S-1 1 d123189ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on July 16, 2021

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

The Fresh Market Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   5411   61-1789388
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

 

 

The Fresh Market Holdings, Inc.

300 N. Greene Street, Suite 1100

Greensboro, NC 27401

(336) 272 1338

(Address, including zip code, and telephone number, including

area code, of Registrant’s principal executive offices)

 

 

Carlos Clark

Senior Vice President, General Counsel and Corporate Secretary

The Fresh Market Holdings, Inc.

300 N. Greene Street, Suite 1100

Greensboro, NC 27401

(336) 272 1338

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Please send copies of all communications to:

 

Howard A. Kenny
Morgan, Lewis & Bockius LLP
101 Park Avenue

New York, NY 10178

(212) 309 6843

 

Marc D. Jaffe

Michael Benjamin
Latham & Watkins LLP

1271 Avenue of the Americas
New York, NY 10020
(212) 906 1200

 

 

Approximate date of commencement of the proposed sale to the public: As soon as practicable after the date this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Non-accelerated filer  
Accelerated filer      Smaller reporting company  
     Emerging Growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed
Maximum Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee(1)

Common stock, par value $0.01 per share

  $100,000,000   $10,910

 

 

(1)

Includes the offering price of the additional shares of common stock that the underwriters have the option to purchase from the Registrant. See “Underwriting (Conflicts of Interest).”

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated July 16, 2021

PRELIMINARY PROSPECTUS

 

 

LOGO

            Shares

The Fresh Market Holdings, Inc.

Common Stock

 

 

This is the initial public offering of The Fresh Market Holdings, Inc., a Delaware corporation. We are offering                shares of our common stock.

We expect the public offering price to be between $                 and $                 per share. Prior to this offering, no public market exists for the shares. We intend to apply to list our common stock on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “TFM.”

Following this offering, certain investment funds (the “Apollo Funds”) managed by affiliates of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”) will beneficially own approximately    % of our outstanding common stock (or approximately    % if the underwriters exercise in full their option to purchase additional shares of our common stock). As a result, we will be a “controlled company” within the meaning of the corporate governance standards for Nasdaq listed companies and would be able to avail ourselves of an exemption from certain corporate governance requirements of such standards. See “Risk Factors—Risks Related to This Offering and Ownership of Our Common Stock,” “Management—Controlled Company Exemption” and “Certain Relationships and Related Party Transactions.”

 

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 25 of this prospectus.

Neither the Securities and Exchange Commission (“SEC”) nor any other regulatory body or state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

      

Initial public
offering
price

    

Underwriting
discounts and
commissions(1)

    

Proceeds to
us, before
expenses

Per Share

     $                  $                  $            

Total

     $                      $                      $                

 

(1)

We refer you to the section “Underwriting (Conflicts of Interest)” on page 148 of this prospectus for additional information regarding compensation payable to the underwriters.

We have granted the underwriters the option, for a period of 30 days from the date of this prospectus, to purchase up to an additional                  shares of common stock from us at the initial public offering price, less the underwriting discounts and commissions.

 

The underwriters expect to deliver the shares on or about                  , 2021.

 

Credit Suisse     BofA Securities
Barclays   Deutsche Bank Securities   RBC Capital Markets
BMO Capital Markets     Guggenheim Securities
  Apollo Global Securities  

 

The date of this prospectus is                 , 2021.


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TABLE OF CONTENTS

 

LETTER FROM OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER

     v  

PROSPECTUS SUMMARY

     1  

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS AND SUMMARY OF RISK FACTORS

     22  

RISK FACTORS

     25  

USE OF PROCEEDS

     53  

DIVIDEND POLICY

     54  

CAPITALIZATION

     55  

DILUTION

     56  

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     58  

BUSINESS

     87  

MANAGEMENT

     105  

EXECUTIVE COMPENSATION

     112  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     136  

PRINCIPAL STOCKHOLDERS

     139  

DESCRIPTION OF CAPITAL STOCK

     141  

SHARES ELIGIBLE FOR FUTURE SALE

     146  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     148  

UNDERWRITING (CONFLICTS OF INTEREST )

     152  

LEGAL MATTERS

     159  

EXPERTS

     159  

WHERE YOU CAN FIND MORE
INFORMATION

     159  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

You should rely only on the information contained in this prospectus and any related free writing prospectus that we may provide to you in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States. See “Underwriting (Conflicts of Interest).”

 

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TRADEMARKS, TRADE NAMES AND SERVICE MARKS

We use various trademarks, trade names and service marks in our business, including without limitation The Fresh Market® and TFM®. This prospectus contains references to our trademarks and service marks. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

INDUSTRY AND MARKET DATA

We are a specialty retailer competing in the “food retail industry,” which we define as including competitors we consider “traditional retailers” (e.g., Albertson’s, Kroger, Publix), “specialty retailers” (e.g., Sprouts Farmers Market, Natural Grocers, Trader Joe’s) and “mass channels” (e.g., Target and Walmart), but excluding “club channels” (e.g., Costco). Specialty retailers are characterized by offerings of food and beverages that are of the highest grade, style and/or quality in their respective categories. We include in this prospectus statements regarding factors that have impacted our industry. Such statements are statements of belief and are based on industry data and forecasts that we have obtained from industry publications and surveys, including those published by Consumer Reports and Nielsen, as well as internal company sources. We also cite figures from a survey recently conducted by Integrated Insight (the “Integrated Insight Survey”). Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such information. In addition, while we believe that the industry information included herein is generally reliable, such information is inherently imprecise. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors” in this prospectus.

 

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BASIS OF PRESENTATION

In this prospectus, unless otherwise indicated or the context otherwise requires, references to the “Company,” the “Issuer,” “we,” “us,” “our” and “Holdings” refer to The Fresh Market Holdings, Inc. (f.k.a. Pomegranate Parent Holdings, Inc.), a Delaware corporation, and its consolidated subsidiaries. References to “The Fresh Market Intermediate Holdings” or “Intermediate Holdings” refer to The Fresh Market Intermediate Holdings, Inc. (f.k.a. Pomegranate Holdings, Inc.), a Delaware corporation, and a wholly owned subsidiary of the Company. References to “The Fresh Market” and “TFM” refer to The Fresh Market, Inc., a Delaware corporation, a wholly owned subsidiary of Intermediate Holdings and an indirect wholly owned subsidiary of the Company.

This prospectus contains the consolidated financial statements of The Fresh Market Holdings, Inc. We operate on a 52- or 53-week fiscal year that ends on the Sunday nearest to January 31. Each quarterly period has 13 weeks, except for a 53-week year, when the fourth quarter has 14 weeks. The fiscal years ended January 26, 2020 and January 27, 2019 each consisted of 52 weeks. The fiscal year ended January 31, 2021 consisted of 53 weeks. References to “fiscal 2020” are to the fiscal year ended January 31, 2021. References to “fiscal 2019” are to the fiscal year ended January 26, 2020. References to “fiscal 2018” are to the fiscal year ended January 27, 2019.

On March 11, 2016, the Company’s subsidiary, Intermediate Holdings and Pomegranate Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Intermediate Holdings (“Merger Sub”) entered into an agreement and plan of merger (the “Merger Agreement”) with The Fresh Market. The Company, Intermediate Holdings and Merger Sub were controlled by the Apollo Funds. On April 27, 2016, pursuant to the Merger Agreement, Merger Sub merged with and into The Fresh Market with The Fresh Market surviving the merger (the “Acquisition”) and becoming a wholly owned subsidiary of Intermediate Holdings and an indirect wholly owned subsidiary of the Company. On March 5, 2021, the Company changed its legal name from Pomegranate Parent Holdings, Inc. to The Fresh Market Holdings, Inc., and Intermediate Holdings changed its legal name from Pomegranate Holdings, Inc. to The Fresh Market Intermediate Holdings, Inc. The Company continues to be controlled by the Apollo Funds as of the date of this prospectus.

 

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USE OF NON-GAAP FINANCIAL MEASURES

We believe that our financial statements and the other financial data included in this prospectus have been prepared in a manner that complies, in all material respects, with accounting principles generally accepted in the United States (“GAAP”) and the regulations published by the SEC. However, management believes evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP financial measures. Specifically, in this prospectus we present “EBITDA,” “Adjusted EBITDA,” “Adjusted EBITDA Margin,” “Store-level EBITDA” and “Store-level EBITDA Margin,” which are not recognized terms under GAAP. We believe that the presentation of these non-GAAP financial measures is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future, as well as other items. Further, we believe that these measures provide a meaningful measure of operating profitability because we use them for performance evaluations and compensation measures for our executives, to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

These measures should not be considered as alternatives to net income, operating income, cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. These measures have important limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. For a discussion of the use of these measures and a reconciliation to the most directly comparable GAAP measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

 

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LOGO

Welcome to The Fresh Market! Founded in 1982 in Greensboro, North Carolina, we are a convenience focused specialty retailer with 159 stores across 22 states. We offer an amazing selection of the very best fresh food the world has to offer with a focus on quality service for our guests. The original store and experience were inspired by our founder Ray Berrys trip to Europe and seeks to emulate the charm and essence of a European-style fresh food market. Our guests can see the quality of our food and smell the fresh aromas in the store as they discover what makes The Fresh Market special. Our roots as a specialty retailer have evolved to meet guests demand for the best ingredients which we thoughtfully cut, season, and prepare to provide convenient restaurant-quality meals within the home. Exceptional service is a hallmark of The Fresh Market experience, as our team members provide high-touch service and highlight the best of our differentiated offering. We invite our potential investors to experience our exceptionally clean, convenient stores located close to home, where they will discover:


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LETTER FROM OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER

Dear Potential Stockholders -

When I joined The Fresh Market in March of 2020, I was thrilled at the opportunity to work with a brand that has a rich heritage and reputation for offering the very best food, experience, and service delivered by exceptional team members. This is a rare and powerful combination, which has worked since inception and we believe, as shown by our results in fiscal 2020 and our results for fiscal 2021 to date, positions us well for strong performance. It is a privilege to partner with Andy Jhawar, our Chairman and highly experienced investor, and Ray Berry, the visionary founder of The Fresh Market.

Our rich heritage dates back to 1982 when Ray Berry and his wife opened the first store in Greensboro, North Carolina after returning from a trip to Europe. Ray and his wife were inspired to bring the charm and essence of an open, Old World European–style fresh food market to America. Our founders wanted to offer a more intimate and personalized shopping experience that is different from a typical warehouse-style supermarket. Their vision was to establish an epicurean experience by offering high-quality fresh food including hand-selected produce, premium meats, fresh cut flowers, daily made bread and baked goods in a differentiated in-store atmosphere. Today, we believe the taste and quality of our food is exceptional with daily procurement and in-store preparation, custom cuts offered at our meat counters, and gourmet seasonings and recipes. We maintain strict product freshness control measures implemented by our merchandising team, and in collaboration with our distributors as well as 40 family-run farms within 100 miles of our stores, we deliver an extensive assortment of high quality products to our 159 stores across 22 states.

We were publicly traded from 2010 to 2016, when we were taken private by the Apollo Funds, along with an investment by the Berry family. Since that time, we have implemented several key strategic initiatives designed to overcome challenges we faced at and after this going private transaction. These initiatives included a merchandising refocus on our core premium fresh food, introduction of new curated meal offerings, competitive prices on frequently shopped items such as bananas, avocados, milk, lemons and butter, improved in-store execution, and investments in omni-channel capabilities and technology. I saw an opportunity to passionately pursue these initiatives with the goal of guests choosing us first, across three important trips: (i) fresh food, (ii) food for special occasions, and (iii) curated meal offerings for the home. The cornerstone of our strategy to gain share in these eating occasions is to serve our guests the best tasting food the world has to offer, with a culture of service and excellence that our dedicated team members uphold.

Our core product offering of high-quality fresh food, hard-to-find ingredients and specialty foods, local items, and curated meal offerings is resonating with our guests, both old and new. We believe The Fresh Market is positioned to capture the secular trend of consumer preference for higher-quality, fresh food. Our stores have consistently been regarded as exceptionally clean, and we have established safety and sanitation committees to ensure every store meets new enhanced protocols under the COVID-19 environment. As others in the industry have become more conventional, we have continued to differentiate our offering to create excitement about our brand’s reputation.

With this offering, we will return to the public markets, which we believe will allow us significant flexibility in funding our strategy, including allowing us to refinance a significant portion of our debt.

In fiscal 2020, our comparable store sales growth was 22.3%. This compares to comparable store sales changes of (1.8)% and 0.4%, for fiscal 2019 and fiscal 2018, respectively. In the first quarter of fiscal 2021, comparable store sales growth was 7.3% (compared to 12.9% in the first quarter of fiscal 2020). While our recent performance is partly attributable to the impact of the COVID-19 pandemic, we believe the initiatives noted above, as well as broader changes in the food-at-home and food-away-from-home markets, also contributed significantly and will continue to spur our performance. We also believe our recent performance in this challenging environment was only able to materialize because of the amazing determination and dedication of our team members. It is truly a testament to the

 

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commitment and fortitude of our team members. They continually act as true brand ambassadors that showcase the best of our offerings, which reinforces our focus on reputation and service. I want to personally thank every store team member for working to make The Fresh Market one of America’s most loved brands. Through the pandemic, we prioritized being a leader in guest and employee safety; we believe we were one of the first companies to implement mask mandates and establish a cross-functional team focused on maintaining a convenient and safe guest experience. Separately, as an effort to do our part during these difficult times, we have partnered with our communities and together donated $1.6 million to Feeding America in response to the food insecurity caused by COVID-19 and also donated to the NAACP Legal Defense Fund and to the International Civil Rights Museum here in Greensboro.

During the pandemic, our guests (both existing and new) had the opportunity to experience The Fresh Market’s fresh offering and service. I am confident that we will continue to earn our guests’ trust as we implement new initiatives that enhance our mission to make our guest’s everyday eating extraordinary. We look forward to having you as a part of The Fresh Market’s future success as we continue to accelerate our overall mission and embark on this exciting journey together.

Jason Potter

President and Chief Executive Officer

 

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LOGO

The Fresh Market Experience At The Fresh Market, our guests discover an amazing selection of the best food the world has to offer. We invite our guests to browse well-stocked, exceptionally clean, convenience-focused stores located close to their homes. The guest experience is our number one focus and our team members deliver impeccable service that we believe makes each trip special and memorable. Guest experience " Our team members greet guests and welcome them into our stores " We strive to inspire our guests to try new flavors by highlighting the best of our offering " Clear path to promotion and increased bonus eligibility for our team members helps retention and results in high-quality service " Make every effort to never let a guest leave our store less than completely satisfied Welcoming atmosphere " Elevated, sensory experience through fresh aromas, classical music and dim lighting " Guests describe our stores as intimate and relaxing " Exceptional cleanliness through daily deep cleaning to maintain the highest sanitation standards


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LOGO

Prime cut meats Custom cuts offered daily by in-store butchers, creating a local butcher shop feel Zero trim policy ensuring every bite is enjoyed and there is no excess fat on our steaks, just the wonderful marbling High-quality USDA prime, premium choice, and grass fed natural beef dry-aged for 14 days minimum Chairman's Reserve prime pork is carefully inspected and hand selected based on key attributes and outperforms conventional pork Expertly prepared, marinated, or seasoned proteins such as our gourmet burgers that are ground fresh into 13 varieties Best-in-class produce Freshest fruits and vegetables that are sourced at their peak ripeness, contain the highest level of sugars, and have the most appetizing textures 200+ organic items every day Each store has rolled out a new, re-merchandised produce department featuring an improved layout and competitive prices 100 daily hand cut fruits and vegetables that add tremendous time savings for our guests Only purchase large specs of fruits and vegetables from our growers Fresh seafood Commitment to variety and freshness - from the docks to our stores in 72 hours First to market for seasonal specialties such as Copper River Salmon Locally sourced oysters, mussels, clams, and shrimp from several coastal states Restaurant quality meals Designed to serve various eating occasions - ready-to-cook, ready-to-heat, and ready-to-eat meals designed by our corporate chef Little Big Meals program offers a great value for a complete meal for four with protein and sides Market Meal Kits offer one pan meals that our guests can prepare in a few easy steps within 20 minutes Our Ultimate Steak Dinner program provides premium, restaurant quality steaks and sides seasoned in-house by our butchers Signature ready-to-eat chicken salad uses fresh roasted chicken, real mayonnaise, cage free eggs, and fresh chopped celery from our produce department


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LOGO


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PROSPECTUS SUMMARY

The following summary contains selected information about us and about this offering. It does not contain all of the information that is important to you and your investment decision. Before you make an investment decision, you should review this prospectus in its entirety, including matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Some of the statements in the following summary constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements and Summary of Risk Factors.”

Who We Are

We are a specialty retailer offering a variety of high quality, fresh foods and difficult-to-find items in a small, convenient, intimate store footprint (average 21,000 sq. ft.) where guests can see all the sightlines across the store. The store ambiance is like an Old World European marketplace layout with an elevated, sensory experience with fresh aromas, classical music, spotlights, and exceptional cleanliness. High-touch guest service is a hallmark of The Fresh Market, as our team members strive to make guests feel like they are at home. Our combination of premium food, strong reputation for special occasions, personalized guest service, and omni-channel capabilities has resulted in comparable store sales growth of 22.3% in fiscal 2020 (compared to comparable store sales changes of (1.8)% and 0.4% for fiscal 2019 and fiscal 2018, respectively). Comparable store sales growth was 7.3% for the first quarter of fiscal 2021 (compared to 12.9% for the first quarter of fiscal 2020). While our fiscal 2020 and early fiscal 2021 results may be attributed in part to the impact of the COVID-19 pandemic, we believe they also demonstrate the effectiveness of our strategy and the initiatives we have taken, as well as broader changes in the food-at-home and food-away-from-home markets. Based on our results to date in fiscal 2021 as the COVID-19 pandemic has begun to subside, we believe we are well positioned for continued strong performance.

Our focus is on delivering the very best for our guests’ fresh food trip, special occasions, and dinner tonight. Approximately 70% of our sales in fiscal year 2020 and fiscal year 2019 have come from fresh foods. This highly curated assortment primarily consisting of produce, meat, seafood, dairy, and ready-to-cook or ready-to-eat meal offerings is supported by specialized and difficult-to-find non-perishable items that account for approximately 29% of our sales, while general commoditized consumer goods, which a consumer finds in conventional retailers, account for less than 1% of our sales over the same time period. Our team members and quality experts have a merchandising approach that requires careful assembly of the food experience with consideration to numerous food attributes. Creative and visually appealing merchandising sets us apart and inspires our guests to create intricate meals for their home, best exemplified by waffles, whipped cream, and strawberries placed together on the produce floor for a delicious, chef-quality dish.

 

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LOGO   LOGO

Each of our stores cuts, seasons and prepares our food daily for optimal taste and freshness and a convenient guest experience. For example, our Peak of Flavor program allows a guest to purchase a ripe avocado or banana to eat that night, in addition to fruit that will peak in the next day or two. In order to deliver on our mission with guests and our stores, our supply chain and distribution partners supply us with the highest quality and freshest food from farm to shelf in 14 days or less. We source from both a leading national specialty distributor, along with 40 family-run farms within 100 miles of our stores, providing us the ability to continuously offer our guests high quality, fresh food. Before any item is made available in our stores, our buyers hold “tastings” where potential new items are tasted and evaluated. We also have partnerships with certain growers that allow us to bring in limited edition offerings, like batches of berries with exceptional sweetness as well as international specialties, such as Tasmanian cherries or stone fruit flown in from South America to maximize freshness.

We also have a dedicated team that curates and sources local products based on a series of specifications to ensure differentiation from conventional retailers. For instance, this focus on working with local farmers and bakers whenever possible allows us to offer our guests Louisiana King Cake for Mardi Gras, North Carolina pickles, or milk in glass bottles from Battenkill Valley Creamery in upstate New York. We also source our own private label products through our small and medium-sized vendors with the goal of offering the “best” items in select categories. We believe smaller batch sizes and proprietary formulas and recipes allow these items to outperform leading brands in terms of quality of ingredients, flavor variety, and taste. Furthermore, we take pride in making a variety of guests’ favorites on a daily basis including roasted chicken salad, fresh-baked nut breads, and flavored gourmet coffee.

We strive to procure sustainably farmed produce and humanely raised meats while promoting environmentally conscious brands that are in line with our values. Our private label canned tuna is sourced from the first tuna fishery to become MSC Certified Sustainable, utilizing pole and line-caught fish. We also partner with growers who are vested in taking care of the environment, such as Fair-Trade Certified squash and avocados, Rainforest Alliance Certified grapes and Fair for Life apples. Our seasonal fresh produce is purchased from 40 family-run farms within 100 miles of our stores. These examples are a small part of our commitment to creating a better future for our planet. In fiscal 2020, we donated 2.5 million pounds of food to Feeding America’s network of food banks while reducing our footprint through recycling all cardboard used in our stores.

Our small-box stores enable us to operate in established neighborhoods in close proximity to our target high-income guests (annual household incomes in excess of $75,000) and supporting our guests’ preference to efficiently and conveniently shop for their families. This small-box format in high-population-density areas near our guests’ homes also supports our growing curbside-pickup business, which is an important component to providing our guests with an omni-channel shopping experience. Moreover, we have a strong geographic

 

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presence in the attractive Southeast markets and our stores benefit from key advantages such as lower labor costs, attractive demographics, lower lease costs and significant real estate availability. Although curbside pickup and delivery are becoming a growing part of our business, our stores are a highly differentiated showcase of an epicurean experience for inspiration and special occasion shopping that draws our guests to shop in a clean and enjoyable environment. Our team members focus on offering solutions to our guests through food pairings and inviting displays.

We were named the #1 customer’s best supermarket in the 2021 USA Today 10Best Reader’s Choice poll. The poll included all the top national supermarket brands and was open for voting this spring and the winners were announced on April 23, 2021. The survey covered consumer experiential brands across multiple industries such as food, lodging and travel destinations. Further, Consumer Reports rated us among the cleanest grocery stores in America in 2019 and Newsweek/Statista rated us #5 for best guest service in grocery in America in 2020. We believe our exceptional store conditions gained the trust of our guests especially during the COVID-19 pandemic as guests demanded and relied upon a safe environment where they could shop. We believe we were one of the first retailers to require all team members and guests to wear personal protective equipment in our stores. In addition, during the peak of the COVID-19 pandemic, our stores underwent a deep cleaning every day to ensure the safety of our team members and guests and continue to foster their trust.

Our approximately 10,000 non-union team members are our brand ambassadors that showcase the best of our offerings. The Fresh Market experience is brought to life because of the high-touch service provided to our guests. Approximately 50% of our team members are full-time which demonstrates our commitment to providing an exceptional work environment and ongoing support to our team. According to an internal survey of customers, 96% of guests were highly satisfied or satisfied with our service experience. In each of our stores, our team members are constantly ensuring our products meet our high-quality fresh standards. We have dedicated team members in each store who cut our fresh produce daily, our butchers prepare meats to our guests’ specifications and our chefs prepare ready-to-eat and ready-to-cook meals. Through a simplified organizational structure that provides a visible path to promotion, numerous training opportunities and increased store-level bonus eligibility, our team members are motivated and incentivized to create a memorable guest experience.

We have spent the last few years bringing The Fresh Market back to its roots of providing a highly differentiated specialty food offering and improving the in-store and omni-channel experience. Along with the Apollo Funds’ support and a strengthened new management team, with five additions to the senior leadership team in 2020 (including both Jason Potter as President and Chief Executive Officer and Jim Heaney as Chief Financial Officer), we have recently delivered exceptional financial performance. We believe our results for fiscal 2020 and our results for fiscal 2021 to date, while partly attributable to the positive impact of the COVID-19 pandemic on grocery retailers, also demonstrate the effectiveness of these initiatives in addressing challenges we faced at and immediately after our take-private transaction by the Apollo Funds in 2016, as well as broader changes in the food-at-home and food-away-from-home markets. We believe we are well positioned for continued strong performance. For fiscal 2020 compared to fiscal 2019, we achieved the following results:

 

   

Increase in sales from $1,523 million to $1,887 million, representing period-over-period growth of 24.0%;

 

   

Increase in net (loss) income from $(65.4) million to $26.9 million;

 

   

Total comparable store sales growth of 22.3%, which we believe is one of the highest growth rates compared to other publicly traded specialty retailers and traditional retailers in the food retail industry. This compares with a change in comparable store sales of (1.8)% for fiscal 2019. Transaction count (i.e., the number of discrete sales transactions during the applicable time period) growth was (3.0)% for fiscal 2020, compared to (3.4)% for fiscal 2019; and

 

   

Increase in Adjusted EBITDA from $118.0 million to $219.4 million, representing period-over-period growth of 86.0%.

 

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For the first quarter of fiscal 2021, our comparable store sales grew 7.3% compared to 12.9% for the prior year, with transaction count growth of 13.7%, and tonnage was up 4.6% compared to the prior year. Sales were $489 million (compared to $447 million in the prior year), net income was $10.5 million (compared to $(15.6) million in prior year), Adjusted EBITDA was $55.8 million (compared to $52.6 million in the prior year) and Adjusted EBITDA margin was 11.4% (compared to 11.8% in the prior year).

Adjusted EBITDA is a non-GAAP financial measure. For a description of our non-GAAP financial measures and a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

Our Industry

 

Our distinctive offering allows us to compete in both consumer occasions for food-at-home and food-away-from-home. During fiscal 2020, we believe our increased net sales resulted from market share gains from food competitors (grocery and restaurants) due to our premium and fresh offering as well as the increased food-at-home spending during the COVID-19 pandemic. Additionally, the closure of more than 70 competing stores in our core markets contributed to these gains.

