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Retailers To Watch

June 27, 2014 | About:

Retailers are now more focused on customer satisfaction with an enhanced buying experience. The inclination for shopping at convenience stores has amplified the demand for “mini-markets and supermarkets”. Retailers are capitalizing on this prospect with new outlets, innovative product inventories, huge discounts, and loyalty programs. Let's look at the three retail companies developing and executing appropriate strategies in this transforming retail industry.

Store expansion and improved margin

The Fresh Market (NASDAQ:TFM) In the first quarter of fiscal 2014, the company opened seven new stores. The company further entered into lease agreement for open 21 new stores. The Fresh Market will reach the 250 store mark, from the 158 stores currently, in next five years. In the current fiscal year it plans to opens around 27 new stores.

The company’s total net sales for the first quarter of fiscal 2014 increased 17.6% to $431.0 million and comparable store sales increased 2.5% to $368.3 million from the first quarter of fiscal 2013. The company’s first quarter comparable store sales were driven by a 1.8% increase in the number of transactions and a 0.7% increase in average transaction size as a result of promotional activity and the strength of the Easter holiday, partially offset by the impact of winter storms early in the quarter.

Consensus of analyst anticipate that total revenue for the company in current fiscal will be around 1.74 billion and will increase to $2.0 billion in next fiscal year.

The Fresh Market reported a 34.4% gross margin in first quarter as compared to 35.3% if the first quarter last year, but increase of around 4% in the last five years. Its contract with Burris logistics is scale based and provides lower per case cost as the volume levels grow. Store growth will generate lower sourcing costs with the increase in volume levels. Continued improvements in the inventory management system and processes will reduce the shrink rate to around 5% in next few years, which is around 8% currently. These factors will improve gross margins from 34.4% to 34.6% in fiscal 2014.

EPS in the first quarter of fiscal 2014 were $0.34, compared to $0.46 per diluted share, in the first quarter of fiscal 2013. The decline in EPS was the results of store closure and exit costs related to previously announced store closings in California and Texas.

The Kroger (NYSE:KR) entered an agreement with Harris Teeter (HTSI), under which it will purchase all outstanding shares of Harris Teeter at a price of $49.38 each in cash, for a total value of $2.5 billion. Post-acquisition, Harris Teeter operates as a subsidiary of Kroger. This increases Kroger's total stores by 9% to 2,630 stores in 34 states in the U.S.

Kroger hasn’t been present in high -growth, upscale markets that have a larger population, but this acquisition will help it increase presence in these markets, such as Washington D.C. Kroger will have the opportunity to exploit a high growth market, using Harris's assets, and its existing infrastructure.

Harris Teeter is a chain of grocery stores in the U.S. with 231 stores across eight states. Its stores are located in popular tourist destinations, university towns, and other high growth cities. The competition from Walmart and regional retailer Publix in these regions could be one of the reasons why Harris decided to go ahead with its sale. With the help of Kroger's higher scale of operation and infrastructure, it plans to compete with Walmart and Publix. Harris could enhance its loyalty based marketing and general merchandise assortment with the help of Kroger's strong purchasing power, information systems, and loyalty programs. Kroger doesn't plan to close any of Harris's stores, and could give Harris plenty of autonomy in running its stores.

On the other hand, acquisition of Harris has affect the share repurchase program of Kroger. The share repurchase is expected to be in the range of $200 million - $400 million this year from the $1 billion buybacks announced last year. This is because it used its cash to pay off its maturing debt to protect its investment grade rating. This will negatively affect the near-term EPS of Kroger. The total debt, after all the restructuring, is expected to be around $10 billion - $10.5 billion. However, synergy gains from the Harris Teeter acquisition will offset the lower EPS, and it is expected to cause EPS accretion of $0.06-$0.09 in first 12 months post-acquisition.

Fresh Market is capitalizing all focused to broaden its footprints with its plans of opening new stores will surely boost its topline. Kroger has acquired Harris Teeter to enter into upscale and high growth markets. Harris will take advantage of Kroger's strong purchasing power and loyalty programs. While the acquisition will reduce share buybacks in the short term, it will generate free cash flows to use towards share repurchases in the future.

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