company’s option, revolving loans under the Credit Agreement bear interest at (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin that ranges from 0.90% to 2.00%, (ii) the Eurodollar rate plus an applicable margin that ranges from 0.90% to 2.00%, or (iii) the base rate plus an applicable margin that ranges from 0% to 1.00%, where the base rate is defined as the greatest of: (a) the federal funds rate plus 0.50%, (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00%.
The commitment fee calculated on the unused portions of the Credit Agreement ranges from 0.125% to 0.250% per annum.
The Credit Agreement contains a number of affirmative and restrictive covenants, including limitations on the Company’s ability to grant liens, incur additional debt, pay dividends, redeem its common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.


6

The Fresh Market, Inc.
Notes to Consolidated Financial Statements - (continued)

3. Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement, requires fair value measurements to be classified and disclosed in one of the following pricing categories:
Level 1 - Quoted prices in active markets for identical assets or liabilities as of the reporting date.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets or liabilities.
Level 3 - Unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. 
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and other accrued expenses approximate fair value because of their short maturity.
Nonrecurring Fair Value Measurements
The Company recorded $5,138 of lease obligation costs as a nonrecurring fair value measurement in connection with its store closures during the twenty-six weeks ended July 26, 2015. These lease obligation costs are included in the “Accrued Liabilities” and “Closed store reserves” line items on the accompanying Consolidated Balance Sheets. The lease obligations were estimated based on the present value of the minimum lease payments less an estimate of sublease income, which is a Level 2 fair value measurement.
The Company wrote-down the carrying value of certain fixed assets to its estimated proceeds, which is a Level 2 fair value measurement, in connection with the store closure and exit activities during the twenty-six weeks ended July 26, 2015. The write-down of $5,595 is included in the “Impairments and store closure costs” line item on the accompanying Consolidated Statements of Comprehensive Income.
The Company recorded these nonrecurring fair value measurements in the first quarter of fiscal 2015, and it did not record any other nonrecurring fair value measurements during the twenty-six weeks ended July 26, 2015.

4. Impairments and Store Closure Costs
Store Closure Costs
During the first quarter of fiscal year 2015, the Company exited the California market and recorded charges primarily consisting of certain lease obligations, write-down and loss on disposal of fixed assets, and severance costs associated with its California locations. The Company expects to incur approximately $15,500 in store closure and exit costs in fiscal year 2015 related to exiting these locations. Changes in market and economic conditions could cause the Company to change its assumptions and may require adjustments to the reserves.
During the twenty-six weeks ended July 26, 2015, the Company incurred $14,815 of expenses associated with closed stores, with $14,261 recorded to the “Impairments and store closure costs” line item and $554 for the liquidation of inventory and other costs associated with the store closure activities recorded to other line items on the accompanying Consolidated Statements of Comprehensive Income. The $14,261 recorded to the “Impairments and store closure costs” line item consisted of: (i) $13,910 in connection with closure and exit activities for closed locations; and (ii) ongoing expenses for closed locations.
The Company closed four stores in the first quarter of fiscal year 2014 and recorded charges primarily consisting of certain lease obligations, severance costs, and write-down and loss on disposal of fixed assets. During the twenty-six weeks ended July 27, 2014, the Company incurred $17,027 of expenses associated with closed stores, with $16,609 recorded to the “Impairments and store closure costs” line item and $418 for the liquidation of inventory and other costs associated with the store closure activities recorded to other line items on the accompanying Consolidated Statements of Comprehensive Income. The $16,609 recorded to the “Impairments and store closure costs” line item consisted of: (i) $16,371 in connection with closure and exit activities for closed locations; and (ii) ongoing expenses for closed locations.
During the thirteen weeks ended July 26, 2015, the net activity recognized for impairments and store closure costs was not significant and primarily related to ongoing expenses for closed locations.
During the thirteen weeks ended July 27, 2014, the Company recognized $9,909 of expenses associated with closed stores, primarily consisting of certain lease obligations, severance costs, and write-down and loss on disposal of fixed assets for the four stores closed during the first quarter of fiscal 2014. The $9,909 recorded to the “Impairments and store closure costs” line item consisted of: (i) $9,770 in connection with closure and exit activities for closed locations; and (ii) ongoing expenses for closed locations.

7

The Fresh Market, Inc.
Notes to Consolidated Financial Statements - (continued)

4. Impairments and Store Closure Costs (continued)
Impairments and store closure costs for the thirteen and twenty-six weeks ended July 26, 2015 and July 27, 2014 were as follows:
 
For the Thirteen Weeks Ended
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
Lease obligation and related costs
$
106

 
$
9,422

 
7,548

 
13,341

Write-down and loss on disposal of fixed assets
(49
)
 
(43
)
 
5,595

 
1,754

Employee and severance costs

 
17

 
788

 
767

Other charges
10

 
513

 
330

 
747

 
$
67

 
$
9,909

 
$
14,261

 
$
16,609

Closed Store Reserves
Closed store reserves include amounts for occupancy costs related to closed stores, which represent the present value of the remaining non-cancelable lease payments required under operating leases for the closed stores, less an estimate of subtenant income. During the twenty-six weeks ended July 26, 2015 and the fifty-two weeks ended January 25, 2015, the Company recorded net reserves for occupancy costs. Closed store reserves of $5,037 and $1,112 are included in the “Accrued liabilities” line item and $10,377 and $10,187 are included in the “Closed store reserves” line item on the accompanying Consolidated Balance Sheets at July 26, 2015 and January 25, 2015, respectively.
Activity for the closed store reserves for the twenty-six weeks ended July 26, 2015 and for the fifty-two weeks ended January 25, 2015 was as follows:
 
For the Twenty-Six Weeks Ended
 
For the Fifty-Two Weeks Ended
 
July 26,
2015
 
January 25,
2015
Beginning balance
$
11,299

 
$
1,812

Additions and adjustments
5,227

 
14,498

Payments
(1,112
)
 
(5,011
)
Ending balance
$
15,414

 
$
11,299


5. Share-based Compensation
 
The Company grants share-based awards under The Fresh Market, Inc. 2010 Omnibus Incentive Compensation Plan. As of July 26, 2015, approximately 1,700,000 shares of the Company’s common stock were available for share-based awards.