 

We believe that consumer focus on high-quality fresh and specialty foods, as well as natural and organic offerings, will continue to benefit our brand. Based on research from the Specialty Food Association and calculations from the USDA, Economic Research Service, specialty food spending grew at a historical compound annual growth rate (“CAGR”) of 7.1% from 2017 to 2020 versus total food-at-home spending of 4.9% (Note that the foregoing CAGR includes the positive impact on food retailers of the COVID-19 pandemic in 2020; for 2019-2020, specialty food spending grew 13.3% and food-at-home spending grew 8.5%). For purposes of this study, “specialty food spending” is defined as spending on food, beverages, and confections that are of the highest grade, style, and/or quality in their respective categories, and the “broader industry” as supermarkets and grocery stores that retail general lines of food product, as well as delicatessens primarily retailing food. According to Nielsen, our core product categories of meat, produce, and prepared foods have grown 7.4%, 7.6%, and 6.2%, respectively, from 2017 to 2020. We believe there is no other retailer offering our differentiated assortment, with many conventional grocers primarily sourcing from commoditized consumer brands in contrast to our specialty, value-added fresh food and locally relevant product offerings.

 

 

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We believe, based in part on our performance to date in fiscal 2021, that we will continue to benefit from industry trends through alignment with changing consumer preferences:

 

   

Consumer focus on high-quality fresh foods as well as natural and organic offerings

 

   

Omni-channel capabilities

 

   

Significant shift in consumer demand from food-away-from-home to food-at-home

 

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Our Competitive Strengths

High-quality offering focused on fresh food that is differentiated from conventional grocery

We are intensely focused on curating an assortment of what we believe are the freshest available foods and specialty items in a small, convenient, intimate store. In a recently conducted guest survey, 81% of the respondents rank our quality and freshness as Excellent or Very Good compared to an average statistic of 68% for a select number of competitors within a 10-mile radius. We believe our high-quality fresh food offering can be a true source of differentiation. For example, 42% of our beef sales come from prime meat while we believe many of our competitors do not offer prime meat. Within our fresh food offering, we believe our expertly prepared, value-add food further differentiates us versus competitors. We offer our guests the convenience of pre-cut fruit and vegetables and pre-seasoned meats that save preparation time, as well as curated meal offerings.

In addition to our sourcing relationships with national distributors, we work with local farmers to procure in-season produce from the Carolinas, Florida, Georgia, and Virginia. Our partner growers allow us to bring in limited edition, heirloom products such as the sweetest batches of berries from Florida and the Carolinas. Our Peak of Flavor program allows guests to choose ripe avocados and bananas that can be enjoyed that night or fruit that will peak in a day or two. Internationally sourced produce is flown in (versus transported by boat) for premium items like Tasmanian cherries or stone fruit from South America.

We offer restaurant-quality meals

While our high-quality, premium fresh food serves as the basis to our differentiation, we take a step further to curate meals-focused offerings that are distinct from other grocers or food retailers. Examples of our meals offering include Market Meal Kits (provides ingredients and recipes for 20-minute one-pan preparation, perfect for convenience-focused guests looking for daily meal ideas), Little Big Meals ($25 offering to feed a family of four, offering a high-quality meal at an exceptional value), and the special dinner programs (restaurant quality dinner programs especially highlighting our superior meat and seafood offerings). Our Market Meal Kits, one of the fastest growing offerings, are assembled in-store, with fresh meats and vegetables cut by hand and expertly paired with sauces and ingredient packs. Sales of Market Meal Kits grew by approximately 45% in fiscal 2020 and by 27% in the first quarter of fiscal 2021. As an example, our Honey Balsamic Pork meal kit features pork tenderloin medallions with honey balsamic glaze, green beans and mashed sweet potatoes to create a delicious dinner in 20 minutes. We also suggest wine and dessert pairings to accompany many of our curated meal offerings. Our meals for special occasions include family dinners for the important holidays and the ultimate special dinner or brunch. Sales from our meals for special occasions grew by approximately 105% in fiscal 2020 and by 11% in the first quarter of fiscal 2021. We believe our commitment to delivering the best quality curated meal offerings helped us to win with both existing and new guests who experienced a heightened engagement with food-at-home in 2020, and our curated meal offerings accounted for approximately 15% of sales in fiscal 2020 and revenue growth of approximately 30% year-over-year for the first quarter of fiscal 2021.

 

 

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The Fresh Market strives to be the go-to food destination for entertaining needs, especially during the holiday seasons. We believe this is a result of our high-quality food offering that meets the expectation for special occasions as well as our attractive holiday meals programs. From intimate dinners to large catered gatherings, The Fresh Market has you covered. Our Dinner for Two on Valentine’s Day offers guests the ability to create a romantic meal at home with a prime Chateaubriand steak and Chilean Sea Bass. For tailgating at home, we offer our fan favorite platter including pot roast and caramelized onion sliders, pepperoni pinwheels with all the appetizers and fresh baked cookies. We believe we are our guests’ number 1 destination for holiday and special occasion meal offerings which results in significantly increased sales during holiday weeks compared to non-holiday weeks.

Conveniently located, easy to navigate small-box format

Our fresh-focused offering is complemented by our small-box stores in established neighborhoods that are close to our target, higher-income guests with average annual household income of over $75,000. We address on-the-go consumer demand for convenience through simple in-store navigation. Average stores are approximately 21,000 square feet versus a conventional food retailer at approximately 60,000 square feet, which allows us to fit in high-density areas where conventional food retailers cannot. The store ambiance is an Old World European marketplace layout with an elevated, sensory experience with fresh aromas, classical music, spotlights, and exceptional cleanliness. We generate very productive marketing and, per the Integrated Insight Survey, achieve an 86% household brand awareness in our markets. In addition, the small-box format in high-population density areas near our guests’ homes supports our convenience-focused curbside-pickup business, which we believe is an important part of providing our guests with an omni-channel shopping experience.

We operate 159 stores on the East Coast and in the Midwest, with our core market being the Southeastern portion of the United States. We benefit from attractive operating dynamics in the Southeast, including lower labor costs and exposure to stronger growing demographics and metropolitan statistical areas (“MSAs”). We believe there is significant whitespace to expand unit count with 75 immediately actionable opportunities within our core markets and an opportunity to double our store count over the next 10 years.

Loyal guest following with attractive demographics

Our customers have a heightened engagement with food and actively seek out high quality fresh and perishable items. According to the Integrated Insight Survey, 37% of our target market will pay more for high quality food and value high quality fresh foods more than getting a deal on other products. We attract guests from a high-income demographic who seek out and have a higher willingness to pay for high quality, fresh food. Approximately 62% of our guests have an average household income above $75,000. Households that have shopped with us have exhibited higher monthly grocery spending than households that do not shop with us.

We have attracted a loyal guest following with our top 10% of guests representing almost 60% of our revenue in fiscal 2020. This population’s heightened engagement with food has been one factor in our strong fiscal 2020 and fiscal 2021 to date performance, as our guests have reported more significant increases in their level of spending and shopping frequency compared to non-guests. Additionally, our guests are vocal advocates for our brand—approximately 92% of survey respondents who shop our stores indicated a likelihood to recommend us. This likelihood to recommend has converted to our reputation spreading by word of mouth, as survey respondents listed a recommendation by a friend as the most common reason for their first visit to our stores. According to the Integrated Insight Survey, over three-quarters of our target market expects to maintain or increase their level of food spending even after the COVID-19 pandemic subsides, and we believe based on the foregoing that we are well positioned to compete for a significant portion of this food spending.

 

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Dedicated store team members making guest experiences enjoyable

Our team members are passionate about quality food and love to highlight unique items within our stores, promoting the treasure hunt discovery experience that we provide. We utilize an extensive training program to encourage personalized service to our guests and each of our stores has on average 36 expertly trained team members. Approximately 50% of our team members are full-time with a high level of retention and an established, clear path to promotion. None of our team members are subject to collective bargaining agreements. In response to the COVID-19 pandemic, we quickly set a high standard for safety and sanitation within our stores. Due to our store team members’ unrelenting focus, 96% of surveyed guests gave us positive ratings for cleanliness and we had 96% customer satisfaction. Furthermore, since 2019, our overall guest satisfaction has increased, our food quality scores have risen to over 80%, and our guests have indicated increasing scores for likelihood to return and recommend our stores.

Our leadership team has revamped our culture to (i) ensure our stores have the freshest available products and offer quality guest service in a clean and safe environment and (ii) be extremely nimble and entrepreneurial in trying out various initiatives to improve our guests’ experience. Such measures include investing in guest wait time so that no guest has to wait longer than 30 seconds to check out and increasing team member training to provide for a better guest experience. At the corporate level, we have elevated our Head of Food Safety to directly report to our CEO given our enhanced focus on guest experience and guest loyalty. In our stores, we have streamlined and simplified direct reports to our store managers so that they can better focus on assisting guests and delivering on our in-store experience. Store team members have access to a number of training resources and are encouraged to grow within the organization. We also foster an environment of transparency, where all store and corporate office team members participate in weekly town halls with the CEO and management team.

Strong financial profile

Our management team and the Apollo Funds have taken significant steps in order to address challenges we have faced and to position us for long-term and sustainable growth, and we believe our results for fiscal 2020 and our results for fiscal 2021 to date demonstrate the benefit of these steps. These steps include changes to the management team; refocusing TFM’s merchandise offering on high quality fresh food and difficult-to-find specialty items while also introducing new curated meal offerings; actions to enhance in-store operational execution; exiting unprofitable stores in non-core markets such as California and Texas; changes in pricing strategy for TFM’s frequently shopped products; and implementing upgraded technology.

Our differentiated strategy of offering a fresh-focused, premium product mix, together with strategic initiatives focused on cost optimization in labor, shrink, and procurement are designed to provide an attractive margin profile compared to other more traditional food retailers. Sales were $1,887 million, $1,523 million and $1,595 million for fiscal 2020, fiscal 2019 and fiscal 2018, respectively, for a CAGR over this period of 9%. Gross margins were 34.9% in fiscal 2020, compared to 31.5% and 33.2% in fiscal 2019 and 2018, respectively. In the same three fiscal years, Adjusted EBITDA was $219 million, $118 million, and $101 million, for a CAGR over this period of 47%, and Adjusted EBITDA margins were 11.6%, 7.7% and 6.3%. In addition, savings from the cost initiatives can be reinvested in the business to further drive profitable growth. For fiscal 2020, fiscal 2019 and fiscal 2018, we reported net income (loss) of $26.9 million, $(65.4) million and $(78.6) million, respectively. For the first quarter of fiscal 2021, sales were $489 million (compared to $447 million in prior year), gross margin was 35.5% (compared to 34.5% in the prior year), net income was $10.5 million (compared to $(15.6) million in the prior year), Adjusted EBITDA was $55.8 million (compared to $52.6 million in the prior year) and Adjusted EBITDA margin was 11.4% (compared to 11.8% in the prior year). For further information, including a discussion of Adjusted EBITDA margin and a reconciliation of Adjusted EBITDA to net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

 

 

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At the store level, average unit sales, or AUV, were $11.9 million, $9.5 million and $9.7 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, and 99% of our stores were profitable in fiscal 2020 (compared to 93% and 92% in fiscal 2019 and fiscal 2018, respectively). For the first quarter of fiscal 2021, 99% of our stores were profitable (compared to 97% in the first quarter of fiscal 2020). We believe we are one of the most productive food and specialty retailers on a profit-per-square-foot basis when also taking into consideration real estate ownership.

We incurred a significant amount of debt in connection with the Acquisition and in the years following ($934.0 million outstanding as of January 31, 2021, with debt service obligations of approximately $90.0 million for fiscal 2021). We intend to use the proceeds of this offering to refinance a significant portion of this debt, which will reduce our ongoing debt service obligations.

Our improved financial performance generated strong cash flow from operations of $152.2 million in fiscal 2020. Our net capital investment required to support the business over the same period was $25.7 million or less than 17% of the cash flow from operations. The end-of-year cash balance in fiscal 2020 increased to $206.4 million which is up over 50% versus the end-of-year cash balance in fiscal 2019. As of the end of the first quarter of fiscal 2021, our cash balance was $189.8 million.

 

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Our Competitive Strengths and Initiatives Are Proven by Our Results

Our average weekly sales (excluding holidays sales, which are generally well above non-holidays sales) continue to grow, and we believe this is in part a result of our competitive differentiation and our initiatives have resonated with our guests. Even in major markets where COVID-19–related restrictions have begun to be lifted and the numbers of seated diners in restaurants have begun to return to pre–COVID-19 levels, as indicated in the chart below (which markets represent approximately 50% of our stores), weekly sales have continued to grow even if at slower rates. For the first quarter of fiscal 2021, comparable store sales growth was 7.3% (compared to 12.9% for the first quarter of fiscal 2020). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidated Results of Operations—Thirteen Weeks Ended May 2, 2021 Compared to the Thirteen Weeks Ended April 26, 2020” for a discussion of the change in comparable store sale growth compared to fiscal 2020. Additionally, 9.6 million new credit/debit cards were used by customers at our stores between April 2020 and June 2021 and approximately 30% of total credit/debit cards used per month over the same period were new cards. We believe that this data supports the momentum in our sales and highlights an opportunity for us to retain a significant number of new customers.

 

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Our Growth Strategies

We see a significant opportunity to drive long-term growth across our business by executing on the following growth strategies:

Further invest behind key capabilities to provide a consistent guest experience and drive comparable store sales growth

We will continue to invest in our highly differentiated offering

We have seen strong momentum in our business in fiscal 2020 and fiscal 2021 to date and we believe we have an opportunity to showcase our enhanced, differentiated shopping experience to our existing and new guests. While our strong performance is partly attributable to the positive impact of the COVID-19 pandemic, and the percentage increases in comparable store sales growth have declined as the pandemic subsides, we believe we are capturing market share in the food-at-home and food-away-from-home markets through continued leadership in our high-quality, fresh premium offerings and innovation in curated meal offerings. We believe that delayed recovery in the restaurant industry and lack of differentiation in the conventional grocery space provide an opportunity for additional market share gains. We have been focused on “owning tonight’s meal” (being top-of-mind to the consumer when it comes to planning and purchasing dinner), and continue to innovate with the introduction of new items and dining occasions to increase relevance to consumers.

We will continue our efforts to systematically upgrade the quality and freshness of our products, with a focus on the produce category. Our produce buyers work directly with growers and have developed long-term relationships to ensure we procure many of the sweetest berries, the finest fruits, and the greatest variety of vegetables. We have launched an extensive training course for the members of the produce department so they can learn how to become produce “gurus,” learning to offer suggestions and tell guests about the story behind the food. These initiatives have resulted in an increasing score on produce satisfaction in guest surveys (from 92.7% in fiscal 2019 to 94.5% in fiscal 2020) and in produce unit growth of 31.4% outpacing total unit growth of 21.7% during fiscal 2020. We believe the continued focus on instituting a systematic approach to improving quality and freshness will accelerate comparable store sales growth.

Our new “Kitchen Square” concept targets the substantial opportunity to serve our guests in ready-to-eat dining occasions. We expect to pilot this new concept in two to three stores in fiscal 2021 by redesigning the layout of the floorspace to allow for a completely new restaurant look and feel. This will become a convenient destination for dine-in, order ahead and “grab and go”–focused guests. An inviting atmosphere filled with inspiring selections will transition throughout the day from a morning coffee and croissant, to a made-to-order salad for lunch, to a pizza and real Carolina BBQ for dinner. The goal is to provide additional restaurant quality choices for our guests and attract a younger demographic to our stores.

 

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Similarly, we are investing in our ready-to-cook curated meal offerings, with a $7 million capital investment into Market Meal Kit walk-around cases in 120 of our stores. We expect this investment to have a payback period of less than 3 years as Market Meal Kits are a key driver in building a bigger basket. These cases provide access to Market Meal Kits, Little Big Meal, Create Your Own Kit, and Ready-to-Heat options. Our Market Meal Kits are assembled in-store, with meats and vegetables cut by hand and expertly paired with sauces and ingredient packs. We also suggest wine and dessert pairings to accompany many of our curated meal offerings.

We have reduced prices across approximately 50 items our guests purchase frequently, such as bananas, avocados, milk and others, so that our most basic items are now priced competitively. In the last year, we have invested approximately 70 basis points of merchandise margin across a number of categories in all our stores, and we plan to continue to reinvest price back in a clinical manner to benefit our guests in select products where price matters the most. We are also pursuing center-of-the-store re-alignments which will optimize shelf space and increase sales productivity by enabling the application of computer-generated ordering. We believe this in turn will improve margin through standardization of shelf alignment and a reduction in shrink.

Improvement of in-store execution and operations will further drive sales and productivity

We are working to enhance profitability by improving our operational efficiencies. We will continue to optimize our merchandise presentation through strategic store remodeling and enhanced visual storytelling. We are installing computer-generated ordering software to improve inventory management, increase our in-stock position and build on our demand forecasting abilities. We are developing engineered labor standards to ensure the right resources are in the right place at the right time to optimize our service levels. These operational improvements will not only drive efficiencies, but will also ensure a more consistent and delightful guest experience.

Our team is constantly evaluating the right in-store presentation to deliver the best experience to our guests. To that effect, we will continue to pursue store refreshes with attractive returns, focusing on enhanced produce refrigeration, aspirational displays, walk-around cases highlighting our curated meal offerings, and new point of sale machines in all 159 of our stores. We plan to finish five store refreshes in fiscal 2021, targeting return on invested capital of greater than 20%. Over the next five years we expect to have modernized more than 75 stores with varying degrees of capital to strengthen our brand, especially in areas where we are adding new stores.

Our exemplary guest service scores are a direct result of our talented and motivated in-store managers and team members. We have recently completed a realignment of our reporting and compensation structure to increase accountability and further incentivize performance. We have seen a significant increase in performance by raising the number of team members that are eligible for store-based performance bonuses. The simplified store organizational structure has increased transparency into promotion opportunities as we look to develop talent through investments in training and performance reviews. Our team members are a critical component of our growth story, providing high-touch service to support our specialty offering.

We are constantly evaluating our operations to identify areas for improvement in our cost structure while also enhancing the guest experience. At the store level, we are introducing engineered labor standards which will more efficiently allocate our highly talented team members, create labor efficiencies between departments and improve overall engagement with our guests. Maximizing the freshness of our high-quality offering while minimizing out-of-stock items is key to ensuring a consistent guest experience. We have engaged in the implementation of an automated demand forecasting system to ensure our best-selling products are available for our guests while also reducing shrink from over-ordering. Continued performance against our growth initiatives will result in additional margin benefit as we leverage our corporate and store overhead, part of which will be reinvested into the business.

 

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Focusing our marketing to deepen engagement with our guests

We have significantly increased our marketing efforts through targeted digital campaigns, innovative print content and aspirational signage. Our brand benefits from an attractive household brand awareness, which per the Integrated Insight Survey, reached 86% in our markets. To further engage with our loyal guest base, we plan to use targeted marketing campaigns employing a variety of channels, including loyalty marketing, email marketing, social media marketing, geo-targeted mobile ads, and in-store marketing. We want to leverage our marketing and eCommerce platforms to help guests discover our new products and menus for “tonight’s meal” and for all their special meal occasions and events. In fiscal 2020, we increased our marketing spend by approximately 60% and we expect to continue investing in our marketing spend. In fiscal 2021, we plan to have our marketing team run campaigns to protect market share where our competitors are entering with new stores.

Capitalize on substantial whitespace opportunity with a focus on expanding store footprint through de-risked in-fill opportunities

We made a strategic decision to pause new store openings over the last three fiscal years to focus on our core business. While we believe our business is now on a sustainable growth trajectory and with tremendous momentum, we plan on returning to a disciplined store growth strategy. Our methodology for selecting new sites includes an analysis of population and spending data, existing competitors and rigorous site level standards. Our internal analysis, in concert with our real estate advisors, has resulted in a methodical, multi-stage expansion plan that focuses on stores within our core market in the Southeast.

Our primary focus is to expand into in-fill locations and surrounding metro areas within core markets. Examples of our near-term focus area include Florida and the Carolinas. We believe our core near-term opportunities include approximately 75 locations and offer high visibility into low-risk expansion. Existing store AUVs above our average in combination with strong market share performance within our core Southeast geography supports the viability of our expansion. These 75 locations provide an ample pipeline for our near-term store openings and exceed the number of new store openings planned for the next five years.

We believe we have the ability to expand beyond our core markets in the long term, by increasing the penetration of our secondary markets and expansion of our core geographies. We plan to open one new store in fiscal 2021 and an average of approximately 10 new stores per year for the following four years.

We seek to open new stores with the following economics:

 

   

Sales per new store of $12 to $13.5 million per year

 

   

Store-level EBITDA margins of 11% to 13%

 

   

Total capital cost per new location of $5.5 to $6.5 million

 

   

Return on invested capital of approximately 25% and a payback period of approximately 4 years

Store-level EBITDA Margins, for any period, are calculated as Store-level EBITDA (which excludes corporate expenses allocated to a store) divided by the store’s sales; return on invested capital is computed as Store-level EBITDA divided by our initial cash investment in the store.

Enhance guest engagement with a full-scale loyalty program and improved eCommerce capabilities

We expect to launch a loyalty program in the fall of fiscal 2021. In order to promote our loyalty program, we intend to leverage our existing database of over 1.75 million email addresses currently subscribed to our digital promotions to drive conversion and penetration early on. The program will center around experiential

 

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rewards and personalized use cases that reinforce our brand, with the goal of increasing visit frequency and basket size for all guests. Through a points accumulation system, our top guests will enjoy the benefit of targeted savings for their loyalty and continued support of The Fresh Market. Our goal would be to reinvest the EBITDA impact of the resulting sales uplift back into the program so that it is a self-sustaining initiative.

Our loyalty program is designed to replicate the signature TFM discovery and “joy of shopping” experience by educating, surprising, delighting and rewarding guests who join the loyalty program including: (i) special loyalty pricing and personalized offers, (ii) promotions and giveaways, (iii) curated clubs and rewards, (iv) social giving and (v) earning special personalized experiences with our distinguished roster of curators and taste makers. Extensive consumer acceptance testing of the loyalty program prototype completed in fiscal 2020 indicated that our loyalty program member guests would visit more often, spend more on each visit, purchase more items per visit and would shift more of their visits to TFM from competitors’ stores where they shop. Importantly, these guests stated that the program enhanced their perception of the TFM brand, our value and our commitment to our guests and communities and that they are eagerly awaiting the launch of our first-ever loyalty program. In addition, the loyalty program will deliver a previously unavailable, robust level of guest purchase behavior data that will inform future merchandising, marketing and operating strategies.

We are in the process of redesigning our eCommerce sales portal, a project that began in the second half of fiscal 2020. We believe this program and improvements to our curbside-pickup experience with our Personal Shopper store team members hand-picking products has significantly increased our eCommerce sales. We believe curbside pickup will be the driver of growth within our digital business, where we can differentiate the experience through our expertise in high-touch guest service. Our continued efforts in our omni-channel capabilities have resulted in average penetration of 5.6% in fiscal 2020 and 5.4% in the thirteen weeks ended May 2, 2021.

Preliminary Financial Results for the Quarter-to-Date ended July 11, 2021

Based on preliminary financial information for the quarter-to-date period through July 11, 2021 (ten of the thirteen weeks comprising our fiscal second quarter ending August 1, 2021), we estimate comparable store sales increased by 1.0%. In addition, we estimate gross margins were below the comparable period in fiscal 2020 due to higher costs from above normal levels of inflation and higher shrink. Operating expenses are also estimated to be higher in the current year period due to lapping unusually low costs in the prior year period and investments in store labor made in the second half of 2020 and early 2021 to support higher sales and increased service levels. Corporate expenses are also estimated to increase over the prior year period for public company readiness and additional labor to support the Company’s growth initiatives and new store development.

Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding the factors and trends affecting our business. Our expected results described above reflect our current estimates for such period based on information available as of the date of this prospectus. We believe that the estimated comparable store sales is important to an investor’s understanding of our performance, notwithstanding that we are not yet able to provide estimated income from operations or net income data. Our independent registered public accounting firm, Ernst & Young LLP, has not audited or reviewed, and does not express an opinion with respect to, this data. Our actual results may differ from these estimates due to the completion of our financial closing procedures and final adjustments and other developments that may arise between now and the time our final financial statements are completed after this offering is consummated.

Revolving Credit Facility Commitment

On July 13, 2021, The Fresh Market entered into a commitment letter with a group of banks with respect to a $100.0 million senior secured revolving credit facility (the “Revolving Credit Facility). It is expected that the Revolving Credit Facility will be in place concurrently with the closing of this offering, subject to the satisfaction

 

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of certain closing conditions, and will mature on the date that is five years after the closing of this offering (subject to a springing maturity if certain material indebtedness is not refinanced prior to the maturity date thereof).

The banks party to the commitment letter, each of whom will act as a joint lead arranger, consist of Credit Suisse AG (acting through such of its affiliates or branches as it deems appropriate, “CS”) and Credit Suisse Loan Funding LLC (“CSLF” and, together with CS, “Credit Suisse”), Bank of America, N.A. (acting through such of its affiliates as it deems appropriate, “Bank of America”), BofA Securities, Inc. (acting through such of its affiliates as it deems appropriate, “BofA Securities”), Barclays Bank PLC (“Barclays”), Royal Bank of Canada (“RBC”), RBC Capital Markets (“RBCCM”), Bank of Montreal (together with its designated affiliates, “BMO”), BMO Capital Markets Corp. (together with its designate affiliates, “BMOCM”), Deutsche Bank AG New York Branch (“DBNY”) and Deutsche Bank Securities Inc. (“DBSI” and together with DBNY, “DB” and, together with Credit Suisse, Bank of America, Barclays, RBC, BMO, BMOCM and DB, the “Banks”). Credit Suisse will act as agent for the Banks under the Revolving Credit Facility. Each of the Banks is an affiliate of an underwriter in this offering.

The Revolving Credit Facility will allow The Fresh Market to borrow from time to time in an aggregate amount outstanding not to exceed $100.0 million (subject to provisions for increases in such amount). Loans may be used for general corporate purposes and up to $40.0 million of the Revolving Credit Facility will be available to back letters of credit issued under the facility. We expect to use letters of credit under the Revolving Credit Facility to replace approximately $22.5 million of outstanding cash-collateralized letters of credit, which will release the cash currently securing such letters of credit. Loans will bear interest at floating rates based on adjusted LIBOR or ABR, as applicable, plus a specified margin.