8

The Fresh Market, Inc.
Notes to Consolidated Financial Statements - (continued)

5. Share-based Compensation (continued)
Share-based compensation expense is recorded in the “Selling, general and administrative expenses” line item on the accompanying Consolidated Statements of Comprehensive Income. Total share-based compensation for the thirteen and twenty-six weeks ended July 26, 2015 and July 27, 2014 was comprised of the following:

 
For the Thirteen Weeks Ended
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
Stock options
$
560

 
$
900

 
$
1,224

 
$
1,807

Restricted stock units, employees
471

 
407

 
1,066

 
849

Restricted stock units, non-employee directors
105

 

 
105

 

Executive restricted stock awards
206

 
316

 
414

 
634

Restricted stock awards, non-employee directors
48

 
105

 
138

 
210

Performance share units
(430
)
 
131

 
(339
)
 
175

Other share-based awards

 
8

 

 
28

 
$
960

 
$
1,867

 
$
2,608

 
$
3,703


During the thirteen weeks ended July 26, 2015, the Company recognized a net benefit of $430 in connection with performance share units. A cumulative adjustment was made to the performance share units because the Company determined that the minimum level of achievement to meet the performance goal is not probable, and, as a result, all expense recognized through July 26, 2015 was reversed.
The following table summarizes option activity under The Fresh Market, Inc. 2010 Omnibus Incentive Compensation Plan (in thousands) for the twenty-six weeks ended July 26, 2015:

Balance at January 25, 2015
888

Granted
176

Exercised
(110
)
Expired
(2
)
Forfeited
(10
)
 
 
Balance at July 26, 2015
942

 
 
Total remaining unearned compensation costs
$
4,010

 
 
Weighted-average remaining service period
2.7 years


9

The Fresh Market, Inc.
Notes to Consolidated Financial Statements - (continued)

5. Share-based Compensation (continued)
The following table summarizes the activity for the twenty-six weeks ended July 26, 2015 for the Company’s existing restricted stock unit programs and restricted stock award programs (in thousands):
 
Restricted Stock Units, Employees
 
Restricted Stock Units, Non-Employee Directors
 
Executive Restricted Stock Awards
 
Restricted Stock Awards, Non-Employee Directors
Balance at January 25, 2015
97

 

 
56

 
11

Granted
97

 
22

 

 

Vested
(26
)
 

 
(3
)
 
(11
)
Forfeited
(3
)
 

 

 

Balance at July 26, 2015
165

 
22

 
53

 

 
 
 
 
 
 
 
 
Total remaining unearned compensation costs
$
4,751

 
$
608

 
$
717

 
$

 
 
 
 
 
 
 
 
Weighted-average remaining service period
3.1 years

 
0.9 years

 
1.1 years

 
0.0 years


6. Earnings per Share
 The computation of basic earnings per share is based on the number of weighted-average common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of incremental common shares deemed outstanding from the assumed exercise of stock options and vesting of restricted stock units and restricted stock awards. The Company excluded the dilutive effect of its performance share awards and performance share units since the related performance conditions had not been satisfied for the thirteen and twenty-six weeks ended July 26, 2015 and July 27, 2014.
A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands, except share and per share amounts):  
 
For the Thirteen Weeks Ended
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
Net income available to common stockholders (numerator for basic and diluted earnings per share)
$
17,472

 
$
11,390

 
$
32,638

 
$
27,961

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (denominator for basic earnings per share)
48,526,755

 
48,282,994

 
48,484,425

 
48,274,868

Potential common shares outstanding:
 

 
 

 
 
 
 
Incremental shares from share-based awards
129,719

 
158,294

 
151,995

 
154,629

Weighted-average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share)
48,656,474

 
48,441,288

 
48,636,420

 
48,429,497

 
 
 
 
 
 
 
 
Basic and diluted earnings per share
$
0.36

 
$
0.24

 
$
0.67

 
$
0.58

 

10

The Fresh Market, Inc.
Notes to Consolidated Financial Statements - (continued)

6. Earnings per Share (continued)
For the thirteen weeks ended July 26, 2015 and July 27, 2014, there were approximately 764,000 and 674,000 shares, respectively, excluded from the computation of diluted weighted-average common shares outstanding because such shares were antidilutive. For the twenty-six weeks ended July 26, 2015 and July 27, 2014, there were approximately 724,000 and 598,000 shares, respectively, excluded from the computation of diluted weighted-average common shares outstanding because such shares were antidilutive.

7. Supplementary Balance Sheet Information

The following table reflects supplementary balance sheet information for the Company’s property and equipment, net at July 26, 2015 and January 25, 2015:


 
July 26, 2015
 
January 25, 2015
Buildings
$
65,725

 
$
65,658

Store fixtures and equipment
388,823

 
364,711

Leasehold improvements
265,536

 
242,966

Office furniture, fixtures and equipment
14,753

 
13,692

Automobiles
1,048

 
1,315

Construction in progress
24,035

 
31,341

Total property and equipment
759,920

 
719,683

Accumulated depreciation
(355,009
)
 
(327,489
)
Total property and equipment, net
$
404,911

 
$
392,194


The following table reflects supplementary balance sheet information for the Company’s accrued liabilities at July 26, 2015 and January 25, 2015:

 
July 26, 2015
 
January 25, 2015
Accrued compensation and benefits
$
31,701

 
$
31,698

Accrued occupancy cost
8,881

 
8,569

Other accrued taxes
5,132

 
4,619

Accrued construction and maintenance costs
8,657

 
11,030

Closed store reserves
5,037

 
1,112

Other accrued liabilities
15,739

 
17,613

 
 
 
 
Total accrued liabilities
$
75,147

 
$
74,641


8. Commitments and Contingencies
Litigation
 
From time to time, the Company is involved in various legal proceedings in the ordinary course of business, including, but not limited to, claims, disputes, litigation, and investigations relating to labor and employment, contracts, product liability, leasing and construction, and other commercial and regulatory matters. In the opinion of management, the resolution of currently pending matters, other than those described or referred to below, will not have a material adverse effect on the Company’s financial condition or results of operations. However, because of the nature and inherent uncertainties of litigation, the Company cannot predict with certainty the ultimate resolution of these actions and, should the outcome of these actions be unfavorable, the Company’s business, financial position, results of operations or cash flows could be materially and adversely affected.

11

The Fresh Market, Inc.
Notes to Consolidated Financial Statements - (continued)
 

8. Commitments and Contingencies (continued)
The Company reviews the status of its legal proceedings and records a provision for a liability when it is considered probable that both a liability has been incurred and the amount of the loss can be reasonably estimated. This review is updated periodically as additional information becomes available. If either or both of the criteria are not met, the Company reassesses whether there is at least a reasonable possibility that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a loss may be incurred, the Company discloses the estimate of the amount of the loss or range of losses, that the amount is not material, or that an estimate of loss cannot be made. The Company expenses its legal fees as incurred.
In assessing potential loss contingencies, the Company considers a number of factors, including those listed in FASB ASC No. 450-20, Contingencies - Loss Contingencies, regarding assessing the probability of a loss and assessing whether a loss is reasonably estimable. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of litigation are difficult to predict and the Company’s view of these matters may change as the litigation and events unfold over time. An unfavorable outcome in any legal matter, if material, could have a material adverse effect on the Company’s results of operations in the period in which the unfavorable outcome occurs and potentially in future periods.
The Company is party to a lawsuit that was filed on July 17, 2013 against it in U.S. District Court in Connecticut alleging that the manner in which the Company implemented and applied the fluctuating workweek method for calculating overtime due to the Company’s department managers violated the federal Fair Labor Standards Act. The complaint purports to state a collective action on behalf of a class of department managers in stores in states in which the Company used the fluctuating workweek method of compensation. The Company believes that the plaintiff’s claims are without merit and intends to vigorously defend itself in this proceeding. The Company cannot at this time predict the outcome of this litigation or estimate the range of its potential exposure. The Company has not recorded any reserves or contingencies related to this legal matter.

9. Subsequent Event

Stock Repurchase Program

In August 2015, the Company’s Board of Directors authorized a $200,000 stock repurchase program. No repurchases have been made under the program through August 27, 2015.

12


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview 
The Fresh Market, Inc. is a growing specialty grocery retailer focused on creating an extraordinary food shopping experience for our customers. Since opening our first store in 1982, we have offered high-quality food products, with an emphasis on fresh, premium perishables and an uncompromising commitment to customer service. We seek to provide an attractive, convenient shopping environment while offering our customers a compelling price-value combination. As of July 26, 2015, we operated 174 stores in 27 states across the United States.
We believe several key differentiating elements of our business have enabled us to execute our strategy profitably across our expanding store base. We believe that our differentiated shopping experience has helped us to expand our business. Within our smaller-box format, we focus on higher-margin food categories and strive to deliver a more personal level of service and a more enjoyable shopping experience. Further, our smaller-box format is adaptable to different retail sites and configurations and has facilitated our successful growth. Additionally, we believe our disciplined, comprehensive approach to planning and merchandising and the support we provide our stores allow us to deliver a consistent shopping experience and strong financial performance across our store base.
 
How We Assess the Performance of Our Business 
In assessing our performance, we consider a variety of performance and financial measures. The key measures that we assess to evaluate the performance of our business are set forth below.
Sales 
Our sales comprise gross sales net of coupons, commissions and discounts.  
The food retail industry and our sales are affected by general economic conditions and seasonality, as well as the factors discussed below, that affect our comparable store sales. Consumer purchases of specialty food products are particularly sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, the level of disposable consumer income, consumer debt, interest rates and consumer confidence. In addition, our business is seasonal and, as a result, our average weekly sales fluctuate during the year and are usually highest in the fiscal fourth quarter when customers make holiday purchases.
Comparable Store Sales 
Our practice is to include sales from a store in comparable store sales beginning on the first day of the sixteenth full month following the store’s opening. We believe that comparability is achieved approximately fifteen months after opening. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. When a store is closed it is removed from comparable store sales in the period it is closed. There may be variations in the way that our competitors calculate comparable or “same store” sales. As a result, data in this Form 10-Q regarding our comparable store sales may not be comparable to similar data made available by our competitors.
 
Various factors may affect comparable store sales, including:
overall economic trends and conditions, including general price levels in the economy;
consumer confidence, preferences and buying trends;
our competition, including competitor store openings or closings near our stores;
our competitors expanding their offerings of premium/perishable products;
the pricing of our products, including the effects of inflation, deflation and our promotional activities which we evaluate and adjust in the ordinary course of our business;
the number of customer transactions at our stores;
our ability to provide an assortment of distinctive, high-quality product offerings to generate new and repeat visits to our stores;

13


the level of customer service that we provide in our stores;
our in-store merchandising-related activities;
our ability to source products efficiently;
our opening of new stores in the vicinity of our existing stores;
the number of stores we open, remodel or relocate in any period; and
severe or unfavorable weather conditions.

As we continue to pursue our growth strategy, we expect that a significant percentage of our sales growth will continue to come from new stores not included in comparable store sales. Accordingly, comparable store sales is only one measure we use to assess our performance. 
Gross Profit 
Gross profit is equal to our sales minus our cost of goods sold. Gross margin measures gross profit as a percentage of our sales. Cost of goods sold is directly correlated with sales and includes the direct costs of purchased merchandise, distribution and supply chain costs, buying costs, store supplies and store occupancy costs. Store occupancy costs include rent, common area maintenance, real estate taxes, personal property taxes, insurance, licenses and utilities. Cost of goods sold is exclusive of depreciation, which is reported separately. The components of our cost of goods sold may not be identical to those of our competitors. As a result, data in this Form 10-Q regarding our gross profit and gross margin rate may not be comparable to similar data made available by our competitors. 
Gross margin rates are driven by economies of scale from our store base, inventory shrinkage as a percentage of sales, productivity through process and merchandising programs, promotional activities, and pricing on select items. Changes in the mix of products sold may also impact our gross margin rate.

Selling, General and Administrative Expenses
Selling, general and administrative expenses include certain retail store and corporate costs, including compensation (both cash and share-based), pre-opening expenses, marketing and advertising, and other corporate administrative costs. Share-based compensation expenses include those arising from grants made under The Fresh Market, Inc. 2010 Omnibus Incentive Compensation Plan. Pre-opening expenses are costs associated with the opening of new stores and include costs associated with store labor, travel, recruiting, relocating and training personnel and other miscellaneous costs. Pre-opening costs are expensed as incurred.
Labor and corporate administrative costs generally decrease as a percentage of sales as a result of an increase in our sales. Accordingly, selling, general and administrative expenses as a percentage of sales are usually higher in lower volume quarters and lower in higher volume quarters. Store-level compensation costs are generally the largest component of our selling, general and administrative expenses. The components of our selling, general and administrative expenses may not be identical to those of our competitors. As a result, data in this Form 10-Q regarding our selling, general and administrative expenses may not be comparable to similar data made available by our competitors. We expect that our selling, general and administrative expenses will increase in future periods due to our continuing store growth.
Impairments and Store Closure Costs

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include a decision to close a store or negative operating cash flows. The carrying value is not recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many factors. An unexpected decline in sales or other factors could expose us to future impairment charges that could be material.
We record a reserve for future lease obligations associated with stores that have closed or unopened leased locations that we decide not to pursue. The fair value of the lease liability is estimated using a discount rate to calculate the present value of the remaining noncancelable lease payments at the cease use date for the location, net of an estimate of subtenant income. Our expectations of potential subtenant income are based on various factors including our knowledge of the geographical area in which the property is located, the remaining lease term and existing conditions. We also seek advice from local brokers and