The Revolving Credit Facility will require The Fresh Market to maintain a specified minimum net first lien leverage ratio, measured on a quarterly basis (starting with the first full fiscal quarter after the closing of the Revolving Credit Facility) if the aggregate amount of outstanding borrowings under the Revolving Credit Facility and letters of credit issued thereunder (excluding $25 million of undrawn letters of credit and cash collateralized letters of credit) as of the last day of the applicable fiscal quarter is greater than 35% of the Revolving Credit Facility commitments. In addition, it will include customary covenants, including restrictions on indebtedness, dividends and stock repurchases, investments, acquisitions and dispositions, liens, and transactions with affiliates.

The Revolving Credit Facility will be guaranteed by all existing and future wholly owned material domestic subsidiaries of The Fresh Market (subject to customary exceptions) and secured on a first priority basis (subject to permitted liens) by a lien on the same assets that secure the Senior Secured Notes (as defined herein). The Revolving Credit Facility and Senior Secured Notes will be subject to a customary intercreditor agreement for pari passu debt.

The closing of the Revolving Credit Facility is subject to the closing of this offering, the refinancing of the New Superpriority Secured Notes (as defined herein) and certain other customary closing conditions.

Apollo Global Management and the Berry Family

We believe we benefit from Apollo’s food retail expertise, their support on various strategic initiatives and their ability to attract talented senior management to our organization. Moreover, we believe the continued support of the Berry Family, with their long-standing influence and commitment to The Fresh Market is integral to our continued success. Both the Apollo Funds and the Berry Family will continue to have significant ownership positions in the Company following the completion of this offering. For information regarding the Apollo Funds and the Berry Family’s ownership in us after this offering, see “Principal Stockholders.”

Apollo Global Management.

Founded in 1990, Apollo is a leading alternative asset manager with 15 offices globally in New York, Los Angeles, Houston, San Diego, Bethesda, London, Frankfurt, Luxembourg, Madrid, Singapore, Hong Kong,

 

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Shanghai, Tokyo, Delhi, and Mumbai. As of March 31, 2021, Apollo had assets under management of approximately $461 billion in its affiliated private equity, credit-oriented capital markets, and real assets funds invested across a core group of industries where Apollo has considerable knowledge and resources.

Apollo Funds are one of the most active private equity investors in retail and consumer businesses, especially in the food retail sector, with a best-in-class track record of generating equity value for stockholders. Apollo Funds’ investments in retail and consumer sectors include or have included The Fresh Market, Smart & Final, Albertsons, Sprouts Farmers Markets, Hostess Brands, Ralphs Grocery Company, Dominick’s Supermarkets, General Nutrition Centers, Qdoba Restaurant Corporation, CKE Restaurants (parent company to Carl’s Jr. and Hardee’s), among others. Apollo Funds’ investments in the food retail sector over the last 20 years have been led by Apollo Senior Partner Andrew Jhawar, who is the current Chairman of the Board of The Fresh Market and Smart & Final, and who was the prior Chairman of the Board of Sprouts Farmers Market.

The Berry Family.

Ray Berry is the founder of The Fresh Market and served as President and Chief Executive Officer of the Company from 1981 until 2007. Prior to founding The Fresh Market, Mr. Berry held positions at numerous grocery and retail companies, including Vice President of Stores at The Southland Corporation (former parent of 7-Eleven, Inc.) where he was responsible for the operations of approximately 4,000 7-Eleven stores. Ray Berry’s son Brett Berry has also served in various roles at The Fresh Market including as Chief Executive Officer from 2007 until 2009. The Berry family has been a longtime stockholder and a strategic sponsor of The Fresh Market.

Corporate Information

We were organized under the laws of the State of Delaware as a corporation on March 29, 2016. Our principal executive offices are located at 300 N. Greene Street, Suite 1100, Greensboro, North Carolina 27401. Our telephone number is (336) 272-1338. Our website is located at www.thefreshmarket.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus.

 

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The Offering

 

Issuer

The Fresh Market Holdings, Inc.

 

Common stock offered by us

            shares (or                shares, if the underwriters exercise their option to purchase additional shares of common stock in full as described below).

 

Option to purchase additional shares

We have granted the underwriters an option to purchase up to an aggregate of                  additional shares of common stock from us at the initial public offering price, less underwriting discounts and commissions. The underwriters may exercise this option at any time within 30 days from the date of this prospectus. See “Underwriting (Conflicts of Interest).”

 

Common stock to be outstanding after this offering

            shares (or                shares if the underwriters exercise their option to purchase additional shares of common stock in full).

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $        million (or approximately $        million if the underwriters exercise their option to purchase additional shares of common stock in full), after deducting underwriting discounts and commissions, based on an assumed initial offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus).

 

  We intend to use the entire net proceeds from this offering, after underwriting discounts and commissions and offering expenses payable by us, to repay outstanding indebtedness. See “Use of Proceeds.”

 

Conflicts of Interest

The Apollo Funds beneficially own in excess of 10% of our issued and outstanding common stock. Because Apollo Global Securities, LLC, an Underwriter in this offering, is an affiliate of Apollo Management L.P. and the Apollo Funds, Apollo Global Securities, LLC is deemed to have a “conflict of interest” under Rule 5121 (“Rule 5121”) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly, this offering is being made in compliance with the requirements of FINRA Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest. Apollo Global Securities, LLC will not confirm sales of the securities to any account over which it exercises discretionary authority without the specific written approval of the account holder. See “Underwriting (Conflicts of Interest).”

 

Controlled company exemption

Upon completion of this offering, the Apollo Funds will continue to beneficially own more than 50% of our outstanding common stock. As a result, we would be able to avail ourselves of the “controlled company” exemption under the rules of the Nasdaq from certain of

 

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the corporate governance listing requirements. We do not currently intend to avail ourselves of this exemption. See “Management—Controlled Company Exemption.”

 

Voting rights

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.

 

Dividend policy

We do not currently intend to pay dividends on our common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth. Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive covenants in the agreements governing our indebtedness, will be at the sole discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. See “Dividend Policy.”

 

Proposed stock exchange symbol

We intend to list our common stock on the Nasdaq Global Select Market under the symbol “TFM.”

 

Risk Factors

You should read the section titled “Risk Factors” beginning on page [24] of this prospectus for a discussion of the risks and uncertainties you should carefully consider before deciding to invest in our common stock.

The number of shares of our common stock to be outstanding immediately after the closing of this offering is based on                shares of common stock outstanding as of                 , 2021 and, except as otherwise indicated, all information in this prospectus, reflects and assumes the following:

 

   

assumes an initial public offering price of $                per share of common stock, the midpoint of the price range on the cover of this prospectus;

 

   

assumes no exercise of the underwriters’ option to purchase additional shares of common stock in this offering;

 

   

does not reflect any additional                shares of our common stock reserved for future grant under our new equity incentive plan, which we expect to adopt in connection with this offering; and

 

   

does not reflect any additional                shares of our common stock issuable upon exercise of outstanding options under our existing equity incentive plan.

 

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SUMMARY CONSOLIDATED HISTORICAL AND OTHER DATA

The following tables present our summary consolidated financial and other data as of and for the periods indicated.

The summary consolidated statements of operations data for the fiscal years ended January 31, 2021, January 26, 2020 and January 27, 2019, and the summary consolidated balance sheet data as of January 31, 2021 and January 26, 2020 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the thirteen weeks ended May 2, 2021 and April 26, 2020, and the summary consolidated balance sheet data as of May 2, 2021 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus, and are subject to normal year end audit adjustments. Our historical results are not necessarily indicative of the results that should be expected in any future period.

The summary historical financial data presented below are not necessarily indicative of the results that may be expected in the future and do not purport to project our financial position or results of operations for any future date or period, and should be read together with the information under the sections titled “Capitalization,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    Thirteen Weeks Ended     Year Ended  
  May 2, 2021
(Unaudited)
    April 26, 2020
(Unaudited)
    January 31, 2021     January 26, 2020     January 27, 2019  
  (dollars in thousands, except per share data)  

Consolidated Statements of (Loss) Income Data

         

Sales

  $ 489,468     $ 447,232     $ 1,887,452     $ 1,522,555     $ 1,595,448  

Cost of goods sold

    315,633       293,095       1,229,161       1,042,282       1,065,956  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    173,835       154,137       658,291       480,273       529,492  

Operating Expenses:

         

Selling, general and administrative expenses

    123,950       109,595       466,952       387,842       440,070  

Transaction and related costs

    563       102       16,460       1,414       (223

Impairments and store closure costs

    747       1,540       3,533       5,387       27,262  

Depreciation

    11,464       11,718       44,363       49,902       59,563  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    37,111       31,182       126,983       35,728       2,820  

Interest expense

    24,178       24,858       96,625       98,252       97,642  

(Gain) loss on extinguishment of debt

    —         7,572       (132     —         3,202  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    12,933       (1,248     30,490       (62,524     (98,024

Tax provision (benefit)

    2,436       14,384       3,576       2,893       (19,427
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 10,497     $ (15,632   $ 26,914     $ (65,417   $ (78,597
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data

 

Net Loss per share—basic and diluted

  $                       $                       $                       $                       $                    

Weighted-average shares outstanding—basic and diluted

                                                                                                                  

 

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    Thirteen Weeks Ended     Year Ended  
  May 2, 2021
(Unaudited)
    April 26, 2020
(Unaudited)
    January 31, 2021     January 26, 2020     January 27, 2019  
  (dollars in thousands, except per share data)  

Non-GAAP Financial Measures

 

EBITDA(1)

  $ 48,575     $ 35,328     $ 171,478     $ 85,630     $ 59,181  

Adjusted EBITDA(1)

    55,766       52,574       219,407       117,972       101,120  

Other Operating Data (unaudited)

 

Number of stores (at period end)

    159       159       159       159       161  

Percentage change in comparable store sales(2)

    7.3     12.9     22.3     (1.8 )%      0.4

Gross square footage at end of period (in thousands)

    3,362       3,362       3,362       3,362       3,410  

Average comparable store size (gross square feet)(3)

    21,147       21,147       21,147       21,169       21,152  

Comparable store sales per gross square foot during period(3)

  $ 146     $ 133     $ 551     $ 448     $ 449  

Balance Sheet Data (end of period)

 

Total Assets

  $ 1,471,760       $ 1,495,401     $ 1,437,787    
 

                

 

Total long-term obligations(4)

  $ 1,077,723       $ 1,079,079     $ 1,063,941    
 

                

 

Total stockholders’ equity

  $ 144,714       $ 134,489     $ 180,213    
 

                

 

 

(1)

EBITDA, a measure used by management to assess operating performance, is defined as net income plus interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA, another measure used by management to assess operating performance, is defined as EBITDA adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements. For a discussion of the use of these measures and further information, see the table below and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

(2)

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 15 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. Generally, a store is removed from comparable store sales in the period it is closed. Consistent with our historical practice, comparable store sales for fiscal 2020 includes sales from the first 52 weeks of fiscal 2020 and comparable store sales for the first quarter of fiscal 2021 is calculated using the thirteen weeks ended May 2, 2021 and May 3, 2020 for the first quarters of fiscal 2021 and fiscal 2020, respectively. There may be variations in the way that our competitors calculate comparable or “same store” sales. As a result, data in this prospectus regarding our comparable store sales may not be comparable to similar data made available by our competitors.

(3)

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.

(4)

Total long-term obligations as of May 2, 2021, January 31, 2021 and January 26, 2020 include our long-term indebtedness and operating lease liabilities.

 

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The following table provides a reconciliation of net income or loss as reported to EBITDA and Adjusted EBITDA:

 

     Thirteen Weeks Ended                    
     May 2,
2021
    April 26,
2020
    Fiscal
2020
    Fiscal
2019
    Fiscal
2018
 
    

(amounts in thousands)

 

Net income (loss) as reported

   $ 10,497     $ (15,632   $ 26,914   $ (65,417   $ (78,597

Depreciation

     11,464       11,718       44,363     49,902     59,563

Tax provision

     2,436       14,384       3,576     2,893     (19,427

Interest expense

      24,178       24,858       96,625     98,252     97,642
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 48,575     $ 35,328     $ 171,478   $ 85,630   $ 59,181

(Gain) loss on extinguishment of debt (1)

   $ —       $ 7,572     $ (132   $ —       $ 3,202

Non-cash share-based compensation (2)

     (272     19       406     (1,503     388

Impairments (3)

     —         —         —         6,009     3,094

Store closure costs (4)

     747       1,540       3,533     (622     24,168

Corporate severance and other charges (5)

     925       2,177       4,760     3,086     4,686

Non-cash rent expense (6)

     2,435       3,194       11,307     20,239     (144

Tenant allowance receipts (7)

     50       —         868     655     2,386

Amortization of favorable and unfavorable leases (8)

     —         —         —         —         466

Sponsor fees (9)

     375       402       1,533     1,598     1,635

Transaction and related costs (10)

     563       102       16,460     1,414     (223

Business optimization expenses (11)

     1,769       60       4,710     965     1,759

Litigation expenses (12)

     —         —         —         (9     165

Coronavirus expenses (13)

     518       2,121       4,041     —         —    

Loss on disposal of assets (14)

     81       59       443     510     357
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 55,766     $ 52,574     $ 219,407   $ 117,972   $ 101,120
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts recorded for the difference between the carrying value and redemption value of debt when the debt is extinguished.

(2)

Non-cash share-based compensation related to equity awards granted to our employees and independent directors. The net benefit for the thirteen weeks ended May 2, 2021 and for fiscal 2019 is due to forfeitures.

(3)

Impairment charges of stores or long-lived assets. See our Consolidated Financial Statements, Note 5, “Fair Value Measurements” in our Notes to the Consolidated Financial Statements, for further details.

(4)

Gains or losses upon disposal of property and equipment, reserve adjustments and other lease costs, liquidation of inventory, and other costs associated with store closures. See our Consolidated Financial Statements, Note 6, “Impairments and Store Closure Costs” in our Notes to the Consolidated Financial Statements, for further details.

(5)

Severance and related employee benefits associated with certain terminations of leadership positions as well as recruiting and on-boarding costs for replacements for certain positions.

(6)

Adjustments to account for (i) the difference in GAAP straight line rent expense and cash rent expense and (ii) the non-cash amortization of tenant allowances. Beginning with fiscal 2019 and the adoption of ASC 842, Leases, incremental non-cash rent expense was recognized primarily related to the amortization of the former favorable lease intangible assets over a shorter period, the remaining lease term, as required under ASC 842, Leases. The shorter amortization period resulted in incremental non-cash expense of $11.2 million in fiscal 2020 and $19.8 million in fiscal 2019 and is expected to result in incremental non-cash expense of $8.3 million in fiscal 2021, $5.2 million in fiscal 2022, and $3.2 million in fiscal 2023 assuming there is no subsequent re-evaluation of the lease terms for lease modifications that may occur in the future. See our Consolidated Financial Statements, Note 7, “Leases” in our Notes to the Consolidated Financial Statements, for further details.

 

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(7)

Cash received from landlords for tenant allowances.

(8)

Amortization of lease related assets and liabilities recorded as part of purchase accounting.

(9)

The annual management and other fees and related expenses, including those paid on a pro rata basis to an affiliate of Apollo and the Rollover Stockholders. See our Consolidated Financial Statements, Note 8, “Related-Party Transactions” in our Notes to the Condensed Consolidated Financial Statements, and Note 14, “Related-Party Transactions” in our Notes to the Consolidated Financial Statements, for further details. The obligation to pay such fees and expenses will terminate upon the completion of this offering and accordingly, the costs are not reflective of our ongoing performance post-offering.

(10)

The transaction and related costs in connection with our Acquisition in fiscal 2016, including litigation expenses associated with stockholder class action lawsuits. The fiscal 2020 amount includes a $15.1 million settlement charge for a stockholder class action lawsuit associated with our Acquisition. See our Consolidated Financial Statements, Note 8, “Related-Party Transactions” in our Notes to the Condensed Consolidated Financial Statements, and Note 15, “Commitments and Contingencies” in our Notes to the Consolidated Financial Statements, for further details.

(11)

Costs related to our business optimization projects, which we expect to be non-recurring. Items included in this line item are discrete charges that are primarily related to third-party assessments of various strategic business processes and the related implementation. A breakdown of major business optimization projects is presented below:

 

     Thirteen Weeks Ended                       
     May 2, 2021     April 26, 2020      Fiscal
2020
     Fiscal
2019
     Fiscal
2018
 
    

(amounts in thousands)

 

Business Optimization

             

Operational process assessment and labor standards development

   $ 632     $ 60      $ 1,649    $ —        $ —    

Merchandising organizational analysis

     81       —          940      —          —    

Digital strategy

     609       —          752      —          —    

New Kitchen Square concept

     241       —          698      —          —    

IPO readiness

     236       —          583      —          —    

Pricing strategy

     —         —          —          878      —    

Center store strategic resets

     —         —          —          46        1,578  

Other

     (30     —          88      41      181
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,769     $ 60      $ 4,710    $ 965    $ 1,759

 

(12)

Expenses related to wage and hour litigation.

(13)

Costs specifically attributed to the COVID-19 pandemic, including employee appreciation bonuses and paid time off while under a doctor-ordered quarantine.

(14)

Losses on the disposal of fixed assets at open store and corporate locations.

 

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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

AND SUMMARY OF RISK FACTORS

This prospectus contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally, but not always, identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. Our actual results and the outcome and timing of certain events may differ significantly from the expectations discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the factors set forth below:

 

   

Risks Related to Our Business and Industry

 

   

the impact of various operating factors and downturns or volatility in general economic conditions, including as a result of the current novel coronavirus (COVID-19) pandemic affecting the food retail industry;

 

   

the impacts of the relaxation of COVID-19–related restrictions and the return to normal operations for other food service businesses;

 

   

competition in our industry and our ability to compete successfully;

 

   

the impact of higher wage and benefit costs on our business;

 

   

our ability to attract, train and retain new team members;

 

   

the impacts of any union attempts to organize our team members;

 

   

our ability to achieve past levels of comparable same store sales growth;

 

   

our dependence on a few key third-party vendors to provide logistical services for our stores, including services related to inventory replenishment and the storage and transportation of many of our products;

 

   

our ability to return to a growth strategy or the burden of new stores on our existing resources;

 

   

the impacts of our significant lease obligations;

 

   

the impact of economic conditions on consumer spending;

 

   

the occurrence of, and our ability to respond to, any disruptions or compromises to our information technology, administrative, or outsourcing systems, including a security breach;

 

   

our ability to maintain the privacy and security of confidential customer and business information;

 

   

our ability to protect or maintain our intellectual property, including The Fresh Market trademark;

 

   

our ability to identify, source, and market new products that meet our high standards and customer preferences and our ability to offer our customers an aesthetically pleasing shopping environment;

 

   

our stores’ heavy reliance on sales of perishable products and the impact of ordering errors or product supply disruptions;

 

   

the impact of increased commodity prices on our profitability;

 

   

the geographic concentration of our stores in the southeastern United States and exposure to local economies, regional downturns or severe weather or catastrophic occurrences;

 

   

the impact of future consumer, employment or other litigation;

 

   

any future requirement to recognize store asset impairment charges and the impact of any decline in the fair value of an intangible asset or our business;

 

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the result of changes in accounting standards, subject assumptions and estimates by our management relating to complex accounting matters;

 

   

the impact of any insurance plan claims or actuarial estimates;

 

   

changes in energy costs;

 

   

unexpected side effects, illness, injury or death that could result from the products we sell and the potential discontinuance or exposure to lawsuits resulting from any such occurrences;

 

   

our ability to maintain our reputation and the value of our brand; and

 

   

changes in federal, state and local laws and regulations and our ability to comply with these laws and regulations.

 

   

Risks Related to Our Indebtedness

 

   

our ability to fund our operations and capital expenditures in light of our substantial indebtedness;

 

   

the impacts of our potential incurrence of additional indebtedness in the future;

 

   

our ability to generate sufficient cash to service our existing or future indebtedness;

 

   

the impacts resulting from any default by us on our indebtedness; and

 

   

volatility and weakness in bank and capital markets.

 

   

Risks Related to This Offering and Ownership of Our Common Stock

 

   

significant fluctuations in our stock price may occur;

 

   

our ability to incur significantly increased costs and devote substantial management time as a result of operating as a public company;

 

   

our ability to comply with requirements to design, implement and maintain effective internal control over financial reporting;

 

   

the effectiveness of our disclosure controls and procedures in detecting errors or acts of fraud;

 

   

the impacts of the Apollo Funds’ substantial control following the completion of this offering;

 

   

the impacts of being a “controlled” company under the rules of Nasdaq;

 

   

our reliance, as a holding company, on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations;

 

   

dilution resulting from this offering;

 

   

future dilution may result from the issuance of additional common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise;

 

   

there is no prior public market for our common stock, and there can be no assurances that a viable public market for our common stock will develop;

 

   

we do not anticipate paying dividends on our common stock in the foreseeable future;

 

   

the impacts if equity research analysts or industry analysts do not publish research or reports about our business, publish negative reports or change their recommendations regarding our stock adversely;

 

   

if we issue preferred stock, the terms of such preferred stock could adversely affect the voting power or value of our common stock;

 

   

our amended and restated certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities;

 

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anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under the Delaware General Corporation Law (“DGCL”) may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our stock; and

 

   

our designation of the Delaware Court of Chancery in our amended and restated certificate of incorporation as the exclusive forum for certain types of stockholder legal proceedings could limit our stockholders’ ability to obtain a more favorable forum for disputes with us or our directors, officers or team members.

These forward-looking statements are not statements of historical fact, and reflect our views based on current expectations, estimates and projections about the industry as well as certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in “Risk Factors” and the other cautionary statements included in this prospectus, which you should consider and read carefully. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus, and our future levels of activity and performance, may not occur and actual results could differ materially and adversely from those described or implied in the forward-looking statements. As a result, you should not regard any of these forward-looking statements as a representation or warranty by us or any other person or place undue reliance on any such forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus.

In addition, statements that contain “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that this information provides a reasonable basis for these statements, this information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

You should read this prospectus and the documents filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by the cautionary statements contained in this section and elsewhere in this prospectus.

 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. Any of the following risks could materially and adversely affect our business, financial condition and results of operations, in which case the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

Various operating factors and downturns or volatility in general economic conditions, including as a result of the current novel coronavirus (COVID-19) pandemic affecting the food retail industry, may disrupt our business and could negatively impact our financial condition.

The global outbreak of COVID-19 that began in the early part of 2020 and has recently resurged in many parts of the country has disrupted our business and could continue to do so for the foreseeable future until the impact of the pandemic subsides.

Although our grocery store operations are generally deemed “essential” operations by federal, state and local authorities, thereby allowing our stores to remain open despite government mandated stay-at-home or similar shelter-in-place orders, there can be no assurance that our stores will continue to be allowed by governmental authorities to remain open while the COVID-19 pandemic persists or if it worsens. A closure of stores would adversely impact our net sales, and any alleged failure to comply with such orders or any other governmental regulations promulgated in response to the COVID-19 crisis could result in costly litigation, enforcement actions and penalties and could also be harmful to our reputation. Even if our stores remain open, we have been required to implement restrictions on the number of customers allowed in our stores at a given time to promote social distancing. Store traffic may further decline as customers shop less frequently, choose other retail or online outlets to minimize potential exposure to COVID-19 or return to restaurants and other outlets to purchase and consume food as state economies reopen.

Although our operations have generally stabilized since the onset of the pandemic, there can be no assurances that the spread of COVID-19 will not strain our supply chain, store operations and merchandising functions in the future. This could create difficulties and delays in obtaining products from our distributors, delivering products to our stores and adequately staffing our stores and distribution centers. If we are unable to continue to source, transport and stock products in our stores or to maintain adequate staffing levels in our stores and distribution centers due to disruptions caused by the COVID-19 crisis, we will be unable to maintain inventory levels and continue to operate our stores at levels to meet customer demand. Further, if we do not identify and source appropriate products in response to our customers’ evolving needs during the COVID-19 crisis, we may lose existing customers and fail to attract new customers, which could cause our sales to decrease, resulting in a material adverse effect on our business, financial condition, results of operations and cash flows.

We may experience material and adverse impacts to our business and financial condition as a result of any economic recession or depression that has occurred or may occur as a result of efforts to curb the spread of COVID-19. For example, during March 2020 through April 2020, the United States experienced a rapid and significant increase in unemployment claims and other indications of a significant economic slowdown believed to be related to the COVID-19 pandemic. Consumers’ perception or uncertainty related to the economy, as well as a decrease in their personal financial condition, could hurt overall consumer confidence and reduce demand for many of our product offerings. Consumers may reduce spending on non-essential items, purchase value-oriented products or increasingly rely on food discounters in an effort to secure the food products that they need, all of which could impact our sales and profit.

 

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We have incurred, and expect to continue to incur, significant costs to support our store team members, including expenses for added labor, store bonuses, enhanced benefits and safety measures. If, as a result of the impact of the COVID-19 pandemic, we are unable to continue to provide our team member with appropriate compensation and protective measures, we may be unable to retain current or attract new team members to meet our needs. In addition, nearly all of administrative and our store support team members remain in a remote work environment in an effort to mitigate the spread of COVID-19. Our failure to provide appropriate technological resources and maintain adequate safeguards around our remote work environment could result in loss of productivity. In addition, the remote work environment may increase certain risks to our business, including phishing and other cybersecurity attacks.

We have experienced instances of our team members contracting COVID-19, and in response we follow CDC and other health authority guidelines to report positive test results and reduce further transmission. Any widespread transmission of COVID-19 among our team members within a particular store or geographical area might necessitate that we temporarily close impacted stores, which may negatively affect our business and financial condition, as well as the perception of our company. Further, if individuals believe they have contracted COVID-19 in our stores or believe that we have not taken appropriate precautionary measures to reduce the transmission of COVID-19, we may be subject to costly and time-consuming litigation.

Our growth plans for 2021 and beyond may be negatively impacted by the COVID-19 pandemic if our new store construction projects are placed on hold or delayed due to restrictions on construction work or constraints on necessary resources, and we expect such delays may continue for as long as the COVID-19 pandemic persists.