14


agents, commercial market value analysts, and third-party fair value reports to develop our assumptions. Changes in market and economic conditions could cause us to change our assumptions and may require adjustments to the reserves.
Income from Operations 
Income from operations consists of gross profit minus selling, general and administrative expenses, impairments and store closure costs and depreciation.
Income Taxes 
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our financial statements in the period that includes the enactment date.
Non-GAAP Adjusted Financial Results

In addition to presenting our financial results in conformity with GAAP in this Form 10-Q, we are also presenting results on an “adjusted” basis in order to exclude the impact of (i) charges associated with store closure and exit costs, impairments of certain real estate and store related assets for the thirteen and twenty-six weeks ended July 26, 2015 and July 27, 2014 and (ii) charges related to a change in leadership for the thirteen and twenty-six weeks ended July 26, 2015. Additionally, these charges reflect an estimated provision for income taxes for the thirteen and twenty-six weeks ended July 26, 2015 and July 27, 2014. Except where the context otherwise requires, the use of the term “adjusted” or “as adjusted” with reference to the financial results discussed in this management’s discussion and analysis refers to the adjusted results described in this paragraph. These adjusted financial results are non-GAAP financial measures. These measures are not in accordance with, or an alternative to, GAAP and are reconciled to the Company’s most recent GAAP financial statement in Period to Period Comparisons - Thirteen Weeks Ended July 26, 2015 Compared to the Thirteen Weeks Ended July 27, 2014” and Period to Period Comparisons - Twenty-Six Weeks Ended July 26, 2015 Compared to the Twenty-Six Weeks Ended July 27, 2014” below. The Company’s management believes that these presentations provide useful information to management, analysts and investors regarding certain additional financial and business trends relating to the Company’s results of operations and financial condition. In addition, the Company’s management uses these measures to review the Company’s financial results and evaluate its business operations. We believe that the presentation of adjusted financial results facilitates an understanding of our operations without the impact associated with the charges referenced above. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.


15


Results of Operations
 
The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of sales.  
 
 
For the Thirteen Weeks Ended
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
 
(amounts in thousands, except share and per share amounts)
Consolidated Statements of Income Data (unaudited):
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Sales
$
442,095

 
100.0
%
 
$
422,227

 
100.0
%
 
$
904,136

 
100.0
%
 
$
853,229

 
100.0
%
Cost of goods sold
293,098

 
66.3
%
 
278,512

 
66.0
%
 
594,581

 
65.8
%
 
561,348

 
65.8
%
Gross profit
148,997

 
33.7
%
 
143,715

 
34.0
%
 
309,555

 
34.2
%
 
291,881

 
34.2
%
Selling, general and administrative expenses
103,610

 
23.4
%
 
99,404

 
23.5
%
 
208,737

 
23.1
%
 
198,267

 
23.2
%
Impairments and store closure costs
67

 
0.0
%
 
9,909

 
2.3
%
 
14,261

 
1.6
%
 
16,609

 
1.9
%
Depreciation
16,818

 
3.8
%
 
15,276

 
3.6
%
 
32,922

 
3.6
%
 
30,302

 
3.6
%
Income from operations
28,502

 
6.4
%
 
19,126

 
4.5
%
 
53,635

 
5.9
%
 
46,703

 
5.5
%
Interest expense
992

 
0.2
%
 
1,124

 
0.3
%
 
1,968

 
0.2
%
 
2,221

 
0.3
%
Income before provision for income taxes
27,510

 
6.2
%
 
18,002

 
4.3
%
 
51,667

 
5.7
%
 
44,482

 
5.2
%
Tax provision
10,038

 
2.3
%
 
6,612

 
1.6
%
 
19,029

 
2.1
%
 
16,521

 
1.9
%
Net income
$
17,472

 
4.0
%
 
$
11,390

 
2.7
%
 
$
32,638

 
3.6
%
 
$
27,961

 
3.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Basic and diluted
$
0.36

 
 

 
$
0.24

 
 

 
$
0.67

 
 
 
$
0.58

 
 
Shares used in computation of net income per share:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Basic
48,526,755

 
 

 
48,282,994

 
 

 
48,484,425

 
 
 
48,274,868

 
 
Diluted
48,656,474

 
 

 
48,441,288

 
 

 
48,636,420

 
 
 
48,429,497

 
 

Percentage totals in the above table may not equal the sum of the components due to rounding.
 
For the Thirteen Weeks Ended
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
Other Operating Data (unaudited):
 

 
 

 
 
 
 
Number of stores at end of period
174

 
158

 
174

 
158

Comparable store sales growth (1)
(1.0
)%
 
2.9
%
 
(0.6
)%
 
2.7
%
Gross square footage at end of period (in thousands)
3,698

 
3,333

 
3,698

 
3,333

Average comparable store size (gross square feet) (2)
21,139

 
21,101

 
21,139

 
21,109

Comparable store sales per gross square foot during period (2)
$
126

 
$
131

 
$
259

 
$
268




 

16


 

(1)
Our practice is to include sales from a store in comparable store sales beginning on the first day of the sixteenth full month following the store’s opening. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. When a store is closed it is removed from comparable store sales in the period it is closed. There may be variations in the way that our competitors calculate comparable or “same store” sales. As a result, data in this Form 10-Q regarding our comparable store sales may not be comparable to similar data made available by our competitors.
(2)
Average comparable store size and comparable store sales per gross square foot are calculated using the gross square footage and sales for stores included within our comparable store base for each month during the given period.

Period to Period Comparisons

Thirteen Weeks Ended July 26, 2015 Compared to the Thirteen Weeks Ended July 27, 2014
 
Sales
Sales increased 4.7%, or $19.9 million, to $442.1 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014, resulting from a $4.0 million decrease in comparable store sales and a $23.9 million increase in non-comparable store sales. There were 150 comparable stores and 24 non-comparable stores open at July 26, 2015.
Comparable store sales decreased 1.0% to $392.7 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. For the thirteen weeks ended July 26, 2015, the decrease in comparable store sales was the result of a 0.7% decrease in the number of transactions and a 0.3% decrease in the average transaction size. Average customer transaction size for comparable stores decreased to $31.16 for the thirteen weeks ended July 26, 2015, compared to $31.27 for the thirteen weeks ended July 27, 2014.
Gross Profit
Gross profit increased 3.7%, or $5.3 million, to $149.0 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. The amount of the increase in gross profit attributable to increased sales was $6.7 million, partially offset by a decrease of $1.4 million attributable to the change in gross margin rate. The gross margin rate decreased 30 basis points to 33.7% for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. The decrease in gross margin rate was driven primarily by a decrease in merchandise margin due to increased shrinkage expense, partially offset by reduced supply chain costs as a percentage of sales and a favorable LIFO adjustment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 4.2%, or $4.2 million, to $103.6 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. The increase in selling, general and administrative expenses was primarily attributable to an increase in the number of stores in operation during the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014, which led to higher overall store-level compensation expenses and other costs to operate our stores. With more stores in operation during the thirteen weeks ended July 26, 2015, store-level compensation expenses increased $2.5 million, and other store operating expenses increased $1.8 million.
As a percentage of sales, selling, general and administrative expenses decreased by 10 basis points to 23.4% for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. The decrease in selling, general and administrative expenses as a percentage of sales for the thirteen weeks ended July 26, 2015 was primarily due to a decrease in incentive compensation expense, partially offset by $1.6 million of investments in marketing and store productivity programs, compared to the thirteen weeks ended July 27, 2014.
Impairments and Store Closure Costs
During the thirteen weeks ended July 26, 2015, we recorded $0.1 million of impairments and store closure costs, compared to $9.9 million for the thirteen weeks ended July 27, 2014, of which $9.8 million related to the stores closed in the first quarter of fiscal year 2014. These charges include certain lease liabilities, severance, write-down and loss on disposal of assets, and other exit costs.
Depreciation Expense
Depreciation expense increased 10.1%, or $1.5 million, to $16.8 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014, principally due to store unit growth, remodels, and refreshes. Depreciation

17


expense as a percentage of sales increased 20 basis points to 3.8% for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014.
Income from Operations 
Income from operations increased 49.0%, or $9.4 million, to $28.5 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. For the thirteen weeks ended July 26, 2015, we incurred a net benefit of $0.1 million in connection with store closure and exit activities related to the stores closed during the first quarter of fiscal year 2015. For the thirteen weeks ended July 27, 2014, we recognized charges of approximately $9.8 million associated with store closure and exit activities. Excluding the store closure and exit activities, adjusted income from operations was $28.4 million for the thirteen weeks ended July 26, 2015, compared to adjusted income from operations of $28.9 million for the thirteen weeks ended July 27, 2014.
Income from operations as a percentage of sales increased 190 basis points to 6.4% for the thirteen weeks ended July 26, 2015, compared to 4.5% for the thirteen weeks ended July 27, 2014. The increase in income from operations as a percentage of sales was primarily due to a decrease in store closure costs for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. Adjusted income from operations as a percentage of sales decreased 40 basis points to 6.4% for the thirteen weeks ended July 26, 2015, compared to 6.8% for the thirteen weeks ended July 27, 2014, primarily related to a decreased gross margin rate.
The following table provides an unaudited reconciliation of adjusted income from operations, a non-GAAP financial measure, to GAAP income from operations for the thirteen weeks ended July 26, 2015 compared to the thirteen weeks ended July 27, 2014.

 
For the Thirteen Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
(amounts in millions)
 
(unaudited)
Income from operations
$
28.5

 
$
19.1

Store closure and exit costs (1)
(0.1
)
 
9.8

 
 
 
 
Adjusted income from operations
$
28.4

 
$
28.9

 
(1) During the thirteen weeks ended July 26, 2015, we incurred a net benefit of approximately $0.1 million in connection with closure and exit activities related to the stores closed during the first quarter of fiscal year 2015, which was recorded to the “Impairments and store closure costs” line item on the Consolidated Statements of Comprehensive Income. During the thirteen weeks ended July 27, 2014, we incurred approximately $9.8 million of expenses associated with closure and exit activities, which was recorded to the “Impairments and store closure costs” line item on the Consolidated Statements of Comprehensive Income. Income from operations is not adjusted for certain ongoing expenses for closed locations which occur on a recurring basis.
Interest Expense 
Interest expense decreased $0.1 million to $1.0 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014.

Income Tax Expense 
Income taxes for the thirteen weeks ended July 26, 2015 resulted in an effective tax rate of approximately 36.5%, compared to the income tax rate of approximately 36.7% for the thirteen weeks ended July 27, 2014.

Net Income
Net income increased 53.4%, or $6.1 million, to $17.5 million for the thirteen weeks ended July 26, 2015, compared to the thirteen weeks ended July 27, 2014. During the thirteen weeks ended July 27, 2014, net income was affected by pre-tax charges of $9.8 million associated with store closure and exit costs. Adjusted net income decreased 0.8%, or $0.1 million, to

18


$17.4 million, for the thirteen weeks ended July 26, 2015, compared to adjusted net income of $17.5 million for the thirteen weeks ended July 27, 2014.
Net income as a percentage of sales for the thirteen weeks ended July 26, 2015 increased 130 basis points to 4.0% from 2.7% for the thirteen weeks ended July 27, 2014. Adjusted net income as a percentage of sales for the thirteen weeks ended July 26, 2015 decreased 20 basis points to 3.9% from 4.1% for the thirteen weeks ended July 27, 2014.
The following table provides an unaudited reconciliation of adjusted net income, a non-GAAP financial measure, to GAAP net income, as well as the related impact to our diluted earnings per share for the thirteen weeks ended July 26, 2015 compared to the thirteen weeks ended July 27, 2014.

 
For the Thirteen Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
(amounts in millions, except per share amounts)
 
(unaudited)
 
 
 
 
 
 
 
 
 
Net
 
Diluted Earnings
 
Net
 
Diluted Earnings
 
Income
 
Per Share, after tax
 
Income
 
Per Share, after tax
Net income
$
17.5

 
$
0.36

 
$
11.4

 
$
0.24

Store closure and exit costs
(0.1
)
 
0.00
 
9.8

 
0.13

Tax provision (1)
0.0
 
0.00
 
(3.6
)
 
0.00
Adjusted net income (2)
$
17.4

 
$
0.36

 
$
17.5

 
$
0.36


 
(1) Tax provision represents the additional income tax expense if the items above were excluded from the calculation of taxable income. The amounts shown for each item in the “Adjusted Diluted Earnings Per Share, after tax” columns are net of the impact of the tax provision.
(2) The totals may not equal the sum of the components due to rounding.
Twenty-Six Weeks Ended July 26, 2015 Compared to the Twenty-Six Weeks Ended July 27, 2014
 