Measures taken by governmental authorities to reduce the transmission of COVID-19, including stay-at-home orders and business closures, as well as lack of subsequent economic stimulus initiatives, have resulted in wide-scale unemployment and financial hardship for a large portion of the U.S. population. Shifts in demand to lower priced options and reduced traffic from stockpiling in preparation for the pandemic or from consuming less food at home as restaurants and other businesses reopen may negatively impact sales in subsequent periods. The economic fallout of the COVID-19 pandemic on the geographic areas where we operate may adversely affect our business.

The full extent to which the COVID-19 pandemic impacts our business and financial condition will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic and the actions necessary to contain COVID-19 or treat its impact.

As certain restrictions imposed as a result of the COVID-19 pandemic are relaxed, and restaurants and other food service businesses begin to resume normal operations, consumers may prepare less food at home, which may adversely affect our business, financial condition and results of operations.

The global COVID-19 pandemic and its sudden and significant effects on the economy have and will continue to impact many of our customers, consumers and suppliers and, as a result, it has and will continue to impact us for an indeterminable period of time. We believe our fiscal 2020 results benefitted in part from the impact of the COVID-19 pandemic on our sales, although we are unable to provide a precise quantification of this positive impact. As a result, as more people across the country receive COVID-19 vaccines and “social distancing” measures and governmental directions to close non-essential businesses are relaxed, specifically with respect to the restaurant and hospitality industries, our operating results may be adversely affected by reduced consumer spending on groceries and food prepared at home and by increased competition. For a further discussion and comparison of our results of operations prior to and during the COVID-19 pandemic, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this prospectus.

We face intense competition in our industry, and our failure to compete successfully may have an adverse effect on our profitability and operating results.

Food retail is a large and competitive industry. Our competition varies and includes national, regional, and local conventional supermarkets, national superstores, alternative food retailers, natural foods stores, smaller

 

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specialty stores, and farmers’ markets. We also compete in the food-at-home and food-away-from-home markets. Each of our competitors competes with us on the basis of product selection and quality, customer service, store format, location, and price, or a combination of these factors. Some of these competitors may have been in business longer or may have greater financial or marketing resources than we do and may be able to devote greater resources to sourcing, promoting, and selling their products. We have seen an increase in pricing pressure on our products and, due to increasing competition, we may face continued pricing pressure on our products, which could have a material negative impact on our gross margin. In addition, a recovery in the restaurant industry as the COVID-19 pandemic subsides could adversely impact our recent market share gains in the food-at-home and food-away-from-home markets.

Some competitors are aggressively expanding their number of stores or their product offerings, including within our core markets in the southeastern United States. In their new or remodeled stores, our competitors often increase the space allocated to perishable food and specialty food categories, which are our core categories, and are lowering the prices of many of those items. If competitors are able to offer perishable and specialty products comparable to those we sell, while also offering a wide range of traditional grocery and non-food items that we do not sell, customers may reduce the number of trips they make to our stores. In addition, if competitors offer lower prices than we do, and we do not make competitive price changes in response, consumers may perceive us as a higher-priced merchant and shop us only on “special occasions,” or not at all. Increased competition in proximity to our existing or future stores also may make obtaining suitable sites for new stores and employee retention more difficult and could raise our occupancy costs and our cost of hiring and retaining qualified team members.

As a result of consumers’ growing desire to shop online, including as a result of the COVID-19 pandemic, we also face increasing competition from both our existing competitors that have incorporated the internet as a direct-to-consumer channel and online providers that sell grocery products and specialty foods. Although we have invested in growing our eCommerce platform, including to respond to increased customer demand as a result of the COVID-19 pandemic, and offering our customers the ability to shop online for curbside pickup, there is no assurance that these online initiatives will be successful. Moreover, we have incurred incremental eCommerce fees as more customers adopt our digital solutions, and expect to incur additional incremental costs if this trend continues. These initiatives may have an adverse impact on our profitability as a result of greater operating costs to compete.

As competition intensifies or competitors open stores within close proximity to our stores, our results of operations may be negatively impacted through a loss of sales, reduction in margin from competitive price changes, and greater operating costs, including increased marketing expense. Our response, or failure to respond effectively, to these competitive pressures could adversely affect our profitability and operating results. Further, any attempt by a competitor to copy or mimic our smaller-box format or operating model could materially impact our business, results of operations, and financial condition by causing a decrease in our market share and our sales and operating results.

Higher wage and benefit costs could adversely affect our business.

Increasingly, our wage and labor–related costs are potentially affected by federal, state, and local legislative or administrative actions. For example, the federal government has considered raising the national minimum wage, and various states and local jurisdictions have sought to increase retail employee wages by raising minimum wage rates or scheduling future increases in such rates, which may also cause wage rates above the minimum to increase in those markets. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our earnings to decrease. If we are unable to attract, train and retain team members capable of meeting our business needs and expectations, our business, brand image and ability to pursue growth opportunities may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our team members may adversely affect our business, results of operations, and financial condition.

 

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If we are unable to attract, train and retain team members, we may not be able to grow or successfully operate our business.

The food retail industry is labor intensive, and our success depends in part upon our ability to attract, train, and retain a sufficient number of qualified team members who understand and appreciate our culture, represent our brand effectively, and establish credibility with our business partners and consumers. Our strategy of offering high quality services and assistance for our customers requires a highly trained and engaged workforce. The turnover rate in the retail industry is relatively high, and there is an ongoing need to recruit and train new team members in existing stores while also staffing any new stores. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce in the markets in which we are located, unemployment levels within those markets, unionization of the available workforce, prevailing wage rates, changing demographics, health and other insurance costs, and changes in laws and regulations governing the employment relationship. Factors that affect our ability to maintain sufficient numbers of qualified team members include employee morale, our reputation, competition from other employers, and our ability to offer appropriate compensation packages.

Union attempts to organize our team members could negatively affect our business.

None of our team members are currently subject to a collective bargaining agreement. If unions attempt to organize all or part of our employee base at certain stores or within certain regions, responding to such organization attempts may distract management and team members and may have a negative financial impact on individual stores or on our business as a whole.

Our inability to return to or achieve past levels of comparable store sales growth could have a material adverse effect on our business, financial condition, and results of operations.

Our comparable store sales have declined for four of the previous five fiscal years. In addition, our overall comparable store sales have fluctuated in the past and will likely fluctuate in the future. A variety of factors affect comparable store sales, including consumer preferences, buying trends and spending levels, economic conditions, price inflation or deflation, product pricing and availability, in-store merchandising-related activities, consumer perceptions of our stores, the frequency with which consumers visit our stores, and our ability to source and distribute products efficiently. In addition, competition and pricing pressures from competitors (including new competitive entrants with new or recently remodeled stores near our stores) coupled with our inability to remodel or provide the updated equipment in our older stores as quickly as originally planned may also materially adversely impact our operating margins. These factors may cause our comparable store sales results to continue to be materially lower than in past periods, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, we have modified our real estate process to grow at a more measured pace, with fewer future store openings, relocations, and remodels than originally planned. As a result, overall revenue growth will be heavily dependent upon the performance of comparable stores from the existing store base.

We are substantially dependent on a few key third-party vendors to provide logistical services for our stores, including services related to inventory replenishment and the storage and transportation of many of our products. Any delays or disruptions in the purchase, storage, transportation or delivery of inventory, or in our ability to procure products, may have a negative effect on our business, results of operations, and financial condition.

Our business relies upon independent third-party service providers for a majority of product shipments to our stores. Since early fiscal 2017, we have relied on one third-party service provider, SuperValu, Inc. (“SuperValu”), to provide key services related to inventory management, warehousing and transportation for all of our stores. During fiscal 2018, SuperValu was acquired by United Natural Foods, Inc. (“UNFI”), who was our

 

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second largest sourcing and distribution provider. The combination of our two largest vendors compounded our dependence on one third-party vendor and may affect our costs and service levels or reduce our supply options. Additionally, any unresolved difficulties associated with integration of the two businesses may result in disruptions to our service. Products sourced and distributed through UNFI accounted for almost two-thirds of the merchandise we purchased in fiscal 2020.

Although we have not experienced any significant difficulty in our inventory management, warehousing, and transportation of products to our stores with UNFI, interruptions could occur in the future and the effects of which may include increases in out-of-stock items, loss of sales, higher costs, and excessive inventory shrinkage. Further, although we expect that UNFI and our other key vendors will have sufficient capacity to accommodate our anticipated needs, they may not have the resources to do so. Any significant disruptions in our relationship with UNFI to service our stores prior to the end of the current term of our agreement, or significant disruptions in our relationships with our other key vendors, including due to their inability to accommodate our needs, would make it difficult for us to continue to operate our existing business or pursue our strategic plans until we execute replacement agreements or develop and implement self-distribution processes. Further, any voluntary change of key vendors could have a short-term disruptive effect on our business. Our initial contractual term with UNFI of three years has expired and we are currently operating under one year auto-renewals unless either party gives 180 days’ notice of non-renewal. We are contractually committed with SuperValu through fiscal 2022. In addition, if our vendors fail to comply with transportation or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. The loss of one or more of our existing significant vendors, particularly UNFI, or our inability to develop relationships with new vendors could reduce our competitiveness and cause our sales and operating results to be materially adversely affected.

While we believe that other third-party service providers could provide similar services on reasonable terms, they are limited in number, and we cannot assure you that we would be able to find a replacement distributor on a timely basis or that such distributor would be able to fulfill our demands on commercially reasonable terms, which could have a material adverse effect on our business, results of operations, and financial condition. We also believe that other distribution strategies may be available, but any such strategies could require significant time to implement, and there is no assurance that such strategies would result in cost savings or adequate service levels. Our third-party service providers (and those they depend upon in turn for materials and services) are subject to a number of risks, including labor disputes, constraints or shortages, union organizing activities, financial liquidity, inclement weather, natural disasters, significant public health and safety events, long-term disruptions to the national and international transportation infrastructure, reduction in capacity, industry-specific regulations, such as hours-of-service rules, supply constraints and general economic and political conditions, any or all of which could limit their ability to provide us with quality products. In addition, these risks may preclude delivery of products to us on a timely basis or at all, which could have an adverse effect on our business, results of operations, and financial condition.

We may not be able to return to a growth strategy on a timely basis or at all. Additionally, new stores may place a burden on our existing resources and adversely affect our existing business.

We have significantly reduced the number of new stores we plan to open while we take steps to improve our core business. We plan to grow at a measured pace. Our growth depends, in part, on our ability to open new stores and to operate those stores successfully. Successful return to sustained growth and implementation of this strategy depends upon, among other things:

 

   

the identification of suitable and available sites for store locations, including sites in new markets;

 

   

the negotiation of acceptable lease terms for store sites;

 

   

the ability to continue to attract customers to our stores through favorable word-of-mouth publicity and targeted marketing activities;

 

   

the hiring, training, and retention of skilled store personnel;

 

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the identification and relocation of experienced store management personnel;

 

   

the effective management of inventory to meet the needs of our stores on a timely basis;

 

   

the availability of sufficient levels of cash flow or necessary financing to support our remodels, relocations or new store expansion; and

 

   

the ability to successfully address competitive merchandising, distribution and other challenges encountered in connection with strategic expansion into new markets.

We may not identify suitable and available sites that meet our investment criteria. The sites that are identified may not produce the levels of sales we predict or that are necessary for a new store to operate profitably. Further, new store openings in markets where we have existing stores may result in reduced sales volumes at our existing stores in those markets. Any new stores that we do open may not achieve sustained sales and operating levels consistent with our mature store base on a timely basis or at all. We cannot assure you that any new store openings will be successful or result in greater sales and profitability. Any failure to successfully open and operate new stores in the time frames and at the costs estimated by us could adversely affect our financial condition and operating results.

We have significant lease obligations, which may require us to continue paying rent for store locations that we no longer operate.

All of our stores are leased, and we are subject to risks associated with our current and future real estate leases for our stores. Our costs could increase because of changes in the real estate markets, entry into new, higher-cost markets and supply or demand for real estate sites. We generally cannot cancel our leases, so if we decide to close or relocate a location, we may nonetheless be committed to perform our obligations under the applicable lease, including paying the base rent for the remaining lease term, and we may not find acceptable assignees or sublessees for such locations. We have closed stores, or elected not to open stores in locations where we had signed leases, for which we are still paying rent and other lease expenses while we attempt to negotiate assignment or termination. Finally, as leases for stores that are in operation expire, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all, and we may not be able to find replacement locations that will provide for the same success as current store locations. Any or all of these factors and conditions could materially adversely affect our growth and profitability.

Economic conditions that impact consumer spending could materially affect our business.

Our results of operations may be materially affected by economic conditions that impact consumer confidence and spending, including discretionary spending. This risk may be exacerbated if customers choose lower-cost alternatives to our product offerings in response to economic conditions, or if consumers perceive our stores as destinations for special occasions rather than regular shopping. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the availability of consumer credit, interest rates, tax rates, and fuel and energy costs, could reduce consumer spending or cause consumers to shift their spending to lower-priced competitors. In addition, inflation or deflation can impact our business. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending, could reduce gross profit margins. As a result, our results of operations could be materially adversely affected.

Our business could be harmed by disruptions of or compromises to our information technology, administrative, or outsourcing systems.

We rely on our information technology (“IT”), administrative, and outsourcing systems to effectively manage our business data, communications, supply chain, order entry and fulfillment to enhance our customer service and other business processes, such as our financial and reporting systems. If we were to experience

 

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failures, breakdowns, substandard performance or other adverse effects to these systems, or difficulties accessing the data stored in these systems, this could disrupt our business and result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business to suffer. In addition, events affecting our third-party payment processors or our integration with them, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of our payment processors or our integration with them, or result in unauthorized access to customer information, could have a material adverse effect on our business. In addition, our IT, administrative, and outsourcing systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures that could result in the compromise of confidential or sensitive customer, employee or Company data, and usage errors or other actions by an employee.

Failure to maintain the privacy and security of confidential customer and business information, and the resulting unfavorable publicity, could have a material adverse effect on our business, financial condition and results of operations.

Our business relies on our ability to collect, use, retain and share confidential business information and certain personal information relating to our customers, team members, suppliers, advertisers and other third parties in connection with our retail business, our payment systems, our online shopping capabilities, our loyalty program and marketing and human resources organizations, and entrust certain of that information to third-party service providers. We also depend on the secure transmission of customer payments and other sensitive or confidential information over external networks. These activities are regulated by a variety of federal, state, local and foreign privacy, data security and data protection laws and regulations. While we actively manage IT security risks within our control to protect against viruses, other malware and security breaches, including breaches of our transaction processing or other systems (including by hackers), and take considerable efforts to secure our computer networks, there can be no assurance that our security won’t be compromised and that such breaches will not occur, or be detected in a timely manner, even if we are compliant with industry security standards. Due to the evolving nature of cyber security threats, and the techniques that criminals use to obtain unauthorized access to systems and data changing frequently, we may not be able to anticipate these frequently changing techniques or implement adequate preventive measures. Therefore, the scope and impact of any potential security breach or other incident caused by improper activities by third parties, including hackers and criminals, cannot be accurately predicted.

Any such breach, damage, or interruption could have a material adverse effect on our business, result in the disclosure of confidential, sensitive, or proprietary business information, cause us to face significant liability, fines and penalties, customer notice obligations, or costly litigation, as we cannot be certain that it would be covered by insurance, expose us to government enforcement actions, possible assessments from the card brands if credit card data was involved, reduce customers’ confidence in our ability to protect their personal information and otherwise harm our reputation with our customers, which could cause them to alter their spending behavior, including amount of spend or frequency of visits to our store, reduce customers’ willingness to use credit and debit cards in our stores, require us to expend significant time and expense developing, maintaining, or upgrading our IT, administrative, or outsourcing systems or prevent us from paying our suppliers or team members, receiving payments from our customers, or performing other IT, administrative, or outsourcing services on a timely basis. Security breaches are increasing in frequency and sophistication and breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting new federal and state laws and legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed on merchants by credit card issuers. As a result, we may become subject to more extensive requirements to protect the financial and personal information that we handle, and incur significant compliance costs.

Additionally, as a merchant that accepts debit and credit cards for payment (and our customers engage in a large number of credit and debit card transactions with us each year), we are subject to the Payment Card Industry (“PCI”) Data Security Standard (“PCI DSS”), issued by the PCI Council. PCI DSS is a multifaceted

 

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security standard that contains compliance guidelines and standards with regard to our security surrounding the physical administrative and technical storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute (“ANSI”) data encryption standards and payment network security operating guidelines. Failure to be PCI-compliant or to meet other payment card standards may result in the imposition of financial penalties or the allocation by the card brands of the costs of fraudulent charges to us. As well, the Fair and Accurate Credit Transactions Act (“FACTA”) requires systems that print payment card receipts to employ personal account number truncation so that the customer’s full account number is not viewable on the slip.

Despite our efforts to comply with PCI DSS, ANSI and FACTA or other payment card standards and security measures, we may become subject to claims that we have violated such laws or standards, based on past, present and future business practices, which could have an adverse impact on our business and reputation. In addition, we have experienced “phishing” attacks, hacking incidents and other unauthorized access to certain data and information, and we cannot be certain that all of our IT and cybersecurity systems and processes will be able to prevent, contain or detect all cyber-attacks or intrusions from known malware or malware that may be developed in the future, particularly as we grow our technology platforms and expand our eCommerce offerings. In addition, as a public company following this offering, we may become the target of an increasing number of such attacks or incidents. To the extent that any disruption results in the loss, damage or misappropriation of information, we may be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations and others. A security breach, whether of our systems or those of key third parties, may compromise the security of such systems, credit and debit card transactions, or personal information, as well as confidential or sensitive corporate information, and may continue undetected for a period of time, increasing the potential impact on such data.

We are subject to rapidly changing and increasingly stringent laws and industry standards relating to data privacy, protection and security. The restrictions and costs imposed by these laws, or our actual or perceived failure to comply with them, could subject us to liabilities that adversely affect our business, operations, and financial performance.

The collection, use, retention and sharing of personal information by us and our third-party service providers is subject to federal, state and local data privacy, protection and security laws and regulations, which have become increasingly stringent and recently changing over recent years. Many states throughout the United States have enacted laws regulating the online collection, use, and disclosure of personal information and requiring that companies implement reasonable data security measures. For example, the California Consumer Privacy Act of 2018 (“CCPA”) took effect on January 1, 2020. The CCPA gives California residents expanded rights relating to their personal information, provides civil penalties for violations, as well as a private right of action for certain data breaches, which may increase data breach litigation. Additionally, a California ballot initiative, the California Privacy Rights Act (“CPRA”), recently passed in California. The majority of the CPRA’s provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes will likely be required. Similar laws have been proposed in other states, including Virginia, and at the federal level. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging and costly.

Laws in all states throughout the United States also require businesses to notify affected individuals, governmental entities, and/or credit reporting agencies of certain security breaches affecting personal information. These laws are not consistent, and compliance with them in particular in the event of a widespread data breach is complex and costly. We strive to comply with evolving and applicable laws and regulations relating to data privacy, protection and security but despite our best efforts, we may not be successful in achieving compliance with such laws and regulations and attempting to achieve full compliance may be costly and adversely affect our business operations and financial performance. The regulatory framework for data privacy, protection and security is, and is likely to remain, uncertain for the foreseeable future, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent

 

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from one jurisdiction to another and may conflict with other rules or our practices. New laws, regulations and industry standards concerning data privacy, protection and security proposed and enacted in various jurisdictions could have a significant impact on our current and planned data privacy, protection and security-related practices, our collection, use, sharing, retention and safeguarding of customer, consumer and/or employee information, as well as any other third-party information we receive, and some of our current or planned business activities.

Any actual or perceived non-compliance with existing and new laws and regulations relating to data privacy, protection and security could result in litigation and proceedings against us by governmental entities, customers or others, fines and civil or criminal penalties, limited ability or inability to operate our business, offer services, or market our platform in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand. Such occurrences could adversely affect our business, financial condition, and results of operations.

In addition, the Telephone Consumer Protection Act (“TCPA”), imposes significant restrictions on the ability to make telephone calls or send text messages to mobile telephone numbers without the prior consent of the person being contacted. The actual or perceived improper making of telephone calls or sending of text messages may subject to us to potential risks, including liabilities or claims relating to consumer protection laws. Claims that we have violated the TCPA could be costly and time consuming to defend, and if successful, expose us to substantial statutory damages. We could also be required to change some portions of our business model, could face negative publicity and our business, financial condition and results of operations could be adversely affected. Even an unsuccessful challenge of our telephone call or text messaging practices by our customers, regulatory authorities or other third parties could result in negative publicity and could require a costly response from and defense by us.

We may be unable to protect or maintain our intellectual property, including The Fresh Market trademark, which could adversely affect our business.

We believe that our intellectual property has substantially contributed to the success of our business and the value of our brand. In particular, our trademarks, including our registered The Fresh Market and TFM trademarks, are valuable assets that reinforce our customers’ favorable perception of our stores.

From time to time, third parties have used names similar to ours, have applied to register trademarks similar to ours and, we believe, have infringed our intellectual property rights. We cannot guarantee that we will successfully uncover all unauthorized third-party uses of our trademarks and other intellectual property. If we are unable to do so, or if we are otherwise unable to prevent third parties from using our names and trademarks, the value of our trademarks may be adversely affected, and customer confusion may result. In order to protect or enforce our intellectual property and other proprietary rights, we may need to initiate litigation or other proceedings against third parties. Any lawsuits or proceedings that we initiate could be expensive, take significant time and divert management’s attention from other business concerns, and we cannot guarantee that such efforts to enforce our trademarks and other intellectual property rights will be successful.

Third parties have, from time to time opposed our trademarks and challenged our intellectual property rights. We respond to these actions on a case-by-case basis. The outcomes of these actions have included both negotiated out-of-court settlements and litigation. Defending against allegations and litigation can be expensive, take significant time and divert management’s attention from other business concerns. We may also be required to pay substantial damages or be subject to a court order prohibiting us from engaging in certain activities. Any claims of intellectual property infringement, even those without merit, could therefore have a material adverse effect on our business, financial condition and results of operations.

In the ordinary course of our business, we evaluate the branding of our stores and products and how they are perceived by our customers. As part of this evaluation, we regularly develop new marks and explore using existing marks in new ways. In the future, we may decide (i) to continue to use The Fresh Market name and

 

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related design, (ii) to use our other existing trademarks on a wider or different basis, or (iii) to develop new trademarks, which could also incorporate The Fresh Market name. If we undertake such efforts, we cannot assure you that they would be successful in strengthening our brand or improving our brand recognition or image to our customers.

Our success depends on our ability to identify, source, and market new products that meet our high standards and customer preferences and our ability to offer our customers an aesthetically pleasing shopping environment.

Our success depends on our ability to identify, source, and market new products that both meet our standards for quality and appeal to customers’ preferences. Consumer preferences may change rapidly and without warning. A change in consumer preferences away from our offerings could have a material adverse effect on our business. A small number of our team members, including our in-house merchants, are primarily responsible for both sourcing products that meet our high specifications and identifying and responding to changing customer preferences. Failure to source and market such products, or to accurately forecast changing customer preferences, could lead to a decrease in the number of customer transactions at our stores and a decrease in the amount customers spend when they visit our stores. In addition, the sourcing of our products is dependent, in part, on our relationships with our vendors. If we are unable to maintain these relationships, we may not be able to continue to source products at competitive prices that both meet our standards and appeal to our customers.

We also attempt to create a pleasant and appealing shopping experience. If we are not successful in creating a pleasant and appealing shopping experience, we may lose customers to our competitors. If we do not succeed in maintaining good relationships with our vendors and in introducing and sourcing new products that consumers want to buy, or if we are unable to provide a pleasant and appealing shopping environment or maintain our level of customer service, our sales, operating margins, and market share may decrease, resulting in reduced profitability.

Our stores rely heavily on sales of perishable products, and ordering errors or product supply disruptions may have an adverse effect on our profitability and operating results.

We have a significant focus on perishable products. Sales of perishable products accounted for more than 70% of our total sales in fiscal 2020 and the first quarter of fiscal 2021. We rely on various suppliers and vendors to provide and deliver our perishable product inventory on a continuous basis and we do not have significant control over the availability or cost to us of many of the products offered for sale in our stores. We could suffer significant product inventory losses in the event of the loss or shutdown of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters, or other catastrophic occurrences. For example, due to the COVID-19 pandemic and the resulting dislocation of workplaces and the economy, the ability of vendors to supply required products may be impaired because of the illness or absenteeism in their workforces, government-mandated shutdown orders or impaired financial conditions. Supplier performance issues may also result in inventory losses. We have implemented certain systems to ensure our ordering is in line with demand and to reduce our rate of inventory shrinkage. Moreover, while the supply of each of our products may return to pre–COVID-19 levels at different times, including as a result of resurgences of the COVID-19 pandemic, and there can be no assurance that our efforts to ensure product inventory for all of the products that our customers require will be successful. Further, we cannot assure you, however, that our ordering systems will always work efficiently, in particular in connection with the opening of new stores, which have no, or a limited, ordering history. If we were to over-order, we could suffer inventory losses, which would negatively impact our operating results, while under-ordering could leave us unable to meet consumer demand. Any or all of these factors could impact our business, financial condition and operating results.

 

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Increased commodity prices may impact profitability.

Many of our products include inputs such as wheat, corn, oils, milk, sugar, cocoa, and other commodities. Commodity prices worldwide may fluctuate widely and are, at times, volatile. While commodity prices do not typically represent the substantial majority of our product costs, any increase in commodity prices may cause our vendors to seek price increases from us (including, for example, prices for proteins and the ingredients for prepared foods). Although we typically are able to pass on modest commodity price increases or mitigate vendor efforts to increase costs to us, we may be unsuccessful in doing so, either in whole or in part, if commodity prices increase materially. In addition, our vendors have incurred additional costs to respond the COVID-19 pandemic, and may seek to pass those costs through to us. In the event we are unable to mitigate or resist our vendors’ requests to obtain price increases, we may in turn consider raising our prices, and our customers may respond negatively or resist any such price increases including by reducing purchases at our stores. Our profitability may be impacted through increased costs to us, which may impact margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions, all of which may have adverse effect on our performance, financial condition and operating results.