Sales
Sales increased 6.0%, or $50.9 million, to $904.1 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014, resulting from a $4.6 million decrease in comparable store sales and a $55.5 million increase in non-comparable store sales. There were 150 comparable stores and 24 non-comparable stores open at July 26, 2015.
Comparable store sales decreased 0.6% to $796.9 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. For the twenty-six weeks ended July 26, 2015, comparable store sales were driven by a 0.3% decrease in the number of transactions and a 0.3% decrease in the average transaction size. Average customer transaction size for comparable stores decreased to $31.49 for the twenty-six weeks ended July 26, 2015, compared to $31.58 for the twenty-six weeks ended July 27, 2014.
Gross Profit
Gross profit increased 6.1%, or $17.7 million, to $309.6 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. The amount of the increase in gross profit attributable to increased sales was $17.4 million and an increase of $0.3 million was attributable to the gross margin rate. The gross margin rate was 34.2% for the twenty-six weeks ended July 26, 2015 and the twenty-six weeks ended July 27, 2014.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5.3%, or $10.5 million, to $208.7 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. The increase in selling, general and administrative expenses was primarily attributable to an increase in the number of stores in operation during the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014, which led to higher overall store-level

19


compensation expenses and other costs to operate our stores. With more stores in operation during the twenty-six weeks ended July 26, 2015, store-level compensation expenses increased $7.0 million, other store operating expenses increased $3.4 million, and corporate general and administrative expenses increased $0.7 million, which included approximately $0.4 million related to the previously announced leadership changes. This was partially offset by a decrease in pre-opening expenses of $0.7 million as we opened eight new stores during the twenty-six weeks ended July 26, 2015, compared to 11 new store openings during the twenty-six weeks ended July 27, 2014.
As a percentage of sales, selling, general and administrative expenses decreased by 10 basis points to 23.1% for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. The decrease in selling, general and administrative expenses as a percentage of sales for the twenty-six weeks ended July 26, 2015 was primarily due to lower incentive compensation expenses, partially offset by $2.1 million of investments in marketing and store productivity programs, compared to the twenty-six weeks ended July 27, 2014.
Impairments and Store Closure Costs
During the twenty-six weeks ended July 26, 2015, we recorded $14.3 million of impairments and store closure costs, which included $13.9 million of store closure and exit costs in connection with our departure from the California market, compared to $16.6 million for the twenty-six weeks ended July 27, 2014, which included $16.4 million of store closure and exit costs in connection with the closure of four stores in March 2014. These costs included certain lease liabilities, severance, write-down and loss on disposal of fixed assets, and other exit costs.
Depreciation Expense
Depreciation expense increased 8.6%, or $2.6 million, to $32.9 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014, principally due to store unit growth, remodels, and refreshes. Depreciation expense as a percentage of sales remained flat at 3.6% for the twenty-six weeks ended July 26, 2015 and for the twenty-six weeks ended July 27, 2014.
Income from Operations 
Income from operations increased 14.8%, or $6.9 million, to $53.6 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. For the twenty-six weeks ended July 26, 2015, we recognized charges of approximately $14.5 million associated with store closure and exit activities and the liquidation of inventory for closed locations, and approximately $0.4 million in connection with previously announced leadership changes. For the twenty-six weeks ended July 27, 2014, we recognized charges of approximately $16.8 million associated with store closure and exit activities, including the liquidation of inventory and other costs associated with store closure activities for closed locations. Excluding these items, adjusted income from operations was $68.5 million for the twenty-six weeks ended July 26, 2015, an increase of 7.9% from adjusted income from operations of $63.5 million for the twenty-six weeks ended July 27, 2014.
Income from operations as a percentage of sales increased 40 basis points to 5.9% for the twenty-six weeks ended July 26, 2015, compared to 5.5% for the twenty-six weeks ended July 27, 2014. The increase in income from operations as a percentage of sales was primarily due to a decrease in store closure and exit costs for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. Adjusted income from operations as a percentage of sales increased 20 basis points to 7.6% for the twenty-six weeks ended July 26, 2015, compared to 7.4% for the twenty-six weeks ended July 27, 2014, primarily related to a decrease in incentive compensation expense.

20


The following table provides an unaudited reconciliation of adjusted income from operations, a non-GAAP financial measure, to GAAP income from operations for the twenty-six weeks ended July 26, 2015 compared to the twenty-six weeks ended July 27, 2014.

 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
(amounts in millions)
 
(unaudited)
Income from operations
$
53.6

 
$
46.7

Store closure and exit costs (1)
14.5

 
16.8

Leadership change-related charges
0.4

 

 
 
 
 
Adjusted income from operations
$
68.5

 
$
63.5


 
(1) During the twenty-six weeks ended July 26, 2015, we incurred approximately $14.5 million of expenses in connection with closure and exit activities, with approximately $13.9 million recorded to the “Impairments and store closure costs” line item and approximately $0.6 million for the liquidation of inventory and other costs recorded to other line items on the Consolidated Statements of Comprehensive Income. During the twenty-six weeks ended July 27, 2014, we incurred approximately $16.8 million of expenses associated with closure and exit activities, with approximately $16.4 million recorded to the “Impairments and store closure costs” line item and approximately $0.4 million for the liquidation of inventory and other costs recorded to other line items on the Consolidated Statements of Comprehensive Income. Income from operations is not adjusted for certain ongoing expenses for closed locations which occur on a recurring basis.
Interest Expense 
Interest expense decreased $0.3 million to $2.0 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014.

Income Tax Expense 
Income taxes for the twenty-six weeks ended July 26, 2015 resulted in an effective tax rate of 36.8%, compared to the income tax rate of 37.1% for the twenty-six weeks ended July 27, 2014.

Net Income
Net income increased 16.7%, or $4.7 million, to $32.6 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. Net income was negatively affected by pre-tax charges of $14.9 million associated with store closure costs related to exiting the California market during the twenty-six weeks ended July 26, 2015 and costs associated with leadership changes, compared to pre-tax charges of $16.8 million associated with store closure and exit costs for the twenty-six weeks ended July 27, 2014. Adjusted net income increased 9.0%, or $3.5 million, to $41.9 million, for the twenty-six weeks ended July 26, 2015, compared to adjusted net income of $38.4 million for the twenty-six weeks ended July 27, 2014.
Net income as a percentage of sales for the twenty-six weeks ended July 26, 2015 increased 30 basis points to 3.6% from 3.3% for the twenty-six weeks ended July 27, 2014. Adjusted net income as a percentage of sales increased 10 basis points to 4.6% for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014.