The geographic concentration of our stores in the southeastern United States creates an exposure to local economies, regional downturns or severe weather or catastrophic occurrences that may materially adversely affect our financial condition and results of operations.

As of May 2, 2021, we operated 46 stores in Florida, making Florida our largest market and representing approximately 29% of our total stores. We also have store concentration in North Carolina, Virginia, and Georgia, operating 21 stores, 13 stores, and 12 stores in those states, respectively. As a result, our business is more susceptible to regional conditions than the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially and adversely affect our revenues and profitability. These factors include, among other things, changes in demographics, economic conditions, population.

The geographic concentration of our stores in the southeastern United States also makes us vulnerable to severe weather conditions and other catastrophic occurrences in areas in which we have stores or from which we obtain products may materially adversely affect our results of operations. Such conditions may result in physical damage to our stores, the inability to re-open stores that may close as a result of damage to the store and/or operating area in a timely manner, closure of one or more of our stores, inadequate workforce in our markets, temporary disruption in the manufacture, transport and supply of products, delays in the delivery of products to our stores, our ability to fund losses of inventory, a reduction in the availability of products in our stores, reductions in customer traffic to our stores and our ability to collect on insurance coverage, which is subject to its own inherent risks including the solvency of our insurance carriers, their approval of our claims and the timing of claims processing and payment. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops yielded by food producers may adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt our businesses and materially adversely affect our financial condition and results of operations.

Future consumer, employment or other litigation could adversely affect our financial condition and results of operation.

Our retail operations are characterized by transactions involving a wide array of product selections, including prepared food, and consequently carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in many other industries. We have been, are, and may in the future become a party to individual personal injury, products liability, intellectual property and other legal actions in the ordinary course of our business. While these actions are generally routine in nature, incidental to the operation of our business and immaterial in scope, if our assessment of any action or actions should prove inaccurate, our financial condition and results of operations could be adversely affected.

 

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Additionally, we are occasionally exposed to industrywide or class-action claims arising from the products we carry or industry-specific business practices. Products that we sell may carry claims, whether stated or implied, as to their origin, ingredients or health benefits, including, by way of example, the use of terms such as “natural.” The use of these terms may not be subject to uniform standards, and the resulting uncertainty has led to legal challenges. Plaintiffs have commenced legal actions, including class actions, against a number of food companies, asserting claims for alleged false, misleading, and deceptive advertising and labeling. Should we become subject to similar claims, consumers may avoid purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these matters may discourage consumers from buying our products. Due to the nature of class action litigation, the cost of defending against any such claims could be significant. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease our sales, which would have a material adverse effect on our business, financial condition, and results of operations.

We also have been, are, and may in the future become subject to claims for discrimination, harassment, wages and hours, and other federal and/or state employment matters, including claims that may be brought on behalf of a putative class of team members. Certain claims asserted in such lawsuits, if resolved against us, could give rise to substantial damages. Our defense costs and any resulting damage awards or settlement amounts may not be covered by insurance. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial position, liquidity, and results of operations in a particular period or periods.

We have recorded store asset impairment charges in the past and may be required to recognize impairment charges in the future.

Pursuant to U.S. generally accepted accounting principles, we are required to recognize an impairment charge when circumstances indicate that the carrying value of long-lived assets may not be recoverable. Our judgment regarding the existence of circumstances that indicate an asset’s carrying value may not be recoverable, and therefore potentially impaired, is based on several factors, including a decision to close a store or negative or declining operating cash flows. If a determination is made that the asset’s carrying value is not recoverable over its estimated useful life, the asset is written down to its estimated fair value, if lower. We recognized store asset impairment charges of $6.0 million and $3.1 million in fiscal 2019 and fiscal 2018, respectively. Our cash flow projections look several years into the future and include assumptions concerning variables such as the potential impact of operational changes, competitive factors, inflation, and the economy. Our estimate of fair value used in calculating an impairment loss is based on market values, if available, or our estimated future cash flow projections discounted to their present value. If these estimates or projections change, we may be required to record impairment charges on certain of these assets, which would negatively impact our results.

Our financial statements include a significant amount of goodwill and intangible assets. A decline in the fair value of an intangible asset or our business could result in an asset impairment charge, which would be recorded as an operating expense in our financial statements and could be material.

Our policy is to evaluate goodwill and indefinite-lived intangible assets for possible impairment as of the first day of the fourth quarter of each fiscal year, or whenever events or changes in circumstances indicate that the fair value of such assets may be below their carrying amount. In addition, intangible assets that are being amortized are tested for impairment whenever events or circumstances indicate that their carrying value may not be recoverable. We have identified that our business operates as a single operating segment and is a single reporting unit for purposes of testing goodwill impairment. For these impairment tests, we use various valuation methods to estimate the fair value of our business and intangible assets. If the fair value of an asset is less than its carrying value, we would recognize an impairment charge for the difference.

It is possible that we could have an impairment charge for goodwill or tradename intangible assets in future periods if (i) overall economic conditions in 2020 or future years vary from our current assumptions, (ii) business

 

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conditions or the strategies for our business change from our current assumptions, or (iii) enterprise values of comparable publicly traded companies, or of actual sales transactions of comparable companies, were to decline, resulting in lower comparable multiples of revenues and earnings before interest, taxes, depreciation, and amortization and, accordingly, lower implied values of goodwill and intangible assets. A future impairment charge for our goodwill or tradename could have a material effect on our consolidated financial statements and related disclosures.

Changes in accounting standards, subjective assumptions and estimates by management related to complex accounting matters may materially impact reporting of our financial condition and results of operations.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations for many aspects of our business, such as accounting for inventories, impairment of long-lived assets, insurance reserves, closed store reserves, leases, unclaimed property laws, income taxes, and share-based compensation, are highly complex and involve subjective judgments. Changes in these rules or their interpretation or changes in underlying estimates, assumptions, or judgments by our management could significantly change our reported or expected earnings.

Also, new accounting guidance and standards may require systems and other changes that could increase our operating costs or change our financial statements. Implementing future accounting guidance related to leases and other areas may be impacted by the newly issued accounting pronouncements and standards. For example, our adoption of ASC 842, Leases impacted our reported financial results. For additional information, see Note 2, “Summary of Significant Accounting Policies” in the Notes to our Consolidated Financial Statements, included elsewhere in this prospectus.

The adoption of new tax legislation could affect our financial performance.

We are subject to income and other taxes in the United States. Our effective tax rate in the future could be adversely affected by changes in the valuation of deferred tax assets and liabilities and changes in tax laws. The carrying value of our deferred tax assets is dependent on our ability to generate future taxable income.

President Biden has provided some informal guidance on what tax law changes he would support. Among other things, his proposals would raise the rate on both domestic and foreign income and impose a new alternative minimum tax on book income. If these proposals are ultimately enacted into legislation, they could materially impact our tax provision, cash tax liability and effective tax rate. If any or all of these (or similar) proposals are ultimately enacted into law, in whole or in part, they could have a negative impact on the Company’s effective tax rate.

We may be unable to fully realize the benefits of our net operating loss, or NOL, carryforwards if an ownership change occurs.

If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code, or Section 382, the NOL carryforward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOL generated prior to the change in ownership. If a change in ownership were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income that we might otherwise be able to use. In general, a change in ownership occurs when, as of any testing date, there has been a cumulative change in the stock ownership of the corporation held by 5% stockholders of more than 50 percentage points over an applicable three-year period. For these purposes, a 5% stockholder is generally any person or group of persons that at any time during an applicable three-year period has owned 5% or more of our outstanding common stock. In addition, persons who own less than 5% of the outstanding common stock are grouped together as one or more “public group” 5% stockholders. Under Section 382, stock ownership would be determined under complex attribution rules and generally includes shares held directly, indirectly

 

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through intervening entities, and constructively by certain related parties and certain unrelated parties acting as a group.

Risks associated with insurance plan claims and actuarial estimates could increase future expenses and may have a materially adverse effect on our business, financial condition and results of operations.

We use a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile and general liability, product liability, director and officers’ liability, employee health care benefits, and other risks, including casualty and property risks. However, there are types of losses we may incur but against which we cannot be insured or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and certain other crime, certain wage and hour and other employment-related claims, including class actions, actions based on certain customer protection laws, certain cyber or data privacy events and some natural and other disasters or similar events. If we incur such losses and they are material, our business could suffer. The liability for these claims has been determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims, on an undiscounted basis. Any actuarial projection of losses is subject to a high degree of variability related to, among other things, future interest and inflation rates, future economic conditions, litigation trends and benefit-level changes. Changes in legal trends and interpretations, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all affect the level of reserves required and could cause material future expense to maintain reserves at appropriate levels. Any deviation of actual claims and other expenses related to these and other risks in excess of our assumptions, estimates, and historical trends may have a material adverse effect on our business, financial condition and results of operations.

Energy costs are a significant component of our operating expenses and increasing energy costs, unless offset by more efficient usage or other operational responses, may impact our profitability.

We utilize natural gas, water, sewer, and electricity in our stores, and our third-party logistics providers use gasoline and diesel fuel in the trucks that deliver products to our stores. Energy and fuel costs, frequently influenced by international, political and economic circumstances have experienced volatility over time and whether driven by increased demand, decreased or disrupted supply, or an anticipation of any such events, may result in increased costs of operating our stores and may increase the costs of our products. We may not be able to recover such rising costs, should they occur, through increased prices charged to our customers, and any increased prices may exacerbate the risk of customers choosing lower-cost alternatives. In addition, if we are unsuccessful in attempts to protect against increases in energy costs through energy contracts, improved energy procurement, improved efficiency, and other operational improvements, the overall costs of operating our stores will increase, which could adversely impact our profitability, financial condition and results of operations.

Products we sell could cause unexpected side effects, illness, injury, or death that could result in their discontinuance or expose us to lawsuits, either of which could result in unexpected costs and damage to our reputation and could have an adverse effect on our operating results.

There is increasing governmental scrutiny of and public awareness regarding food safety. Unexpected side effects, illness, injury, or death caused by products we sell, whether food or non-food, or concerns about these items, could result in the discontinuance of sales of these products or prevent us from achieving market acceptance of the affected products. Concerns regarding the quality or safety of our food products or our food supply chain could cause consumers to avoid purchasing certain products from us or to seek alternative sources of food, even if the basis for the concern is unfounded, has been addressed, or is outside of our control. Adverse publicity about these concerns, including on social media, whether or not ultimately based on fact or involving products sold at our stores, could discourage consumers from buying our products, which could have an adverse effect on our reputation, brand, and operating results. Any lost confidence on the part of our customers would be difficult and costly to reestablish. Any such adverse effect could be exacerbated by our position in the market as

 

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a purveyor of fresh, high-quality food products and could significantly reduce our brand value. Issues regarding the safety of any food items sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results.

Further, such side effects, illnesses, injuries, and death could also expose us to product liability or negligence lawsuits. In particular, the sale of food products entails an inherent risk of product liability claims, product recalls, and the resulting negative publicity. Food products containing contaminants or allergens could be inadvertently manufactured, prepared, or distributed by us, and if processing at the consumer level does not eliminate them, these contaminants or allergens could result in illness or death. In addition, food products we sell may be subject to deliberate contamination. We cannot assure you that product liability claims will not be asserted against us or that we will not be obligated to perform product recalls in the future, whether on food or other products. Any such claims (even if unsuccessful or not fully pursued), recalls, or adverse publicity with respect to our private-label products or other products may have an even greater negative effect on our sales and operating results in addition to generating negative and adverse publicity for our private-label brand or other products. Additionally, the U.S. Food and Drug Administration (the “FDA”) has promulgated a number of regulations, including under the Food Safety Modernization Act (the “FSMA”), which impose more stringent requirements at various steps in the supply chain and may result in increased compliance costs, which may be passed down to us by our suppliers, or in supply chain disruptions. These include new rules on food traceability proposed in September 2020, which may increase the risk of supply disruption or increased compliance costs. The real or perceived sale of contaminated or harmful products may cause negative publicity with respect to us, or our brand or products, including on social media, which could in turn harm our reputation and net sales, and could have a material adverse effect on our business, results of operations, or financial condition.

Any consumer claims brought against us may exceed our existing or future insurance policy coverage or limits, or not be covered by any rights to indemnity or contribution we have against others. Our insurance carriers may contest their coverage obligations. Any judgment against us that is in excess of our available insurance coverage would have to be paid from our cash reserves, which would reduce our capital resources. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets.

If we fail to maintain our reputation and the value of our brand, our sales may decline.

We believe our continued success depends on our ability to maintain and grow the value of The Fresh Market brand. Maintaining, promoting, and positioning our brand and reputation will depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high-quality customer experience. Brand value is based in large part on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations, or litigation. Our brand could be adversely affected if we fail to achieve these objectives, or if our public image or reputation was tarnished by negative publicity.

Various aspects of our business are subject to federal, state, and local laws and regulations. Our compliance with these laws and regulations may require additional capital expenditures and could materially adversely affect our ability to conduct our business as planned.

We are subject to numerous and frequently changing federal, state, and local laws and regulations, relating to matters such as product labeling, weights and measures, taxation, zoning, land use, environmental protection, labor and employment including workplace safety, food safety, public health, community right-to-know, information security and data privacy and alcohol and beverage sales. States in which we operate and several local jurisdictions regulate the licensing of supermarkets and the sale of alcoholic beverages. In addition, certain local regulations may limit our ability to sell alcoholic beverages at certain times. We are also subject to laws governing our relationship with team members, including minimum wage requirements, overtime, working conditions, benefits such as paid sick leave, immigration, disabled access, and work permit requirements, as well as laws governing the employment of minors.

 

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Federal and state regulatory agencies may impose additional regulations that raise the cost of operating our business or cause us to make changes to our operations. Such regulations may include, but are not limited to, any changes to the Department of Labor’s criteria for exempt status under the Fair Labor Standards Act, the FDA’s rulemaking regarding menu labeling, the various rules promulgated under the FSMA, and the forthcoming regulations relating to disclosure on products made with bioengineered foods. Compliance with new laws and regulations in these areas, or with new or stricter interpretations of existing requirements, could reduce the revenue and profitability of our stores and could otherwise materially adversely affect our business, financial condition, or results of operations. Such changes in applicable law also may cause us to alter the types of products or services that we offer or affect our ability to profitably operate stores in certain jurisdictions. Further, our new store openings could be delayed or prevented or our existing stores could be impacted by difficulties or failures in our ability to obtain or maintain required approvals or licenses. Our stores are subject to unscheduled inspections on a regular basis, which, if violations are found, could result in the assessment of fines, suspension of one or more needed licenses and, in the case of repeated “critical” violations, closure of the store until a re-inspection demonstrates that we have remediated the problem. For example, we have had to comply with recent new laws in many of the states or counties in which we operate regarding actions to mitigate the spread of COVID-19. We cannot predict the nature of future laws, regulations, interpretations, or applications or determine what effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state, and local regulatory schemes would have on our business in the future.

Risks Related to Our Indebtedness

Our substantial indebtedness could adversely affect our ability to fund our operations and capital expenditures, and limit our ability to react to changes in the economy or our industry or pay our debts.

We have, and expect to continue to have, a substantial amount of debt. As of May 2, 2021, we had $934 million face value of outstanding indebtedness, represented by our secured notes due 2023 issued on April 27, 2016 (“Senior Secured Notes”) and our secured notes due 2025 issued on March 13, 2020 (“New Superpriority Secured Notes”) to refinance certain previously outstanding notes (the “Superpriority Notes”). For fiscal 2020, we had debt service obligations of approximately $92 million to the holders of the Senior Secured Notes and the holders of the Superpriority Secured Notes and the New Superpriority Secured Notes, excluding the prepayment penalty for the Superpriority Secured Notes. We primarily depend on cash flow from operations to fund our business and growth plans, and such debt service obligations require us to dedicate a substantial portion of our cash flow from operations to the servicing and repayment of our indebtedness, thereby reducing funds available to us for other purposes and limiting our ability to operate and expand our business, to pursue capital expenditures (including for new store growth, relocations, remodels and refreshes, strategic initiatives, or other purposes), or to respond to competitive pressures.

Our outstanding indebtedness and any additional indebtedness we incur may have important consequences for us, including, without limitation:

 

   

it may be more difficult for us to satisfy our obligations with respect to our indebtedness, including the Senior Secured Notes and New Superpriority Secured Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing the Senior Secured Notes and the New Superpriority Secured Notes;

 

   

we may be required to dedicate a significant portion of our cash flows from operations to the payment of principal and interest on our indebtedness, thereby limiting the availability of our cash flow for other purposes, such as capital expenditures;

 

   

we may be limited in our flexibility in planning for, or reacting to, changes in our operations, our business or the industry in which we operate;

 

   

we may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

 

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impact our rent expense on leased space;

 

   

increase our vulnerability to general economic downturns in our business and the food industry as well as our vulnerability to competitive pressures;

 

   

restrict us from making strategic acquisitions, engaging in development activities, opening new stores, or exploiting business opportunities that may arise;

 

   

cause us to make non-strategic divestitures;

 

   

limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds or dispose of assets;

 

   

prevent us from raising the funds necessary to repurchase all Senior Secured Notes tendered to us or redeem all New Superpriority Secured Notes upon the occurrence of certain changes of control, which failure to repurchase would constitute a default under the agreements governing the Senior Secured Notes and the New Superpriority Secured Notes; or

 

   

expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest.

In addition, the agreements governing our indebtedness contain, and any additional debt financing we may incur would likely contain, covenants that restrict our operations, 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. Our ability to service our debt obligations and achieve compliance with affirmative and negative debt covenants will largely depend on our future operating performance, which cannot be assured. A failure by us to comply with the covenants or financial ratios contained in the agreements governing our indebtedness, including the Senior Secured Notes and the New Superpriority Secured Notes, could result in an event of default and could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default, if not cured or waived, the noteholders and lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements governing our indebtedness, including the Senior Secured Notes and the New Superpriority Secured Notes. If our indebtedness were to be accelerated, our future financial condition could be materially adversely affected.

We may incur additional indebtedness in the future, including secured debt, which could adversely affect our financial health and our ability to react to changes to our business, and could further exacerbate the risks associated with our substantial leverage.

We may incur additional indebtedness in the future. Although the terms of the agreements governing our indebtedness, including the Senior Secured Notes and the New Superpriority Secured Notes, contain restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations that do not constitute indebtedness. In addition to the agreements governing the Senior Secured Notes and the New Superpriority Secured Notes, the covenants under any other existing or future debt instruments could allow us to incur a significant amount of additional indebtedness and, subject to certain limitations, such additional indebtedness could be secured and have priority ahead of the Senior Secured Notes under the payment waterfall. Any increase in the amount of our indebtedness could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets, or issue equity to obtain necessary funds. We do not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory to us, or at all.

 

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Our level of indebtedness may:

 

   

require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital; capital expenditures, including new store growth, relocations, remodels, and refreshes; and other general corporate purposes;

 

   

limit our ability to pay future dividends or certain other distributions on our capital stock or repurchase our capital stock and prepay subordinated indebtedness;

 

   

limit our ability to obtain additional financing (either through additional debt or equity financing) for working capital, capital expenditures, expansion plans, and other investments, which may in turn limit our ability to implement our business strategy;

 

   

restrict our ability to prepay, redeem or repurchase certain debt;

 

   

restrict or limit our ability to make certain loans, investments or other restricted payments; heighten our vulnerability to downturns in our business, the food retail industry, or the general economy; and limit our flexibility in planning for, or reacting to, changes in our business and the food retail industry; or

 

   

prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our store base and product offerings.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to make payments on our existing or any future indebtedness to fund our operations.

We may not be able to generate sufficient cash to service all of our indebtedness, including the Senior Secured Notes and the New Superpriority Secured Notes, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

Our ability to pay principal and interest on the Senior Secured Notes and the New Superpriority Secured Notes and to satisfy our other debt obligations depends upon, among other things, our future financial and operating performance, which will be affected by prevailing economic, industry, and competitive conditions and financial, business, legislative, regulatory, and other factors, many of which are beyond our control.

We cannot assure you that our business will generate cash flow from operations, or that we will be able to issue additional notes under the New Superpriority Secured Notes Indenture or otherwise borrow funds, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on the Senior Secured Notes and the New Superpriority Secured Notes.

If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness, including the Senior Secured Notes and the New Superpriority Secured Notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. We cannot assure you that we will be able to restructure or refinance any of our debt on commercially reasonable terms or at all. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as sales of assets, sales of equity or negotiations with our lenders to restructure the applicable debt. In addition, the terms of existing or future debt agreements, including the agreements governing the Senior Secured Notes and the New Superpriority Secured Notes, may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at

 

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all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Our equityholders have no continuing obligation to provide us with debt or equity financing. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could result in a material adverse effect on our business, results of operations, and financial condition and could negatively impact our ability to satisfy our obligations under the Senior Secured Notes and the New Superpriority Secured Notes.

If we cannot make scheduled payments on our indebtedness, we will be in default, and holders of the Senior Secured Notes and the New Superpriority Secured Notes could declare all outstanding principal and interest to be due and payable, our secured lenders (including the holders of the Senior Secured Notes and the New Superpriority Secured Notes) could foreclose against the assets securing their notes, and we could be forced into bankruptcy or liquidation.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Senior Secured Notes and the New Superpriority Secured Notes.

Any default under the agreements governing our indebtedness, including defaults under the agreements governing the Senior Secured Notes and the New Superpriority Secured Notes that are not waived by the required holders, and the remedies sought by the holders of such indebtedness could leave us unable to pay principal, premium, if any, or interest on the Senior Secured Notes and the New Superpriority Secured Notes and could substantially decrease the market value of the Senior Secured Notes and the New Superpriority Secured Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including the agreements governing the Senior Secured Notes and the New Superpriority Secured Notes), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to (i) declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest and (ii) institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. Upon any event of default, all payments will be made to repay the New Superpriority Secured Notes before the Senior Secured Notes are repaid.

If our operating performance declines, we may in the future need to seek waivers from the required holders under the New Superpriority Secured Notes Indenture to avoid being in default. If we breach our covenants under the New Superpriority Secured Notes Indenture and seek a waiver, we may not be able to obtain a waiver from the required holders. In such a case, we would be in default, the holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation.

In the future, we may be dependent upon our lenders for financing to execute our business strategy and to meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow, it could have a material adverse effect on our business, financial condition, and results of operations.

During periods of volatile credit markets, there is risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments. If our lenders are unable to fund borrowings under their revolving credit commitments or we are unable to borrow, it could be difficult to obtain sufficient funding to execute our business strategy or to meet our liquidity needs, which could have a material adverse effect on our business, financial condition, and results of operations.

Volatility and weakness in bank and capital markets may adversely affect credit availability and related financing costs for us.

Banking and capital markets can experience periods of volatility and disruption. If the disruption in these markets is prolonged, our ability to refinance, and the related cost of refinancing, some or all of our debt could be

 

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adversely affected. Although we currently can access the bank and capital markets, there is no assurance that such markets will continue to be a reliable source of financing for us. These factors, including the tightening of credit markets, could adversely affect our ability to obtain cost-effective financing. Increased volatility and disruptions in the financial markets also could make it more difficult and more expensive for us to refinance outstanding indebtedness and to obtain financing. In addition, the adoption of new statutes and regulations, the implementation of recently enacted laws, or new interpretations or the enforcement of older laws and regulations applicable to the financial markets or the financial services industry could result in a reduction in the amount of available credit or an increase in the cost of credit. Disruptions in the financial markets can also adversely affect our lenders, insurers, customers, and other counterparties. Any of these results could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to This Offering and Ownership of Our Common Stock

Our stock price may fluctuate significantly.

The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The following factors could affect the trading price of our common stock:

 

   

our operating and financial performance;

 

   

actual or anticipated variations in our quarterly results of operations;

 

   

the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

   

strategic actions by our competitors;

 

   

changes in operating performance and the stock market valuations of other companies;

 

   

announcements related to media reports or other public forum comments related to litigation, claims or reputational charges against us;

 

   

negative publicity arising from altercations or food safety incidents at one or more of our venues;

 

   

our failure to meet revenue or earnings estimates made by research analysts or other investors;

 

   

changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

   

speculation in the press or investment community;

 

   

investor perceptions of us and the industries in which we or our customers operate;

 

   

sales of our common stock by us or our stockholders, or the perception that such sales may occur;

 

   

changes in accounting principles, policies, guidance, interpretations or standards;

 

   

additions or departures of key management personnel;

 

   

actions by our stockholders;

 

   

general market conditions within the broader stock market;

 

   

the development and sustainability of an active trading market for our common stock;

 

   

domestic and international economic, political, legal and regulatory factors unrelated to our performance; and

 

   

the realization of any risks described under this “Risk Factors” section, or other risks that may materialize in the future.

 

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The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, financial condition and results of operations.

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and be required to comply with certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, and the listing requirements of Nasdaq, on which our common stock will be traded, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may in turn lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. We will need to institute a comprehensive compliance function and establish internal policies to ensure we have the ability to prepare on a timely basis financial statements that are fully compliant with all SEC reporting requirements and establish an investor relations function. We expect that compliance with these requirements will increase our legal, accounting and financial compliance costs and will make some activities more time consuming and costly. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under securities laws, as well as rules and regulations implemented by the SEC and Nasdaq. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to continue to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of the Sarbanes-Oxley Act. In that regard, we have to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Furthermore, these rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage

The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees, or as executive officers. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. In addition, if we fail to comply with these rules and regulations, we could be subject to a number of penalties, including the delisting of our common stock, fines, sanctions or other regulatory action or civil litigation.

Failure to comply with requirements to design, implement and maintain effective internal control over financial reporting could materially impact our business and stock price.

As a private company, we have not been required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404(a) of the Sarbanes-Oxley Act, or Section 404.

 

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As a public company, our management will have the responsibility for significant requirements for enhanced financial reporting and internal controls. The process of designing, implementing and maintaining effective internal controls is a continuous effort that will require us to anticipate and react to changes in our business and the economic and regulatory environments. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing whether such controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and adversely affect our operating results. In addition, we will be required, pursuant to Section 404, to furnish a report by our management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report following the closing of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation and testing. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business.

Furthermore, as a public company following the closing of this offering, we may, during the course of our testing of our internal controls over financial reporting, or during the subsequent testing by our independent registered public accounting firm, identify deficiencies which would have to be remediated to satisfy the SEC rules for certification of our internal controls over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the SEC significant deficiencies or material weaknesses in our system of internal controls. The existence of a material weakness would preclude management from concluding that our internal controls over financial reporting are effective, and would preclude our independent auditors from issuing an unqualified opinion that our internal controls over financial reporting are effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in the accuracy and completeness of our financial reporting and may negatively affect the trading price of our common stock, and we could be subject to sanctions or investigations by regulatory authorities. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting, it could negatively impact our business, results of operations and reputation.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon the closing of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We have designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected, which could limit our ability to report our financial results accurately and timely, and could also expose us to litigation

 

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Our principal stockholder, the Apollo Funds, will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control, and Apollo’s interests may conflict with our interests and the interests of other stockholders.

Following this offering, our principal stockholder, the Apollo Funds, will own    % of our outstanding common stock (or    % of our outstanding common stock if the underwriters exercise their option to purchase additional shares in full). See “Principal Stockholders.” As a result, the Apollo Funds will have effective control over the outcome of votes on all matters requiring approval by our stockholders, including entering into significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of our assets and issuance of additional debt or equity. Moreover, the Apollo Funds will have significant influence over the management and affairs of our company. The interests of the Apollo Funds could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by the Apollo Funds could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us. Additionally, the Apollo Funds are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete, directly or indirectly, with us. The Apollo Funds may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Apollo Funds continue to directly or indirectly own a significant amount of our equity, even if such amount is less than a majority, the Apollo Funds will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. This concentration of ownership may also affect the prevailing market price of our common stock due to investors’ perceptions that conflicts of interest may exist or arise. As a result, this concentration of ownership may not be in your best interests.

We will be a “controlled company” within the meaning of Nasdaq rules and, as a result, qualify for an exemption from certain corporate governance requirements.

Following this offering, the Apollo Funds will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a “controlled company” within the meaning of the corporate governance standards. Under Nasdaq rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

   

a majority of the board of directors consist of independent directors;

 

   

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

Although we do not currently intend to avail ourselves of this exemption, these requirements will not apply to us as long as we remain a controlled company. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. See “Management’s Discussion and Analysis of

 

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Financial Condition and Results of Operations—Liquidity and Capital Resources.” The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.

Investors in this offering will experience immediate and substantial dilution.

Based on our pro forma net tangible book value per share as of                  and an assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $        per share, representing the difference between our pro forma net tangible book value per share and the assumed initial public offering price. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. For additional information on the dilution you may experience as a result of investing in this offering, see “Dilution.”

You may be diluted by the future issuance of additional common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise, which could adversely affect our stock price.

After this offering, we will have                shares of common stock authorized but unissued (assuming no exercise of the underwriters’ option to purchase additional shares). Our amended and restated certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved                shares for issuance upon exercise of outstanding stock options and                for issuances under our new equity incentive plan. Any common stock that we issue, including under our new equity incentive plan or other equity incentive plans that we may adopt in the future, as well as under outstanding options would dilute the percentage ownership held by the investors who purchase common stock in this offering.

From time to time in the future, we may also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including acquisitions. Our issuance of additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock.

There has been no prior public market for our common stock, and there can be no assurances that a viable public market for our common stock will develop.

Prior to this offering, our common stock was not traded on any market. The initial public offering price for the shares was determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the trading market following the closing of this offering, and although we intend to list our shares of common stock on                  , an active, liquid and orderly trading market for our common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. We cannot predict the extent to which investor interest in our common stock will lead to the development of an active trading market on the                or otherwise or how liquid that market might become. If an active public market for our common stock does not develop, or is not sustained, it may be difficult for you to sell your shares you purchase in this offering at a price that is attractive to you or at all. An inactive trading market may also impair our ability to raise capital by selling shares of our common stock and enter into strategic partnerships or acquire other complementary products, technologies or businesses by using shares of our common stock as consideration. Furthermore, although we intend to list our shares of common stock on                 , there can be no guarantee that we will continue to satisfy the continued listing standards of the                 . If we fail to satisfy the continued listing standards, we could be de-listed, which would negatively impact the value and liquidity of your investment.

 

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We do not anticipate paying dividends on our common stock in the foreseeable future.

We do not anticipate paying any dividends in the foreseeable future on our common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt. As a result, capital appreciation, if any, of our common stock may be your major or sole source of gain from ownership of our common stock for the foreseeable future. Investors seeking dividends should not purchase shares of our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and subject to, among other things, our compliance with applicable law, and depending on, among other things, our business prospects, financial condition, results of operations, cash requirements and availability, debt repayment obligations, capital expenditure needs, the terms of any preferred equity securities we may issue in the future, covenants in the agreements governing our current and future indebtedness, other contractual restrictions, industry trends, the provisions of the Delaware General Corporation Law (the “DGCL”) affecting the payment of dividends and distributions to stockholders and any other factors or considerations our board of directors may regard as relevant. Furthermore, because we are a holding company, our ability to pay dividends on our common stock will depend on our receipt of cash distributions and dividends from our direct and indirect wholly owned subsidiaries, which may be similarly impacted by, among other things, the terms of any preferred equity securities these subsidiaries may issue in the future, debt agreements, other contractual restrictions and provisions of applicable law. Moreover, our existing debt arrangements contain, and any future indebtedness likely will contain, restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to pay dividends and make other restricted payments. While we may change this policy at some point in the future, we cannot assure you that we will make such a change. See “Dividend Policy.”

If equity research analysts or industry analysts do not publish research or reports about our business, publish negative reports or change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock, should one develop, will be influenced by the research and reports that industry or equity research analysts publish about us or our business. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with us, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. If no or few securities or industry analysts commence coverage of us, the trading price for our common stock will be negatively impacted. In the event we do obtain industry or equity research analyst coverage, we will not have any control over the analysts’ content and opinions included in their reports. If any of the analysts who cover us issue an adverse or misleading opinion regarding us or our business model, financial performance, stock price or otherwise, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our common stock or if our operating results do not meet their expectations, our stock price could decline and result in the loss of all or a part of your investment in us.

We may issue preferred stock, the terms of which could adversely affect the voting power or value of our common stock.

Our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.

 

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Our amended and restated certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

The doctrine of corporate opportunity generally provides that a corporate fiduciary may not develop an opportunity using corporate resources, acquire an interest adverse to that of the corporation or acquire property that is reasonably incident to the present or prospective business of the corporation or in which the corporation has a present or expectancy interest, unless that opportunity is first presented to the corporation and the corporation chooses not to pursue that opportunity. The doctrine of corporate opportunity is intended to preclude officers, directors and other fiduciaries from personally benefiting from opportunities that belong to the corporation. Our amended and restated certificate of incorporation, which will become effective upon the closing of this offering, will provide that the doctrine of corporate opportunity will not apply with respect to Apollo and will further provide for the allocation of certain corporate opportunities between Apollo and us. Under these provisions, neither Apollo, Apollo-managed funds, their portfolio companies or other affiliates (together, the “Apollo Entities”) nor any of their officers, directors, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities or lines of business in which we operate. For instance, a director of our company who also serves as a director, officer, partner or employee of the Apollo Entities may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated to the Apollo Entities instead of to us. The terms of our amended and restated certificate of incorporation are more fully described in “Description of Capital Stock.”

Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under the DGCL may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our stock.

Our amended and restated certificate of incorporation and amended and restated bylaws include certain provisions that could have the effect of discouraging, delaying or preventing a change of control of our company or changes in our management that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions include, among other things:

 

   

restrictions on the ability of our stockholders to fill a vacancy on the board of directors;

 

   

our ability to issue preferred stock with terms that the board of directors may determine, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

   

specify that special meetings of our stockholders can be called only upon the request of the chairman of our board of directors or by a resolution adopted by a majority of our board of directors;

 

   

in the event the Apollo Entities cease to beneficially own more than 50% of the outstanding common stock, our directors may only be removed from the board of directors for cause by the affirmative vote of the holders of at least 662/3% of the voting power of outstanding shares of our common stock entitled to vote thereon;

 

   

the absence of cumulative voting in the election of directors, which may limit the ability of minority stockholders to elect directors; and

 

   

advance notice requirements for stockholder proposals and nominations, which may discourage or deter a potential acquirer from soliciting proxies to elect a particular slate of directors or otherwise attempting to obtain control of us.

These provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a transaction involving a change of control of our company that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock that investors might be willing to pay in the future for shares of our common stock if they are viewed as discouraging future takeover attempts.

 

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Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. Accordingly, Section 203 could have an anti-takeover effect with respect to certain transactions that the board of directors does not approve in advance. The provisions of Section 203 may encourage companies interested in acquiring the company to negotiate in advance with the board of directors because the stockholder approval requirement would be avoided if the board of directors approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder.

However, Section 203 of the DGCL also could discourage attempts that might result in a premium over the market price for the shares held by stockholders. These provisions also may make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests. Our amended and restated certificate of incorporation provides that we will not be governed by Section 203. Our amended and restated certificate of incorporation also will contain a provision that provides us with protections similar to Section 203, and will prevent us from engaging in a business combination with an interested stockholder for a period of three years from the date such person acquired such common stock unless (with certain exceptions) the business combination is approved in a prescribed manner, including if board of director approval or stockholder approval is obtained prior to the business combination, except that such provision will provide that the Apollo Funds shall not be deemed an “interested stockholder” for purposes of this provision of our amended and restated certificate of incorporation and therefore not subject to the restrictions set forth in this provision.

Our designation of the Delaware Court of Chancery in our amended and restated certificate of incorporation as the exclusive forum for certain types of stockholder legal proceedings could limit our stockholders’ ability to obtain a more favorable forum for disputes with us or our directors, officers or team members.

Our amended and restated certificate of incorporation will provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, team members or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our bylaws or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence

Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder, and our amended and restated bylaws will provide that the federal district courts of the United States of America will, to the fullest extent permitted by law, be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. Our decision to adopt such a federal forum provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law. While there can be no assurance that federal or state courts will follow the holding of the Delaware Supreme Court or determine that our federal forum provision should be enforced in a particular case, application of our federal forum provision means that suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court.

Section 27 of the Exchange Act creates exclusive federal jurisdiction over all claims brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and our amended and

 

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restated bylaws will provide that the exclusive forum provision does not apply to suits brought to enforce any duty or liability created by the Exchange Act. Accordingly, actions by our stockholders to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder must be brought in federal court. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder.

Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions, including the federal forum provision; provided, however, that stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Additionally, our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, team members or agents, which may discourage such lawsuits against us and such persons. See “Description of Capital Stock—Forum Selection.” Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition and results of operations.

 

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USE OF PROCEEDS

We expect to receive approximately $         million of net proceeds (based upon the assumed initial public offering price of $        per share, the midpoint of the range set forth on the cover page of this prospectus) from the sale of the common stock offered by us, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Assuming no exercise of the underwriters’ option to purchase additional shares of common stock, each $1.00 increase (decrease) in the public offering price would increase (decrease) the net proceeds we receive in this offering by approximately $         million. We estimate that the net proceeds to us, if the underwriters exercise their right to purchase the maximum of                 additional shares of common stock from us, will be approximately $         , after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. This assumes a public offering price of $                 per share, which is the midpoint of the price range set forth on the cover of this prospectus.

We intend to use the entire net proceeds from this offering, after underwriting discounts and commissions and offering expenses payable by us, to repay outstanding indebtedness. The debt to be refinanced consists of our Senior Secured Notes, which bear interest at 9.75% per annum and will mature in May 2023, and our New Superpriority Secured Notes, which bear interest at variable rates (effective rate of 9.75% for fiscal 2020) and will mature in March 2025. Affiliates of the underwriters may hold certain of these notes, and thus would receive a portion of the net proceeds of this offering to the extent such proceeds are used to refinance the notes held by such affiliates of the underwriters.

 

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DIVIDEND POLICY

We currently intend that we will retain all of our future earnings for use in the operation and expansion of our business and, therefore, we currently do not anticipate declaring or paying cash dividends on shares of our common stock in the foreseeable future. Subject to the foregoing, the declaration and payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements, including our secured credit facilities and senior notes, and any other factors deemed relevant by our board of directors. As a holding company, our ability to pay dividends on our common stock will depend on our receipt of cash distributions and dividends from our direct and indirect wholly owned operating subsidiaries, which may be similarly impacted by, among other things, the terms of any preferred equity securities these subsidiaries may issue in the future, debt agreements, other contractual restrictions and provisions of applicable law.

Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Relating to this Offering and Ownership of Our Common Stock—We do not anticipate paying dividends on our common stock in the foreseeable future.

Immediately prior to the end of fiscal 2020 in January 2021, we made a one-time distribution of approximately $73.0 million in cash and assets, consisting of $62.5 million aggregate principal amount of the Senior Secured Notes, that had been held at the Company level.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of May 2, 2021 (i) on an actual basis and (ii) on an as adjusted basis to give effect to the filing of our amended and restated certificate of incorporation and the sale of                shares in this offering at an assumed initial public offering price of $                , the midpoint of the price range shown on the cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us in this offering, and the use of the net proceeds in this offering to retire outstanding indebtedness.

You should read this table together with the information included elsewhere in this prospectus, including “Prospectus Summary—Summary Consolidated Historical and Other Data,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements.

 

     As of May 2, 2021  
     Actual     As Adjusted  
    

(In millions, except share

and per share data)

 

Cash and cash equivalents (excluding restricted cash)

   $ 189.8     $                    
  

 

 

   

 

 

 

Total Debt(1)

   $ 933.7     $    

Stockholders’ equity;

    

Common stock—$0.01 par value;                 shares authorized,                 shares issued and outstanding (actual);                 shares issued and outstanding (as adjusted)

     0.7    

Preferred stock—$0.01 par value;                 shares authorized, no shares issued and outstanding (actual and as adjusted)

     —      

Additional paid-in capital

     603.9    

Accumulated deficit

     (459.8  
  

 

 

   

 

 

 

Total stockholders’ equity(2)

     144.7    
  

 

 

   

 

 

 

Total capitalization(2)

   $ 1,078.4     $    
  

 

 

   

 

 

 

 

(1)   Our total debt as of May 2, 2021 primarily included (i) $800.0 million aggregate principal amount of Senior Secured Notes and $133.7 million aggregate principal amount of New Superpriority Secured Notes. Our total debt as of May 2, 2021 does not include $2.2 million of unamortized original issue discount and premium, net, and $9.4 million of unamortized debt issuance costs.
(2)   Each $1.00 increase (decrease) in the offering price per share of our common stock would increase (decrease) our as adjusted total capitalization and equity by $                 .

The foregoing table:

 

   

assumes no exercise of the underwriters’ option to purchase additional shares of common stock in this offering;

 

   

does not reflect any additional                shares of our common stock reserved for future grant under our new equity incentive plan, which we expect to adopt in connection with this offering; and

 

   

does not reflect any additional                shares of our common stock issuable upon exercise of issued and outstanding options.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering.

Our historical net tangible book value as of                  was $         . Our historical net tangible book value represents the amount of our total tangible assets (total assets less total intangible assets) less total liabilities. Historical net tangible book value per share represents historical net tangible book value divided by the number of shares of common stock issued and outstanding as of                  .

Our pro forma net tangible book value (deficit) as of                  was $         , or $         per share of our common stock. Pro forma net tangible book value (deficit) per share represents our pro forma net tangible book value (deficit) divided by the total number of shares outstanding as of                  , after giving effect to the sale of                 shares of common stock in this offering at the assumed initial public offering price of $        per share (the midpoint of the estimated price range on the cover page of this prospectus) and the application of the net proceeds from this offering. This amount represents an immediate increase in net tangible book value of $        per share of common stock to our existing stockholders before this offering and an immediate and substantial dilution in net tangible book value of $        per share of common stock to new investors purchasing shares of common stock in this offering. We determine dilution by subtracting the as pro forma net tangible book value per share of common stock after this offering from the amount of cash that a new investor paid for a share of common stock in this offering. The following table illustrates this dilution, assuming the underwriters do not exercise their option to purchase additional shares of common stock:

 

Assumed initial public offering price per share of common stock

                           $                    

Historical net tangible book value per share as of                

     

Increase per share of common stock attributable to the pro forma adjustments described above

     
  

 

 

    

Pro forma net tangible book value per share of common stock after this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share

      $    
     

 

 

 

The following table summarizes, as of                  , the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at the assumed initial public offering price of $                 per share, calculated before deduction of estimated underwriting discounts and commissions.

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
     Number      Percent     Amount      Percent  

Existing Stockholders

                   $                                     $                    

Investors in the Offering

                                  

Total

        100   $          100  

A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by new investors by $         , $         and $         per share, respectively. An increase (decrease) of 1,000,000 in the number of shares offered by the selling stockholder, assuming no changes in the assumed initial public offering price per share would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by $         and $         , respectively.

 

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To the extent the underwriters’ option to purchase additional shares is exercised, there will be further dilution to new investors.

If the underwriters were to fully exercise their option to purchase additional shares of our common stock, the percentage of common stock held by existing investors would be         %, and the percentage of shares of common stock held by new investors would be        %.

The foregoing tables and calculations are based on    shares of our common stock outstanding as of                 , 2021, and except as otherwise indicated, reflects and assumes the following:

 

   

assumes an initial public offering price of $        per share of common stock, the midpoint of the price range on the cover of this prospectus;

 

   

assumes no exercise of the underwriters’ option to purchase                additional shares of common stock in this offering;

 

   

does not reflect an additional                shares of our common stock reserved for future grant under our new equity incentive plan, which we expect to adopt in connection with this offering; and

 

   

does not reflect any additional shares of our common stock issuable upon exercise of outstanding options under our existing equity incentive plan.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this management’s discussion and analysis of financial condition and results of operations in conjunction with our audited consolidated financial statements and related notes which are included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Cautionary Note Regarding Forward-Looking Statements and Summary Risk Factors” and “Risk Factors” and included elsewhere in this prospectus.

We report our results of operations on a 52- or 53-week fiscal year ending on the last Sunday in January. The year ended January 31, 2021 was a 53-week fiscal year; the years ended January 26, 2020 and January 27, 2019 were 52-week fiscal years. We refer to the year ended January 31, 2021 as “fiscal 2020,” the year ended January 26, 2020 as “fiscal 2019,” and the year ended January 27, 2019 as “fiscal 2018.”

Unless otherwise noted, our financial results have been presented on a GAAP basis. In limited instances, we have presented our financial results on a GAAP and non-GAAP (adjusted) basis, which is described in the section entitled “Non-GAAP Financial Measures.”

Overview

We are a specialty retailer offering a variety of high quality food products with an emphasis on fresh, premium perishable and other specialty items, including enticing convenient meal solutions. We operate our stores in a small-box format seeking to provide an attractive, convenient shopping environment with a high level of customer service. Our customers are typically medium- to high-income earners who enjoy healthy, premium products. Our stores feature colorful and visually appealing product presentation, accent lighting, and other elements that help create a “neighborhood grocer” feel.

The Fresh Market opened its first store in Greensboro, North Carolina in 1982. As of May 2, 2021, we operated 159 stores in 22 states.

Key Factors Affecting Our Results of Operations

Overall Macroeconomic Trends

The overall economic environment and related changes in consumer behavior can have a significant impact on our business. In general, positive economic conditions promote greater consumer spending, while economic weakness generally results in a reduction in consumer spending. Our results of operations may be materially affected by economic conditions that impact consumer confidence and spending, including discretionary spending. This risk may be exacerbated if customers choose lower-cost alternatives to our product offerings in response to economic conditions, or if consumers perceive our stores as destinations for special occasions rather than regular shopping. However, certain changes in consumer behavior, such as increased dining at home in weak economic times, can have a positive, mitigating effect on our results. Macroeconomic conditions affecting disposable consumer income include employment levels, business conditions, changes in housing market conditions, the availability of consumer credit, interest rates, tax rates, and fuel and energy costs. In addition, during periods of high employment, we may experience higher labor costs.

Competition

Food retail is a large and competitive industry. Our competition varies and includes national, regional, and local conventional supermarkets, national superstores, alternative food retailers, natural foods stores, smaller

 

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specialty stores, and farmers’ markets. In addition, we compete with restaurants and other dining options in the food-at-home and food-away-from-home markets. The opening and closing of competitive stores, as well as restaurants and other dining options, in regions where we operate will affect our results. In addition, changing consumer preferences with respect to food choices and to dining out or at home can impact us.

Recent Operational Changes

We have spent the last few years bringing The Fresh Market back to its roots of providing a highly differentiated specialty food offering and improving the in-store and omni-channel experience. Along with the Apollo Funds’ support and a strengthened new management team, with five additions to the senior leadership team in 2020 (including both Jason Potter as President and Chief Executive Officer and Jim Heaney as Chief Financial Officer), we have recently delivered exceptional financial performance.

Our Response to the COVID-19 Pandemic

We are proud to provide our guests with high quality, fresh foods and restaurant quality meals, delivered

with impeccable service in an exceptionally clean and well-stocked store. As the COVID-19 pandemic has declined, we continue to carefully monitor and adjust our safety protocols and follow CDC guidance. We have maintained many of the protocols established at the beginning of the pandemic to keep our team members and guests safe. Safety measures that continue include requiring team members to wear face coverings, augmented cleaning protocols, providing face coverings and gloves to team members, requiring team members attest they do not have COVID-19 symptoms before working, and plexiglass at cash registers and protective film on credit card machines. As a result of the successful execution of our team and our various safety measures, we were honored to be recognized as one of the “Cleanest Grocery Stores in America” by Consumer Reports and will continue to earn our guests’ trust with every shopping trip. As described in “Risk Factors” under the risk “Various operating factors and downturns or volatility in general economic conditions, including as a result of the current novel COVID-19 pandemic affecting the food retail industry, may disrupt our business and could negatively impact our financial condition,” the COVID-19 pandemic has presented many risks and challenges that we must manage. While we have experienced many challenges, including but not limited to, product shortages, staffing difficulties, and evolving customer shopping behaviors, our focus remains on both offering our customers a high quality service experience and supporting our essential front-line team members. Though we have successfully managed these challenges to date, our operations and financial condition could still be negatively affected by the COVID-19 pandemic and future developments, which are highly uncertain and cannot be predicted.

Fifty-Three Week Fiscal Years

We report our results of operations on a 52- or 53-week fiscal year ending on the last Sunday in January, with each fiscal quarter consisting of a 13-week period, except the fourth quarter of a 53-week fiscal year will have 14 weeks. Fiscal 2020 was a 53-week fiscal year; fiscal 2019 and fiscal 2018 were each 52-week fiscal years. Fiscal years in which there are 53 weeks will have additional sales and expenses from the additional week.

Public Company Expenses

Following the offering, our financial results will be impacted by the significant annual public company legal, accounting and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Exchange Act and be required to comply with rules and regulations applicable to public companies, including the listing requirements of Nasdaq.

Key Performance Measures

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 (i) number of stores, (ii) the percentage

 

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change in comparable store sales, (iii) annual average unit sales, or “AUV,” and (iv) Adjusted EBITDA. The following table sets out our key performance measures for fiscal 2020, fiscal 2019 and fiscal 2018 and for the first quarters of fiscal 2021 and 2020.

 

     Thirteen Weeks Ended     Fiscal Year Ended  
     May 2, 2021     April 26, 2020     January 31,
2021
    January 26,
2020
    January 27,
2019
 

Store count (at period end)

     159       159       159       159       161  

Percentage change in comparable store sales

     7.3     12.9     22.3     (1.8 )%      0.4

AUV (in thousands)

       $ 11,869     $ 9,522     $ 9,654  

Adjusted EBITDA (in thousands)

   $ 55,766     $ 52,574     $ 219,407     $ 117,972     $ 101,120  

Store Count

Store count reflects the number of stores we operate at the end of the relevant period.

Percentage Change in 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 15 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. Generally, a store is removed from comparable store sales in the period it is closed. Consistent with our historical practice, comparable store sales for fiscal 2020 includes sales from the first 52 weeks of fiscal 2020 and comparable store sales for the first quarter of fiscal 2021 is calculated using the thirteen weeks ended May 2, 2021 and May 3, 2020 for the first quarters of fiscal 2021 and fiscal 2020, respectively. There may be variations in the way that our competitors calculate comparable or “same store” sales. As a result, data in this prospectus 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;

 

   

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;

 

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the number of stores we open, remodel, relocate, or refresh in any period; and

 

   

severe or unfavorable weather conditions.

In particular, competition (including competitor store openings or closings near our stores and competitor expansion of offerings of premium/perishable products) may affect comparable store sales.

When we open new stores, a percentage of our sales will not be included in comparable store sales. Accordingly, comparable store sales is only one measure we use to assess our performance.

AUV

Average unit sales, or AUV, is based on the same stores included in comparable store sales. It is calculated as the total aggregated annual stores sales divided by the end-of-year comparable store count. We review AUV on an annual basis and do not report it quarterly.

Adjusted EBITDA

Adjusted EBITDA is defined as net income plus interest expense, income taxes, and depreciation and amortization, or “EBITDA,” adjusted to exclude unusual items and other adjustments that management believes are not reflective of the ongoing performance of the business and that are required or permitted in calculating covenant compliance under our debt agreements. Adjusted EBITDA is a non-GAAP financial measure. Refer to the tables included in the section titled “—Non-GAAP Financial Measures” for more information and a reconciliation of Adjusted EBITDA to net income.

Components of our Results of Operations

Sales

Our sales comprise gross sales net of coupons, commissions, and discounts.