21


The following table provides an unaudited reconciliation of adjusted net income, a non-GAAP financial measure, to GAAP net income, as well as the related impact to our diluted earnings per share for the twenty-six weeks ended July 26, 2015 compared to the twenty-six weeks ended July 27, 2014.

 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
 
(amounts in millions, except per share amounts)
 
(unaudited)
 
 
 
 
 
 
 
 
 
Net
 
Diluted Earnings
 
Net
 
Diluted Earnings
 
Income
 
Per Share, after tax
 
Income
 
Per Share, after tax
Net income
$
32.6

 
$
0.67

 
$
28.0

 
$
0.58

Store closure and exit costs
14.5

 
0.19

 
16.8

 
0.22

Leadership change-related charges
0.4

 
0.00
 

 

Tax provision (1)
(5.6
)
 
0.00
 
(6.4
)
 
0.00
Adjusted net income (2)
$
41.9

 
$
0.86

 
$
38.4

 
$
0.79

 
(1) Tax provision represents the additional income tax expense if the items above were excluded from the calculation of taxable income. The amounts shown for each item in the “Adjusted Diluted Earnings Per Share, after tax” columns are net of the impact of the tax provision.
(2) The totals may not equal the sum of the components due to rounding.

Liquidity and Capital Resources 
Our primary sources of liquidity are cash on hand and cash generated from operations. Our primary uses of cash are purchases of inventory, operating expenses, capital expenditures primarily for opening new stores and relocating and remodeling existing stores, debt service and corporate taxes. We believe that the cash on hand and cash generated from operations, together with the borrowing availability under the Credit Agreement, will be sufficient to meet our working capital needs for at least the next twelve months, including investments made, and expenses incurred, in connection with opening new stores and relocating and remodeling existing stores and other strategic initiatives. These strategic initiatives include the replacement of store equipment and product display fixtures, investments in information technology and merchandising enhancements. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within a few days of the related sale. 
At July 26, 2015, we had approximately $73.4 million in cash and cash equivalents and $149.6 million in borrowing availability under the Credit Agreement.
While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional expansion opportunities within the next year which could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional expansion opportunities, our ability to pursue such opportunities could be materially adversely affected.

22


A summary of our operating, investing and financing activities for the twenty-six weeks ended July 26, 2015 and July 27, 2014 is shown in the following table:
 
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
Net cash provided by operating activities
$
77,406

 
$
68,213

Net cash used in investing activities
(53,651
)
 
(40,271
)
Net cash provided by (used in) financing activities
1,143

 
(22,488
)
Net increase in cash and cash equivalents
$
24,898

 
$
5,454


 Operating Activities 
Cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, realized gain or loss on disposal of property and equipment, share-based compensation, changes in deferred income taxes, and the effect of changes in assets and liabilities.
 
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
Net income
$
32,638

 
$
27,961

Adjustments to reconcile net income to net cash provided by operating activities:


 


Depreciation and amortization
33,016

 
30,406

Loss on disposals of property and equipment
5,606

 
1,791

Share-based compensation
2,608

 
3,703

Excess tax (benefit) shortfall from share-based compensation
(90
)
 
157

Deferred income taxes
(6,122
)
 
(16,280
)
Changes in assets and liabilities
9,750

 
20,475

Net cash provided by operating activities
$
77,406

 
$
68,213

 
Net cash provided by operating activities increased 13.5%, or $9.2 million, to $77.4 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. The increase in net cash provided by operating activities was primarily due to lower tax payments and the timing of various working capital items.
 
Investing Activities 
Cash used in investing activities consists primarily of capital expenditures for opening new stores, remodeling, refreshing and relocating existing stores, as well as investments in information technology and merchandising enhancements.  
 
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
Purchases of property and equipment
$
(54,343
)
 
$
(40,363
)
Proceeds from sale of property and equipment
692

 
92

Net cash used in investing activities
$
(53,651
)
 
$
(40,271
)
 
Capital expenditures increased 34.6%, or $14.0 million, to $54.3 million for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014. Capital expenditures related to new, remodeled, and refreshed stores totaled $48.3 million for the twenty-six weeks ended July 26, 2015, compared to $37.1 million for the twenty-six weeks ended July 27, 2014.

23


We plan to spend approximately $95.0 million to $105.0 million on capital expenditures during fiscal 2015, primarily related to new and remodeled stores.
We plan to open 18 new stores during fiscal 2015, eight of which were opened as of July 26, 2015, and to remodel or refresh nine to ten stores, eight of which were completed as of July 26, 2015.
 
Financing Activities 
Cash provided by and used in financing activities consists primarily of borrowings and payments under our revolving credit facility. We currently do not intend to pay cash dividends on our common stock.
 
 
For the Twenty-Six Weeks Ended
 
July 26,
2015
 
July 27,
2014
Borrowings on revolving credit facility
$

 
$
118,133

Payments made on revolving credit facility

 
(139,833
)
Payments made for debt issuance costs

 
(441
)
Payments made on capital and financing lease obligations
(580
)
 
(292
)
Proceeds from issuance of common stock pursuant to employee stock purchase plan
78

 
95

Excess tax benefit (shortfall) from share-based compensation
90

 
(157
)
Payments made on withholding tax for restricted stock vesting
(993
)
 
(155
)
Proceeds from exercise of share-based compensation awards
2,548

 
162

Net cash provided by (used in) financing activities
$
1,143

 
$
(22,488
)
 
Net cash provided by financing activities for the twenty-six weeks ended July 26, 2015 increased $23.6 million, to $1.1 million. There was no net activity for our revolving credit facility for the twenty-six weeks ended July 26, 2015, compared to net payments of $21.7 million for the twenty-six weeks ended July 27, 2014. Additionally, there was an increase in net proceeds from the exercise of share-based compensation awards for the twenty-six weeks ended July 26, 2015, compared to the twenty-six weeks ended July 27, 2014.
 