Gross Profit

Gross profit is equal to our sales minus our cost of goods sold. Cost of goods sold is directly correlated with sales and includes the direct costs of purchased merchandise, inventory shrinkage, distribution and supply chain costs, packaging, store supplies, and store occupancy costs. Store occupancy costs include rent, common area maintenance, real estate taxes, personal property taxes, insurance, licenses, utilities, and other non-cash amortization charges. Rebates and discounts from vendors are recorded as the related purchases are made and are recognized as a reduction to cost of goods sold as the related inventory is sold. Cost of goods sold does not contain depreciation expense because we outsource all aspects of our supply chain, including warehousing and distribution, and rely upon independent third-party service providers for product shipments to our stores. The components of our cost of goods sold may not be identical to those of our competitors. As a result, data in this prospectus regarding our gross profit and gross margin rate may not be comparable to similar data made available by our competitors.

Gross margin rate measures gross profit as a percentage of our sales. Gross margin rates are driven by economies of scale from our store base, pricing strategy, inventory shrinkage as a percentage of sales, leverage of fixed costs 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 retail store and corporate compensation (both cash and share-based), buying costs, pre-opening expenses, marketing and advertising, and other store and corporate

 

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administrative costs. Pre-opening expenses are costs associated with new store openings or grand re-openings, including costs associated with rent, store labor, travel, recruiting, relocating and training personnel, advertising, and other miscellaneous costs, while grand re-opening expenses are primarily related to advertising. Pre-opening costs and costs incurred for producing and communicating advertising are expensed when incurred.

Labor and corporate administrative costs generally fluctuate as a percentage of sales as a result of an increase or decrease 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 prospectus regarding our selling, general and administrative expenses may not be comparable to similar data made available by our competitors.

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 or declining 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. A decline in sales or other factors could expose us to future impairment charges that could be material.

Prior to the adoption of ASC 842, Leases, we recorded a reserve for future lease obligations associated with closed stores or unopened leased locations that we decided not to pursue. The fair value of the lease liability was estimated using a discount rate to calculate the present value of the remaining noncancelable lease payments at the cease use date for the store, net of an estimate of subtenant income. Our expectations of potential subtenant income were based on various factors, including our knowledge of the geographical area in which the leased property was located, the remaining lease term, and existing conditions. We also sought advice from local brokers and agents, commercial market analysts, and third-party fair value reports to develop our assumptions. Changes in market and economic conditions could have caused us to change our assumptions and adjust the reserves.

Income from Operations

Income from operations consists of gross profit minus selling, general and administrative expenses, impairments and store closure costs, transaction and related 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.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In this process, certain relevant criteria are evaluated including the taxable income in prior carryback years that can be used to absorb net operating losses and credit

 

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carrybacks, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, prudent and feasible tax planning strategies, and future expected taxable income. We establish a valuation allowance for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized.

Consolidated Results of Operations

The following table summarizes key components of our results of operations for the periods indicated as a percentage of sales.

 

    Thirteen Weeks Ended     Year Ended  
    May  2,
2021
(Unaudited)
    April  26,
2020
(Unaudited)
    January 31,
2021 (1)
    January 26,
2020
    January 27,
2019
 
    (13 weeks)     (13 weeks)     (53 weeks)     (52 weeks)     (52 weeks)  

Consolidated Statements of Operations Data:

                   

Sales

  $ 489,468     100.0   $ 447,232     100.0   $ 1,887,452     100.0   $ 1,522,555     100.0   $ 1,595,448     100.0

Cost of goods sold (2)

    315,633     64.5     293,095     65.5     1,229,161     65.1     1,042,282     68.5     1,065,956     66.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    173,835     35.5     154,137       34.5     658,291     34.9     480,273     31.5     529,492     33.2

Operating Expenses:

                   

Selling, general and administrative expenses

    123,950       25.3     109,595       24.5     466,952     24.7     387,842     25.5     440,070     27.6

Transaction and related costs

    563       0.1     102       0.0     16,460     0.9     1,414     0.1     (223     0.0

Impairments and store closure costs

    747       0.2     1,540       0.3     3,533     0.2     5,387     0.4     27,262     1.7

Depreciation

    11,464       2.3     11,718       2.6     44,363     2.4     49,902     3.3     59,563     3.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    37,111       7.6     31,182       7.0     126,983     6.7     35,728     2.3     2,820     0.2

Interest expense

    24,178       4.9     24,858       5.6     96,625     5.1     98,252     6.5     97,642     6.1

(Gain) loss on extinguishment of debt

    —             7,572       1.7     (132     0.0     —             3,202     0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    12,933       2.6     (1,248     (0.3 )%      30,490     1.6     (62,524     (4.1 )%      (98,024     (6.1 )% 

Tax provision (benefit)

    2,436       0.5     14,384       3.2     3,576       0.2     2,893     0.2     (19,427     (1.2 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 10,497       2.1   $ (15,632     (3.5 )%    $ 26,914     1.4   $ (65,417     (4.3 )%    $ (78,597     (4.9 )% 

 

Percentage totals in the above table may not equal the sum of the components due to rounding.

 

(1)

The 53rd week for the year ended January 31, 2021 was January 25, 2021 through January 31, 2021 and its impact including sales, gross profit, and selling, general and administrative expenses was approximately $35.5 million, $14.1 million, and $8.7 million, respectively.

(2)

Cost of goods sold included an incremental $11.2 million and $19.8 million in non-cash amortization expense for the years ended January 31, 2021 and January 26, 2020 associated with the change in accounting principle with the adoption of ASC 842, Leases, on January 28, 2019. See our Consolidated Financial Statements, Note 7, “Leases” for additional information.

Thirteen Weeks Ended May 2, 2021 Compared to the Thirteen Weeks Ended April 26, 2020

Sales

Sales increased 9.4%, or $42.2 million, to $489.5 million for the thirteen weeks ended May 2, 2021. There were 159 comparable stores and no non-comparable stores as of May 2, 2021, compared to 159 comparable stores and no non-comparable stores as of April 26, 2020. The increase in sales was primarily driven by increased customer traffic due to merchandising focused on improving the at-home eating experience and changes in customer shopping behaviors associated with the ongoing coronavirus pandemic, including relaxation of coronavirus-related protocols compared to the prior year. The prior year included unprecedented changes in customer shopping behaviors due to the coronavirus pandemic, including COVID related stocking up of pantries, increased consumption of food at home, and customers consolidating purchases during less frequent shopping trips.

 

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Comparable store sales growth was 7.3% for the thirteen weeks ended May 2, 2021, compared to 12.9% for the thirteen weeks ended April 26, 2020. While comparable store sales grew significantly in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 for the reasons discussed above, they did so at a lower growth rate than in fiscal 2020 compared to fiscal 2019. Comparable store sales growth in the first quarter of fiscal 2020 benefitted in part from the impact on sales of the COVID-19 pandemic, and comparable sales growth for the second, third and fourth quarters of fiscal 2020 compared to the prior year periods were similarly impacted. Our 7.3% comparable store sales growth for the first quarter of fiscal 2021 reflects the comparison with the increased fiscal 2020 first quarter sales, and as our comparable store sales for the remainder of fiscal 2021 are compared to fiscal 2020, we expect the rate of growth will be similarly impacted.

The following table provides our comparable sales data for the periods presented (compared to the corresponding period in the prior fiscal year):

 

     For the Thirteen Weeks Ended  
     May 2,
2021
    April 26,
2020
 

Percentage change in comparable store sales

     7.3     12.9

Percentage change in number of transactions

     13.7     (9.9 )% 

Percentage change in average customer transaction size

     (5.6 )%      25.2

Average customer transaction size

   $ 40.11     $ 41.23  

Gross Profit

Gross profit increased 12.8%, or $19.7 million, to $173.8 million for the thirteen weeks ended May 2, 2021. The increase in gross profit was due to a $14.6 million increase attributable to increased sales volume and a $5.1 million increase associated with an improved gross margin rate.

Our cost of goods sold increased $22.5 million to $315.6 million for the thirteen weeks ended May 2, 2021, which was primarily driven by merchandise purchases attributable to increased sales volume.

The gross margin rate increased 100 basis points to 35.5% for the thirteen weeks ended May 2, 2021, which was predominantly driven by leverage achieved through higher sales volume reducing shrink and occupancy costs as a percentage of sales partially offset by increased supplies and packaging expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 13.1%, or $14.4 million, to $124.0 million for the thirteen weeks ended May 2, 2021. During the thirteen weeks ended May 2, 2021, increased sales volume drove increases of $7.1 million in store compensation expense, $2.4 million in corporate compensation expense, and $1.8 million in business optimization project investments. Additionally, we incurred $2.0 million in increased marketing expenses.

As a percentage of sales, selling, general and administrative expenses increased to 25.3% for the thirteen weeks ended May 2, 2021, compared to 24.5% for the thirteen weeks ended April 26, 2020. The increase as a percentage of sales was driven by increases of 40 basis points from increased marketing investments and 40 basis points from increased store and corporate bonus accruals.

Transaction and Related Costs

Transaction and related costs were $0.6 million and $0.1 million for the thirteen weeks ended May 2, 2021 and April 26, 2020, respectively. Transaction and related costs for both periods are associated with litigation-related legal fees from the Acquisition. The litigation was settled in March 2021 for a gross settlement amount of

 

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$27.5 million. Our insurers agreed to directly fund $12.4 million of the settlement and we contributed the $15.1 million balance on April 12, 2021. We recognized $15.1 million in expense related to the settlement during fiscal 2020.

Store Closure Costs

Store closure costs were $0.7 million and $1.5 million for the thirteen weeks ended May 2, 2021 and April 26, 2020, respectively. The primary activity is related to charges for ongoing closed store activity in both periods.

Depreciation

Depreciation expense decreased 2.2%, or $0.3 million, to $11.5 million for the thirteen weeks ended May 2, 2021. The decrease was attributable to reduced capital investments in recent years.

Depreciation expense as a percentage of sales was 2.3% and 2.6% for the thirteen weeks ended May 2, 2021 and April 26, 2020, respectively.

Income from Operations

Income from operations increased $5.9 million to $37.1 million for the thirteen weeks ended May 2, 2021, compared to $31.2 million for the thirteen weeks ended April 26, 2020. The increase in income from operations was primarily attributable to increased sales volume and gross profit partially offset by an increase in selling, general and administrative expenses.

Income from operations as a percentage of sales was 7.6% for the thirteen weeks ended May 2, 2021, compared to 7.0% for the thirteen weeks ended April 26, 2020.

Interest Expense

Interest expense decreased $0.7 million to $24.2 million for the thirteen weeks ended May 2, 2021, compared to $24.9 million for the thirteen weeks ended April 26, 2020. Interest expense primarily relates to our debt agreements and the related interest and amortization expenses. See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Condensed Consolidated Financial Statements, for further details.

Tax Provision

Income tax expense decreased $11.9 million to $2.4 million for the thirteen weeks ended May 2, 2021, compared to $14.4 million for the thirteen weeks ended April 26, 2020. The decrease in income tax expense is primarily related to a decrease in the valuation allowance attributable to the Company utilizing net operating loss carryforwards, for which a valuation allowance was previously established, partially offset by increased income from operations.

The effective tax rate for the thirteen weeks ended May 2, 2021 was 18.8%, compared to 1,152.6% for the thirteen weeks ended April 26, 2020. The primary driver for the variance of the Company’s effective rate from the statutory rate of 21.0% for the thirteen weeks ended May 2, 2021 was a decrease in the valuation allowance attributable to the Company utilizing net operating loss carryforwards, for which a valuation allowance was previously established. The primary driver for the variance of the Company’s effective rate from the statutory rate of 21.0% for the thirteen weeks ended April 26, 2020 was the recording of additional valuation allowance for discrete items associated with the enactment of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The negative effective tax rate was a result of the Company recognizing tax provision expense due to the recording of the valuation allowance for discrete items while the Company had a loss before tax provision. See our Consolidated Financial Statements, Note 5, “Income taxes” in our Notes to the Condensed Consolidated Financial Statements, for further details.

 

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Net Income (Loss)

Net income increased $26.1 million to $10.5 million for the thirteen weeks ended May 2, 2021, compared to a net loss of $15.6 million for the thirteen weeks ended April 26, 2020. The increase in our net income during the thirteen weeks ended May 2, 2021 was primarily attributable to increased income from operations and a decrease in income tax expense.

Our net income as a percentage of sales was 2.1% for the thirteen weeks ended May 2, 2021, compared to a net loss of 3.5% as a percentage of sales for the thirteen weeks ended April 26, 2020.

Year Ended January 31, 2021 Compared to the Year Ended January 26, 2020

Sales

Sales increased 24.0%, or $364.9 million, to $1,887.5 million for fiscal 2020, compared to fiscal 2019. The increase in sales and larger basket size were primarily driven by changes in customer shopping behaviors due to the ongoing coronavirus pandemic, including increased consumption of food at home and customers consolidating purchases during less frequent shopping trips. Additionally, sales were positively affected by changes to merchandising that are focused on improving the at-home eating experience, as well as the 53rd week in fiscal 2020 contributing $35.5 million in sales. There were 159 comparable stores and no non-comparable stores as of January 31, 2021 and January 26, 2020.

The following table provides our comparable store sales data for the first 52 weeks of fiscal 2020 and fiscal 2019, respectively.

 

     Year Ended  
     January 31,
2021
    January 26,
2020
 

Percentage change in comparable store sales

     22.3     (1.8 )% 

Percentage change in number of transactions

     (3.0 )%      (3.4 )% 

Percentage change in average customer transaction size

     26.0     1.6

Average customer transaction size

   $ 41.61     $ 33.00  

Gross Profit

Gross profit increased 37.1%, or $178.0 million, to $658.3 million for fiscal 2020, compared to fiscal 2019. The increase in gross profit was due to $115.1 million attributable to increased sales volume and an increase of $62.9 million in connection with an improved gross margin rate. The 53rd week in fiscal 2020 contributed approximately $14.1 million of gross profit in total.

Our cost of goods sold increased $186.9 million to $1,229.2 million for fiscal 2020, compared to fiscal 2019, which was primarily attributable to $194.0 million in increased merchandise purchases attributable to increased sales volume, partially offset by a decrease of $8.1 million in store occupancy costs.

Due to the adoption of ASC 842, Leases, the amortization period for former favorable lease assets was shortened and resulted in more non-cash amortization expense being recognized in the initial years after adoption. The effect of the acceleration of amortization expense was an increase to cost of goods sold of $11.2 million and $19.8 million for fiscal 2020 and fiscal 2019, respectively.

The gross margin rate increased 340 basis points to 34.9% for fiscal 2020, compared to fiscal 2019. The increase in gross margin rate was primarily driven by a 190 basis point decrease in store occupancy costs as a result of reduced non-cash amortization expenses and leverage achieved through higher sales volume reducing occupancy costs as a percentage of sales. Leverage through higher sales volume also resulted in a 140 basis point increase in merchandise margin due to a reduction of shrink as a percentage of sales.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 20.4%, or $79.1 million, to $467.0 million for fiscal 2020, compared to fiscal 2019. During fiscal 2020, improved operating results and increased sales volume drove increases of $31.6 million in store compensation expense, $11.5 million in corporate compensation expense, $7.4 million in e-commerce expenses, predominantly due to fees associated with increased Instacart volume, and $3.7 million in business optimization investments. Additionally, we incurred $4.0 million in one-time, non-recurring expenses related to the coronavirus pandemic, including deep cleaning our stores, employee appreciation bonuses, and paid time off while under a doctor-ordered quarantine, as well as an increase of $7.3 million in expenses related to cleaning and maintaining our stores and $6.3 million in marketing expenses. Selling, general and administrative expenses incurred during the 53rd week in fiscal 2020 were approximately $8.7 million.

As a percentage of sales, selling, general and administrative expenses decreased to 24.7% for fiscal 2020, compared to 25.5% for fiscal 2019. Leverage on our store compensation and benefit expenses due to higher sales volume resulted in a decrease of 170 basis points relative to the prior year. The decrease was partially offset by increases of 30 basis points related to corporate compensation expense and 40 basis points for e-commerce expenses.

Transaction and Related Costs

We incurred transaction and related costs of $16.5 million during fiscal 2020, compared to $1.4 million during fiscal 2019. The fiscal 2020 costs include a $15.1 million settlement of a stockholder class action lawsuit associated with our Acquisition in fiscal 2016. Additionally, both periods include legal fees associated with this litigation. See our Consolidated Financial Statements, Note 15, “Commitments and Contingencies” in our Notes to the Consolidated Financial Statements, for further details.

Impairments and Store Closure Costs

Impairments and store closure costs decreased $1.9 million, to $3.5 million for fiscal 2020, compared to fiscal 2019. For fiscal 2020, the store closure costs were primarily attributable to charges related to ongoing closed store activities partially offset by net reserve adjustments associated with lease terminations. In fiscal 2019, the costs included $6.0 million in impairment charges predominantly associated with write-downs for certain store locations, partially offset by a net credit of $0.6 million in store closure costs driven by net reserve adjustments with lease terminations. See our Consolidated Financial Statements, Note 6, “Impairments and Store Closure Costs” in our Notes to the Consolidated Financial Statements, for further details.

Depreciation Expense

Depreciation expense decreased 11.1%, or $5.5 million, to $44.4 million for fiscal 2020, compared to fiscal 2019. The decrease was attributable to a larger percentage of our fixed assets being fully depreciated and reduced capital investments in recent years.

Depreciation expense as a percentage of sales decreased by 90 basis points to 2.4% for fiscal 2020, compared to 3.3% for fiscal 2019.

Income from Operations

Income from operations improved $91.3 million to $127.0 million for fiscal 2020, compared to $35.7 million for fiscal 2019. The increase in income from operations was primarily attributable to increased sales volume and gross profit partially offset by an increase in selling, general and administrative expenses and transaction and related costs.

Income from operations as a percentage of sales was 6.7% for fiscal 2020, compared to 2.3% for fiscal 2019.

Interest Expense

Interest expense decreased 1.7%, or $1.6 million, to $96.6 million for fiscal 2020, compared to fiscal 2019. The decrease was primarily attributable to our purchase of Senior Secured Notes in open market transactions

 

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during July 2020, which effectively retired the bonds and eliminated the associated interest expense. See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

Gain on Extinguishment of Debt

The gain on the extinguishment of debt was $0.1 million for fiscal 2020 as a result of two extinguishment of debt transactions during fiscal 2020.

During March 2020, we redeemed the Superpriority Secured Notes and incurred a loss of $7.6 million on the extinguishment of debt. The loss on extinguishment of debt included a make whole redemption premium payment of $4.9 million to redeem the Superpriority Secured Notes and the writeoff of the remaining unamortized original issue discount of $1.6 million and debt issuance costs of $1.0 million.

During July 2020, we purchased Senior Secured Notes in open market transactions, which effectively retired the bonds. We recognized a $7.7 million gain on the extinguishment of debt, which is the difference between the

bonds’ cash redemption price of $53.5 million and carrying value of $61.2 million on the purchase date.

See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

Tax Provision (Benefit)

Income tax expense increased $0.7 million to $3.6 million for fiscal 2020, compared to $2.9 million for fiscal 2019. The increase in income tax expense is associated with increased income from operations and recording discrete items arising from the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act resulted in valuation allowances on certain deferred tax assets, mainly related to increasing the valuation allowance on the deferred tax asset for our federal net operating loss carryforward.

Income taxes for fiscal 2020 resulted in an effective tax rate of 11.7%, compared to the effective tax rate of negative 4.6% for fiscal 2019. For fiscal 2020, the primary driver for the variance of the Company’s effective rate from the statutory rate of 21.0% was a decrease in the valuation allowance because we utilized net operating loss carryforwards, for which a valuation allowance was previously established. For fiscal 2019, the primary driver of the variance of the Company’s effective rate from the statutory rate of 21.0% was adjustments made to the valuation allowance associated with certain deferred tax assets.

Net Income

Net income increased $92.3 million to $26.9 million for fiscal 2020, compared to a net loss of $65.4 million for fiscal 2019. The increase in our net income during fiscal 2020 was primarily attributable to increased income from operations.

Our net income as a percentage of sales was 1.4% for fiscal 2020, compared to a net loss as a percentage of sales of 4.3% for fiscal 2019.

Year Ended January 26, 2020 Compared to the Year Ended January 27, 2019

Sales

Sales decreased 4.6%, or $72.9 million, to approximately $1,522.6 million for fiscal 2019, compared to fiscal 2018. The closure of two stores during fiscal 2019 contributed $3.6 million to the decrease and the closure of 15 stores in July 2018 contributed $40.8 million. The remainder of the decrease was predominantly related to lower comparable store sales and a result of fewer transactions driven by the competitive environment, including increased promotional activity. There were 159 comparable stores and no non-comparable stores as of January 26, 2020, compared to 161 comparable stores and no non-comparable stores open at January 27, 2019.

 

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The following table provides our comparable store sales data for fiscal 2019 and fiscal 2018, respectively.

 

     Year Ended  
     January 26,
2020
    January 27,
2019
 

Percentage change in comparable store sales

     (1.8 )%      0.4

Percentage change in number of transactions

     (3.4 )%      (2.5 )% 

Percentage change in average customer transaction size

     1.6     2.9

Average customer transaction size

   $ 33.00     $ 32.48  

Gross Profit

Gross profit decreased 9.3%, or $49.2 million, to $480.3 million for fiscal 2019, compared to fiscal 2018. The decrease in gross profit was due to $24.2 million attributable to decreased sales volume and a decrease of $25.0 million in connection with a lower gross margin rate.

Our cost of goods sold decreased $23.7 million to $1,042.3 million for fiscal 2019, compared to fiscal 2018, which was primarily attributable to decreases of $40.0 million in merchandise product costs and $1.9 million in supplies expense, partially offset by an increase of $18.2 million in store occupancy costs. The decreases in merchandise product costs and supplies expense were primarily due to fewer stores in operation and lower comparable store sales.

Due to the adoption of ASC 842, Leases, store occupancy costs included an incremental non-cash amortization expense of $19.8 million, primarily driven by a shortened amortization period for former favorable lease assets, and additional rent expense of $1.8 million for operating leases formerly accounted for as financing leases. In the prior year, the associated lease cost for financing leases would have been recorded as depreciation and interest expense. With the adoption of ASC 842, Leases, we evaluated these leases and determined the leases are operating leases beginning in fiscal 2019. Excluding the effects of ASC 842, Leases, store occupancy costs decreased $3.6 million, primarily due to fewer stores in operation.

The gross margin rate decreased 170 basis points to 31.5% for fiscal 2019, compared to fiscal 2018. The decrease in gross margin rate was primarily driven by a 150-basis-point increase in store occupancy costs as a result of adopting ASC 842, Leases, as well as additional increases in promotional activity and distribution and transportation costs, partially offset by reduced supplies expense, as a percentage in sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 11.9%, or $52.2 million, to $387.8 million for fiscal 2019, compared to fiscal 2018. Thirteen million dollars of the decrease is related to having fewer stores in operation. Excluding the impact of closed stores, overall compensation and benefits expenses decreased by $33.7 million with declines of $8.9 million in reduced bonus expenses, $17.2 million in other store compensation and benefit expenses, and $7.5 million in other corporate compensation and benefits expenses. The decreases were primarily driven by initiatives to reduce labor and benefit costs and from underperformance against bonus measures. We additionally experienced reductions in marketing expenses, leadership change costs, and other corporate general and administrative expenses relative to fiscal 2018 due to changing strategic priorities and cost-management initiatives.

As a percentage of sales, selling, general and administrative expenses decreased to 25.5% for fiscal 2019, compared to 27.6% for fiscal 2018. The decrease was predominantly due to a decrease of 190 basis points related to overall compensation and benefit expenses.

Transaction and Related Costs

We incurred transaction and related costs of $1.4 million during fiscal 2019, compared to a benefit of $0.2 million during fiscal 2018. Transaction and related costs for both periods are associated with legal fees from our Acquisition in fiscal 2016.

 

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Impairments and Store Closure Costs

Impairments and store closure costs decreased $21.9 million to $5.4 million for fiscal 2019, compared to fiscal 2018. In fiscal 2019, the costs include $6.0 million in impairment charges predominantly associated with write-downs for certain store locations, partially offset by a net credit of $0.6 million in store closure costs. See our Consolidated Financial Statements, Note 6, “Impairments and Store Closure Costs” in our Notes to the Consolidated Financial Statements, for further details.

In fiscal 2018, we recorded $24.2 million in store closure costs and $3.1 million in impairments, primarily related to 15 store locations closed in July 2018. Additionally, we recorded charges for locations in which there were lease obligations that we decided not to pursue and for ongoing closed store activities, with offsets to these charges as previously recorded reserves were adjusted based on the timing of expected subtenant income or for the assignment or termination of certain leases.

Depreciation Expense

Depreciation expense decreased 16.2%, or $9.7 million, to $49.9 million for fiscal 2019, compared to fiscal 2018. The decrease was primarily attributable to a larger percentage of our fixed assets being fully depreciated and fewer stores in operation. Fiscal 2018 includes $0.5 million in depreciation expense associated with financing leases for locations where we were considered the accounting owner. With the adoption of ASC 842, Leases, on January 28, 2019, we concluded the leases related to these locations were operating and did not recognize depreciation expense for these leases during fiscal 2019.

Depreciation expense as a percentage of sales decreased by 40 basis points to 3.3% for fiscal 2019, compared to 3.7% for fiscal 2018.

Income from Operations

Income from operations improved $32.9 million to $35.7 million for fiscal 2019, compared to $2.8 million for fiscal 2018. The increase in income from operations was primarily attributable to decreases in selling, general and administrative expenses and impairments and store closure costs, partially offset by reduced gross profit.

Income from operations as a percentage of sales was 2.3% for fiscal 2019, compared to 0.2% for fiscal 2018.

Interest Expense

Interest expense increased 0.6%, or $0.6 million, to $98.3 million for fiscal 2019, compared to fiscal 2018. The increase was primarily attributable to the issuance of the Superpriority Secured Notes on March 15, 2018 and the related interest, amortization of debt issuance costs and the original issue discount, and payment of commitment fees on Delayed Draw Superpriority Secured Notes. See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details. Fiscal 2018 includes $1.4 million in interest associated with finance leases for locations where we were considered the accounting owner. With the adoption of ASC 842, Leases, on January 28, 2019, we concluded the leases related to these locations were operating and did not recognize interest expense for these leases during fiscal 2019.