Revolving Credit Agreement 
On June 12, 2014, we entered into the Credit Agreement with Bank of America, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, and the several lenders party thereto, which refinanced and replaced our prior senior unsecured revolving credit facility.
The Credit Agreement matures June 12, 2019 and is available to provide support for working capital, capital expenditures and other general corporate purposes, including permitted acquisitions and issuance of letters of credit. While we currently have no material domestic subsidiaries, other entities will guarantee our obligations under the Credit Agreement if and when they become our material domestic subsidiaries during the term of the Credit Agreement.
The Credit Agreement provides for total borrowings of up to $175.0 million. Under the terms of the Credit Agreement, we are entitled to request an increase in the size of the facility by an amount not exceeding $100.0 million in the aggregate. If the existing lenders elect not to provide the full amount of a requested increase, or in lieu of accepting offers from existing lenders to increase their commitments, we may designate one or more other lenders to become a party to the Credit Agreement, subject to the approval of the Administrative Agent. The Credit Agreement includes a letter of credit sublimit of $60.0 million and a swing line sublimit of $15.0 million.
At our option, revolving loans under the Credit Agreement bear interest at (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin that ranges from 0.90% to 2.00%, (ii) the Eurodollar rate plus an applicable margin that ranges from 0.90% to 2.00%, or (iii) the base rate plus an applicable margin that ranges from 0% to 1.00%, where the base rate is defined as the greatest of: (a) the federal funds rate plus 0.50%, (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00%.
The commitment fee calculated on the unused portions of the Credit Agreement ranges from 0.125% to 0.250% per annum.

24


The Credit Agreement contains a number of affirmative and restrictive covenants, including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.
In addition, the Credit Agreement provides that we are required to maintain the following financial ratios:
a consolidated maximum leverage ratio as of the end of any fiscal quarter of not more than 4.25 to 1.00, based upon the ratio of (i) Adjusted Funded Debt (as defined in the Credit Agreement) minus certain cash and cash equivalents in excess of $5.0 million as of the end of each fiscal quarter to (ii) Consolidated EBITDAR (as defined in the Credit Agreement) for the period consisting of the four fiscal quarters then ending; and
a consolidated fixed charge coverage ratio as of the end of each fiscal quarter of not less than 1.70 to 1.00, based upon the ratio of (i) Consolidated EBITDAR (as defined in the Credit Agreement) less cash taxes paid and dividends and other distributions made in respect of capital stock, in each case, over the period consisting of the four fiscal quarters then ending to (ii) the sum of cash interest, lease, rent and scheduled principal payments on Funded Debt (as defined in the Credit Agreement), in each case, over the period consisting of the four fiscal quarters then ending.
The Credit Agreement contains customary events of default. If an Event of Default (as defined in the Credit Agreement) occurs and is continuing, on the terms and subject to the conditions set forth in the Credit Agreement, amounts outstanding under the Credit Agreement may be accelerated and may become or be declared immediately due and payable.
We were in compliance with all debt covenants under the Credit Agreement as of July 26, 2015.

Stock Repurchase Program
In August 2015, our Board of Directors authorized a $200.0 million stock repurchase program. The primary source of funds for stock repurchases will be cash flows from operations net of investing activities. Repurchases under the program may be made through open market transactions at prevailing market prices, with block trades permitted from time to time and in the discretion of our management and as market conditions allow. The timing of the repurchases and the actual amount repurchased will depend on a variety of factors, including the amount of cash flow available for repurchases, the market price for our shares and general market and economic conditions. No repurchases have been made under the program through August 27, 2015. Repurchases are expected to commence during or after September 2015.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements at July 26, 2015 consisted of operating leases. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
Our contractual obligations primarily consist of long-term debt obligations and lease obligations. No material changes outside the ordinary course of business have occurred in our contractual obligations during the twenty-six weeks ended July 26, 2015. For a more comprehensive discussion of our contractual obligations see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 25, 2015.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. These estimates and assumptions are affected by management’s application of accounting policies. On an ongoing basis, management evaluates its estimates and judgments. Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements include accounting for inventories, impairment of long-lived assets, closed store reserves, leases, insurance reserves, taxes and share-based compensation, which are discussed in more detail under the caption “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 25, 2015.

25


Seasonality
The food retail industry and our sales are affected by seasonality. Our average weekly sales fluctuate during the year and are usually highest in the fourth quarter when customers make holiday purchases.   
Inflation
While inflation may impact our sales and cost of goods sold, we believe the effects of inflation on our results of operations and financial condition were not significant for the thirteen and twenty-six weeks ended July 26, 2015. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 
We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. Our exposure to market risks results primarily from changes in interest rates and there have been no material changes regarding our market risk position from the information provided under Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 25, 2015.
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures 
Our management, with the participation of our Interim President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our Interim President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that, as of July 26, 2015, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Interim President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 
Changes in Internal Control over Financial Reporting 
There were no changes in our internal control over financial reporting during the thirteen weeks ended July 26, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

26


 Part II. Other Information
 
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings in the ordinary course of business, including, but not limited to, claims, disputes, litigation, and investigations relating to labor and employment, contracts, product liability, leasing and construction, and other commercial and regulatory matters. Although we cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations, except for the proceeding described in the immediately succeeding paragraph, which could have a material adverse effect on us.
We are party to a lawsuit that was filed on July 17, 2013 against us in U.S. District Court in Connecticut alleging that the manner in which we implemented and applied the fluctuating workweek method for calculating overtime due to our department managers violated the federal Fair Labor Standards Act. The complaint purports to state a collective action on behalf of a class of department managers in stores in states in which we used the fluctuating workweek method of compensation. We believe that the plaintiff’s claims are without merit and intend to vigorously defend ourselves in this proceeding. We cannot at this time predict the outcome of this litigation or estimate the range of our potential exposure. We have not recorded any reserves or contingencies related to this legal matter.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 25, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

The following table provides information about repurchases of our common stock during the three-month period ended July 26, 2015:

 
 
 
 
 
 
Total
 
Approximate
 
 
 
 
 
 
Number of
 
Dollar Value
 
 
 
 
 
 
Shares
 
of Shares
 
 
Total
 
Average
 
Purchased
 
that May Yet
 
 
Number
 
Price
 
as Part of a
 
be
 
 
of Shares
 
Paid Per
 
Publicly
 
Purchased
 
 
Purchased
 
Share
 
Announced
 
under the
Period
 
(1)
 
($)
 
Program
 
Program
April 27, 2015 through May 27, 2015
 

 

 

 

May 28, 2015 through June 27, 2015
 
138

 
$
32.69

 

 

June 28, 2015 through July 26, 2015
 

 

 

 

 

(1)
Represents shares of common stock withheld for income tax purposes in connection with the vesting of shares of restricted stock issued to certain employees.

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Item 6. Exhibits
Exhibit Number
 
Description
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
 
The following financial information (unaudited) from The Fresh Market, Inc.’s Quarterly Report on Form 10-Q for the period ended July 26, 2015, filed on August 27, 2015, formatted in eXtensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements
 
 
 



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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
August 27, 2015
THE FRESH MARKET, INC.
 
 
 
 
By:
/s/ Jeffrey B. Short
 
 
Jeffrey B. Short
 
 
Vice President and Controller
 
 
(Principal Accounting Officer)
 


29