Loss on Extinguishment of Debt

The loss on the extinguishment of debt was $3.2 million for fiscal 2018. The Company incurred the loss when the Revolving Credit Facility was terminated on March 15, 2018 in connection with the issuance of the Superpriority Secured Notes, and the remaining unamortized debt issuance costs were written off. See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

 

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Tax Provision (Benefit)

Income tax expense increased $22.3 million to $2.9 million for fiscal 2019, compared to an income tax benefit of $19.4 million for fiscal 2018. The increase in income tax expense is due to improved income from operations and our recording of a valuation allowance on the deferred tax asset associated with limitations in deducting interest expense under the Tax Cuts and Jobs Act.

Income taxes for fiscal 2019 resulted in an effective tax rate of negative 4.6%, compared to the effective tax rate of 19.8% for fiscal 2018.

Net Loss

We incurred a net loss of $65.4 million for fiscal 2019, compared to $78.6 million for fiscal 2018. The decrease in our net loss during fiscal 2019 was primarily affected by improved income from operations, partially offset by increased interest expense and increased income tax expense.

Our net loss as a percentage of sales was 4.3% for fiscal 2019, compared to a net loss as a percentage of sales of 4.9% for fiscal 2018.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

EBITDA, a measure used by management to assess operating performance, is defined as net income plus interest expense, income taxes, and depreciation and amortization.

Adjusted EBITDA, another measure used by management to assess operating performance, is defined as EBITDA adjusted to exclude unusual items and other adjustments that management believes are not reflective of the ongoing performance of the business.

In addition, as discussed below in more detail, certain additional adjustments are permitted by the indentures governing our outstanding debt and are used in calculating “EBITDA” for calculating covenant compliance.

We also use certain measures derived from Adjusted EBITDA. Adjusted EBITDA margin is defined as Adjusted EBITDA for a period, divided by the sales for such period. Store-level EBITDA means, for any period, a particular store’s Adjusted EBITDA, excluding any allocations of corporate expenses allocated to that store, and Store-level EBITDA margin means, for any period, a store’s Store-level EBITDA divided by that store’s sales.

Management believes EBITDA is helpful in highlighting trends because EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments. In addition, EBITDA provides more comparability between the historical operating results and operating results that reflect the new capital structure. Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future. Management uses Adjusted EBITDA to make operating decisions and believes it is helpful to investors, because it allows period-to-period comparisons of the Company’s ongoing operating results. The information can also be used to perform trend analyses and to better identify operating trends that may otherwise be masked or distorted. Finally, the Company believes such information provides a higher degree of transparency.

Each of the above described EBITDA-based measures is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance.

 

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EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, EBITDA:

 

   

excludes certain tax payments that may represent a reduction in cash available to us;

 

   

does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

 

   

does not reflect changes in, or cash requirements for, our working capital needs; and

 

   

does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness.

In addition, Adjusted EBITDA:

 

   

does not include one-time expenditures;

 

   

excludes the gain or loss on the extinguishment of debt

 

   

excludes the impairment of stores or long-lived assets and gains or losses upon disposal of property or equipment;

 

   

excludes lease costs, liquidation of inventory, and other costs associated with store closures;

 

   

excludes non-cash equity-based compensation expense;

 

   

excludes executive severance and other charges related to leadership changes; and

 

   

does not include management and other fees and related expenses payable to our equityholders.

Our definition of Adjusted EBITDA allows us to add back certain non-cash and non-recurring charges or costs that are deducted in calculating net income. However, some of these are expenses that involve cash, may recur, vary greatly and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes.

Because of these limitations, we rely primarily on our GAAP results and use EBITDA and Adjusted EBITDA only as supplemental information.

 

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Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

The following table provides a reconciliation of net loss as reported to EBITDA and Adjusted EBITDA:

 

    Thirteen Weeks Ended                    
    May 2, 2021     April 26, 2020     Fiscal
2020
    Fiscal
2019
    Fiscal
2018
 
    (amounts in thousands)  

Net income (loss) as reported

  $ 10,497     $ (15,632   $ 26,914     $ (65,417   $ (78,597

Depreciation

    11,464       11,718       44,363     49,902     59,563

Tax provision

    2,436       14,384       3,576     2,893     (19,427

Interest expense

     24,178       24,858       96,625     98,252     97,642
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 48,575     $ 35,328     $ 171,478   $ 85,630   $ 59,181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Gain) loss on extinguishment of debt (1)

  $ —       $ 7,572     $ (132   $ —       $ 3,202

Non-cash share-based compensation (2)

    (272     19       406     (1,503     388

Impairments (3)

    —         —         —         6,009     3,094

Store closure costs (4)

    747       1,540       3,533     (622     24,168

Corporate severance and other charges (5)

    925       2,177       4,760     3,086     4,686

Non-cash rent expense (6)

    2,435       3,194       11,307     20,239     (144

Tenant allowance receipts (7)

    50       —         868     655     2,386

Amortization of favorable and unfavorable leases (8)

    —         —         —         —         466

Sponsor fees (9)

    375       402       1,533     1,598     1,635

Transaction and related costs (10)

    563       102       16,460     1,414     (223

Business optimization expenses (11)

    1,769       60       4,710     965     1,759

Litigation expenses (12)

    —         —               (9     165

Coronavirus expenses (13)

    518       2,121       4,041            

Loss on disposal of assets (14)

    81       59       443     510     357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 55,766     $ 52,574     $ 219,407   $ 117,972   $ 101,120
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts recorded for the difference between the carrying value and redemption value of debt when the debt is extinguished.

(2)

Non-cash share-based compensation related to equity awards granted to our employees and independent directors. The net benefit for the thirteen weeks ended May 2, 2021 and for fiscal 2019 is due to forfeitures.

(3)

Impairment charges of stores or long-lived assets. See our Consolidated Financial Statements, Note 5, “Fair Value Measurements” in our Notes to the Consolidated Financial Statements, for further details.

(4)

Gains or losses upon disposal of property and equipment, reserve adjustments and other lease costs, liquidation of inventory, and other costs associated with store closures. See our Consolidated Financial Statements, Note 6, “Impairments and Store Closure Costs” in our Notes to the Consolidated Financial Statements, for further details.

(5)

Severance and related employee benefits associated with certain terminations of leadership positions as well as recruiting and on-boarding costs for replacements for certain positions.

(6)

Adjustments to account for (i) the difference in GAAP straight line rent expense and cash rent expense and (ii) the non-cash amortization of tenant allowances. Beginning with fiscal 2019 and the adoption of ASC 842, Leases, incremental non-cash rent expense was recognized primarily related to the amortization of the former favorable lease intangible assets over a shorter period, the remaining lease term, as required under ASC 842, Leases. The shorter amortization period resulted in incremental non-cash expense of $11.2 million in fiscal 2020 and $19.8 million in fiscal 2019 and is expected to result in incremental non-cash expense of $8.3 million in fiscal 2021, $5.2 million in fiscal 2022, and $3.2 million in fiscal 2023 assuming there is no subsequent re-evaluation of the lease terms for lease modifications that may occur in the future. See our Consolidated Financial Statements, Note 7, “Leases” in our Notes to the Consolidated Financial Statements, for further details.

 

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(7)

Cash received from landlords for tenant allowances.

(8)

Amortization of lease related assets and liabilities recorded as part of purchase accounting.

(9)

The annual management and other fees and related expenses, including those paid on a pro rata basis to an affiliate of Apollo and the Rollover Stockholders. See our Consolidated Financial Statements, Note 8, “Related-Party Transactions” in our Notes to the Condensed Consolidated Financial Statements, and Note 14, “Related-Party Transactions” in our Notes to the Consolidated Financial Statements, for further details. The obligation to pay such fees and expenses will terminate upon the completion of this offering and accordingly, the costs are not reflective of our ongoing performance post-offering.

(10)

The transaction and related costs in connection with our Acquisition in fiscal 2016, including litigation expenses associated with stockholder class action lawsuits. The fiscal 2020 amount includes a $15.1 million settlement charge for a stockholder class action lawsuit associated with our Acquisition. See our Consolidated Financial Statements, Note 6, “Supplementary Balance Sheet” in our Notes to the Condensed Consolidated Financial Statements and Note 15, “Commitments and Contingencies” in our Notes to the Consolidated Financial Statements, for further details.

(11)

Costs related to our business optimization projects which we expect will be non-recurring. Items included in this line item are discrete charges that are primarily related to third-party assessments of various strategic business processes and the related implementation. A breakdown of major business optimization projects is presented below:

 

     Thirteen Weeks Ended                       
     May 2, 2021     April 26, 2020      Fiscal
2020
     Fiscal
2019
     Fiscal
2018
 
    

(amounts in thousands)

 

Business Optimization

             

Operational process assessment and labor standards development

   $ 632     $ 60      $ 1,649    $ —        $ —    

Merchandising organizational analysis

     81       —          940      —          —    

Digital strategy

     609       —          752      —          —    

New Kitchen Square concept

     241       —          698      —          —    

IPO readiness

     236       —          583      —          —    

Pricing strategy

     —         —          —          878      —    

Center store strategic resets

     —         —          —          46        1,578  

Other

     (30     —          88      41      181
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,769     $ 60      $ 4,710    $ 965    $ 1,759

 

(12)

Expenses related to wage and hour litigation.

(13)

Costs specifically attributed to the COVID-19 pandemic, including employee appreciation bonuses and paid time off while under a doctor-ordered quarantine.

(14)

Losses on the disposal of fixed assets at open store and corporate locations.

 

The indentures governing our Senior Secured Notes and our New Superpriority Secured Notes include covenants which place restrictions on our ability to make investments, incur debt, and pay dividends, among other things, based on the ratio of our EBITDA, as defined in such indentures, for the four consecutive fiscal quarters then ending to consolidated fixed charges for such four-fiscal-quarter period. To the extent this ratio is at least 2.00:1.00 (on a pro forma basis for the action contemplated), the indentures generally permit us to incur debt, and to make investments or pay dividends up to an amount computed under the Indentures. To the extent such ratio is less than 2.00:1.00, we must instead rely on specific exemption or “baskets” to incur debt, make investments or pay dividends. For the four fiscal quarters ended January 31, 2021, this ratio was approximately 2.13:1.00. At this time, we do not expect this ratio will materially affect our liquidity or financial position. In general, EBITDA for purposes of calculating covenant compliance is defined as our Adjusted EBITDA presented herein, further adjusted for the following items: (i) pre-opening expenses incurred in connection with the opening of new stores (primarily consisting of rent, employee wages and travel costs during the pre-opening period, (ii) adjustments reflecting the incremental rent expense associated with the conversion of financing leases under ASC 840, Leases, to operation leases under ASC 842, Leases, for our former accounting owner locations,

 

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(iii) non-capital professional fees associated with new store projects, (iv) EBITDA losses related to the operation of two stores during fiscal 2019 and 15 stores closed during fiscal 2018, and (v) expenses incurred at The Fresh Market Holdings, Inc. level. For fiscal 2020, fiscal 2019 and fiscal 2018 these additional adjustments totaled (in thousands) $2,188, $2,807 and $6,174, respectively, and accordingly, for purposes of covenant compliance under our debt agreements, EBITDA for fiscal 2020, fiscal 2019 and fiscal 2018 was (in thousands) $221,595, $120,779 and $107,294, respectively.

Quarterly Results of Operations and Other Data

The following table sets forth selected unaudited consolidated quarterly statement of operations data for each of the nine fiscal quarters through May 2, 2021. Each quarter consisted of a thirteen week period ended on the dates indicated, except that the fourth quarter of fiscal 2020 consisted of the fourteen weeks ended January 31, 2021. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus. The information for each quarter presented, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period. Totals in tables may not foot due to rounding.

 

   

 

    Thirteen Weeks (Fourteen in the case of January 31, 2021) Ended (Unaudited)  
  May 2,
2021
    January 31,
2021
    October 25,
2020
    July 26,
2020
    April 26,
2020
    January 26,
2020
    October 27,
2019
    July 28,
2019
    April 28,
2019
 
  (dollars in thousands)  

Consolidated Statements of Operations

                 

Sales

  $ 489,468     $ 538,065     $ 439,420     $ 462,735     $ 447,232     $ 399,751     $ 354,648     $ 368,997     $ 399,159  

Cost of goods sold

    315,633       348,857       287,809       299,400       293,095       273,854       244,504       254,090       269,834  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    173,835       189,208       151,611       163,335       154,137       125,897       110,144       114,907       129,325  

Operating expenses

                 

Selling, general and administrative expenses

    123,950       134,479       114,597       108,281       109,595       94,167       93,924       95,949       103,802  

Transaction and related costs

    563       15,358       439       561       102       108       202       340       764  

Impairments and store closure costs

    747       1,088       (543     1,448       1,540       7,534       2,108       (1,651     (2,604

Depreciation

    11,464       10,724       11,263       10,658       11,718       12,509       12,112       11,994       13,287  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    37,111       27,559       25,855       42,387       31,182       11,579       1,798       8,275       14,076  

Interest expense

    24,178       24,823       22,708       24,236       24,858       24,668       24,467       24,386       24,731  

(Gain) loss on extinguishment of debt

    —         —         —         (7,704     7,572       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision (benefit) for income taxes

    12,933       2,736       3,147       25,855       (1,248     (13,089     (22,669     (16,111     (10,655

Tax provision (benefit)

    2,436       (7,298     30       (3,540     14,384       (239     1,867       701       564  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 10,497     $ 10,034     $ 3,117     $ 29,395     $ (15,632   $ (12,850   $ (24,536   $ (16,812   $ (11,219
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows selected performance measures and comparable store sales data for the nine fiscal quarters indicated. For a discussion of our selected performance measures, see “—Key Performance Measures” above.

 

    Thirteen Weeks (Fourteen in the case of January 31, 2021) Ended  
    May 2,
2021
    January 31,
2021
    October 25,
2020
    July 26,
2020
    April 26,
2020
    January 26,
2020
    October 27,
2019
    July 28,
2019
    April 28,
2019
 
    (dollars in thousands)  

Store Count (at end of period)

    159       159       159       159       159       159       160       161       161  

Percentage change in comparable store sales

    7.3     25.8     24.8     26.4     12.9     (3.5 )%      (2.1 )%      (2.0 )%      0.4

Percentage change in number of transactions

    13.7     4.7     0.6     (6.8 )%      (9.9 )%      (3.7 )%      (3.2 )%      (3.8 )%      (2.8 )% 

Percentage change in average customer transaction size

    (5.6 )%      20.2     24.0     35.7     25.2     0.3     1.1     1.8     3.3

Average weekly sales

    37,651       38,433       33,802       35,595       34,402       30,750       27,281       28,384       30,705  

The following table presents a reconciliation of net income (loss) as reported to EBITDA and Adjusted EBITDA for each of the nine fiscal quarters through May 2, 2021. For a discussion of the use of these measures, see “—Non-GAAP Financial Measures” above.

 

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    Thirteen Weeks (Fourteen in the case of January 31, 2021) Ended  
    May 2,
2021
    January 31,
2021
    October 25,
2020
    July 26,
2020
    April 26,
2020
    January 26,
2020
    October 27,
2019
    July 28,
2019
    April 28,
2019
 
    (dollars in thousands)  

Net income (loss) as reported

  $ 10,497     $ 10,034     $ 3,117     $ 29,395     $ (15,632   $ (12,850   $ (24,536   $ (16,812   $ (11,219

Depreciation and amortization expense

    11,464       10,724       11,263       10,658       11,718       12,509       12,112       11,994       13,287  

Tax provision (benefit)

    2,436       (7,298     30       (3,540     14,384       (239     1,867       701       564  

Interest expense

    24,178       24,823       22,708       24,236       24,858       24,668       24,467       24,386       24,731  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    48,575       38,283       37,118       60,749       35,328       24,088       13,910       20,269       27,363  

(Gain) loss on extinguishment of debt (1)

    —         —         —         (7,704     7,572       —         —         —         —    

Non-cash share-based compensation (2)

    (272     169       153       65       19       100       (589     (232     (782

Impairments (3)

    —         —         —         —         —         5,341       668      

Store closure costs (4)

    747       1,088       (543     1,448       1,540       2,193       1,440       (1,651     (2,604

Corporate severance and other charges (5)

    925       186       1,457       940       2,177       807       427       867       985  

Non-cash rent expense (6)

    2,435       2,376       2,730       3,007       3,194       4,506       4,932       4,995       5,806  

Tenant allowance receipts (7)

    50       325       536       7       —         465       42       137       11  

Sponsor fees (8)

    375       378       375       378       402       409       390       411       388  

Transaction and related costs (9)

    563       15,358       439       561       102       108       202       340       764  

Business optimization expenses (10)

    1,769       2,937       1,217       496       60       (1     8       895       63  

Litigation expenses (11)

    —         —         —         —         —         —         (10     —         1  

Coronavirus expenses (12)

    518       848       309       763       2,121       —         —         —         —    

Loss on disposal of assets (13)

    81       303       3       78       59       46       67       159       238  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 55,766     $ 62,251     $ 43,794     $ 60,788     $ 52,574     $ 38,062     $ 21,487     $ 26,190     $ 32,233  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts recorded for the difference between the carrying value and redemption value of debt when the debt is extinguished.

(2)

Non-cash share-based compensation related to equity awards granted to our employees and independent directors. The net benefit for certain periods is due to forfeitures.

(3)

Impairment charges of stores or long-lived assets. See our Consolidated Financial Statements, Note 5, “Fair Value Measurements” in our Notes to the Consolidated Financial Statements, for further details.

(4)

Gains or losses upon disposal of property and equipment, reserve adjustments and other lease costs, liquidation of inventory, and other costs associated with store closures. See our Consolidated Financial Statements, Note 6, “Impairments and Store Closure Costs” in our Notes to the Consolidated Financial Statements, for further details.

(5)

Severance and related employee benefits associated with certain terminations of leadership positions as well as recruiting and on-boarding costs for replacements for certain positions.

(6)

Adjustments to account for (i) the difference in GAAP straight line rent expense and cash rent expense and (ii) the non-cash amortization of tenant allowances. Beginning with fiscal 2019 and the adoption of ASC 842, Leases, incremental non-cash rent expense was recognized primarily related to the amortization of the former favorable lease intangible assets over a shorter period, the remaining lease term, as required under ASC 842, Leases. See our Consolidated Financial Statements, Note 7, “Leases” in our Notes to the Consolidated Financial Statements, for further details.

(7)

Cash received from landlords for tenant allowances.

(8)

The annual management and other fees and related expenses, including those paid on a pro rata basis to an affiliate of Apollo and the Rollover Stockholders. See our Consolidated Financial Statements, Note 14, “Related-Party Transactions” in our Notes to the Consolidated Financial Statements, for further details. The obligation to pay such fees and expenses will terminate upon the completion of this offering and accordingly, the costs are not reflective of our ongoing performance post-offering.

(9)

The transaction and related costs in connection with our Acquisition in fiscal 2016, including litigation expenses associated with stockholder class action lawsuits. The amount for the fourth quarter of fiscal 2020 includes a $15.1 million settlement charge for a stockholder class action lawsuit associated with our Acquisition. See our Consolidated Financial Statements, Note 15, “Commitments and Contingencies” in our Notes to the Consolidated Financial Statements, for further details.

 

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(10)

Costs related to our business optimization projects which we expect will be non-recurring. Items included in this line item are discrete charges that are primarily related to third-party assessments of various strategic business processes and the related implementation. A breakdown of major business optimization projects is presented below:

 

    Thirteen Weeks (Fourteen in the case of January 31, 2021) Ended  
    May 2,
2021
    January 31,
2021
    October 25,
2020
    July 26,
2020
    April 26,
2020
    January 26,
2020
    October 27,
2019
    July 28,
2019
    April 28,
2019
 
    (dollars in thousands)  

Business Optimization

                 

Operational process assessment and labor standards development

  $ 632     $ 848     $ 409     $ 332     $ 60       —         —         —         —    

Merchandising organizational analysis

    81       687       203       50       —         —         —         —         —    

Digital strategy

    609       577       175       —         —         —         —         —         —    

New Kitchen Square concept

    241       315       272       111       —         —         —         —         —    

IPO readiness

    236       422       158       3       —         —         —         —         —    

Pricing strategy

    —         —         —         —         —         —         —         878       —    

Center store strategic resets

    —         —         —         —         —         —         5       16       25  

Other

    (30     88       —         —         —         (1)       3       1       38  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Business optimization projects

  $ 1,769     $ 2,937     $ 1,217     $ 496     $ 60     $ (1)     $ 8     $ 895     $ 63  

 

(11)

Expenses related to wage and hour litigation.

(12)

Costs specifically attributed to the coronavirus, including employee appreciation bonuses and paid time off while under a doctor-ordered quarantine.

(13)

Losses on the disposal of fixed assets at open store and corporate locations.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from operations and cash on hand. 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. Our primary uses of cash are working capital requirements, debt service requirements, capital expenditures, and corporate taxes. Based on our current level of operations and available cash, we believe our cash flows from operations, combined with the ability to incur additional debt, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements, and capital spending requirements over the next 12 months and the foreseeable future.

We cannot assure you, however, that our business will generate cash flows from operations in an amount sufficient to enable us to pay our indebtedness, including the Senior Secured Notes and New Superpriority Secured Notes, or to fund our other liquidity needs. Our ability to do so depends on prevailing economic conditions, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness, including the Senior Secured Notes and the New Superpriority Secured Notes, on commercially reasonable terms or at all. Any future acquisitions, joint ventures, or other similar transactions will likely require additional capital, and there can be no assurance that any such capital will be available to us on acceptable terms or at all.

At May 2, 2021, we had $213.2 million in cash, cash equivalents, and restricted cash.

 

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A summary of our operating, investing, and financing activities is shown in the following table:

 

    Thirteen Weeks Ended     Year Ended  
    May 2,
2021
    April 26,
2020
    January 31,
2021
    January 26,
2020
    January 27,
2019
 
    (in thousands)  

Net cash (used in) provided by operating activities

  $ (1,159   $ 62,815     $ 152,191   $ (11,488   $ 309

Net cash used in investing activities

    (15,075     (2,841     (25,663     (12,093     (15,492

Net cash (used in) provided by financing activities

    (337     4,275       (58,768     (1,250     119,485
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

  $ (16,571   $ 64,249     $ 67,760   $ (24,831   $ 104,302
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

Cash provided by (used in) operating activities consists primarily of net income (loss) adjusted for non-cash items, including depreciation and amortization, operating lease costs, realized gains or losses on disposal of property and equipment, impairment charges, share-based compensation, changes in deferred taxes, and the effect of changes in assets and liabilities.

 

    Thirteen Weeks Ended     Year Ended  
    May 2,
2021
    April 26,
2020
    January 31,
2021
    January 26,
2020
    January 27,
2019
 
   

(in thousands)

 

Net income (loss)

  $ 10,497     $ (15,632   $ 26,914     $ (65,417   $ (78,597

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

         

Depreciation and amortization

    11,464       11,718       44,363     49,917     60,029

Non-cash operating lease cost

    8,929       9,296       39,965     46,402     —    

Non-cash interest expense

    1,159       1,318       5,271     5,243     4,707

Loss on disposals of property and equipment

    81       56       565     808     3,545

Impairments of long-lived assets

        —         6,009     3,094

Share-based compensation

    (272     19       406     (1,503     387

(Gain) loss on extinguishment of debt

    —         7,572       (132     —         3,202

Deferred income taxes

    2,396       14,384       3,339     2,749     (19,129

Change in assets and liabilities

    (35,413     34,084       31,500     (55,696     23,071
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  $ (1,159   $ 62,815     $ 152,191   $ (11,488   $ 309
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in operating activities was $1.2 million for the thirteen weeks ended May 2, 2021, compared to net cash provided by operating activities of $62.8 million for the thirteen weeks ended April 26, 2020. The change in net cash used in operating activities for the thirteen weeks ended May 2, 2021 was primarily related to $15.1 million of cash paid due to the settlement of a stockholder class action lawsuit associated with the Acquisition (the total settlement amount was $27.5 million, $12.4 million of which was covered directly by our insurance and the remaining $15.1 million was paid by us), the payment of bonuses, and other changes in working capital, partially offset by improved operating performance.

 

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Net cash provided by operating activities was $152.2 million for the year ended January 31, 2021, compared to $11.5 million of net cash used in operating activities for the year ended January 26, 2020. The net cash provided by operating activities increased $163.7 million from the prior year, primarily due to higher sales and net income and changes in working capital.

For the year ended January 26, 2020, net cash used in operating activities increased $11.8 million from the prior year. Net cash used in operating activities included a $55.7 million change in assets and liabilities that was primarily attributable to decreases of $32.7 million in operating lease liabilities, and $9.6 million in compensation-related accruals. This was partially offset by $46.4 million net cash provided by non-cash operating lease cost from the amortization of a right to use asset.

Investing Activities

Cash used in investing activities consists primarily of cash used for capital expenditures for on-going store maintenance as well as investments in information technology and merchandising enhancements.

 

    Thirteen Weeks Ended     Year Ended  
    May 2,
2021
    April 26,
2020
    January 31,
2021
    January 26,
2020
    January 27,
2019
 
    (in thousands)  

Purchases of property and equipment

  $ (15,113   $ (2,844   $ (25,792   $ (13,494   $ (17,367

Proceeds from sales of property and equipment

    38       3       129     1,401     1,875
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  $ (15,075   $ (2,841   $ (25,663   $ (12,093   $ (15,492
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities was $15.1 million for the thirteen weeks ended May 2, 2021, compared to $2.8 million for the thirteen weeks ended April 26, 2020. The increase in cash used in investing activities was predominantly due to increased capital spending associated with strategic initiatives and a slight increase in maintenance capital expenditures.

Capital expenditures increased 91.1%, or $12.3 million, to $25.8 million for the year ended January 31, 2021, compared to $13.5 million for the year ended January 26, 2020. The increase was attributable to increased investments in strategic initiatives and maintenance capital expenditures.

Capital expenditures decreased 22.3%, or $3.9 million, to $13.5 million for the year ended January 26, 2020, compared to $17.4 million for the year ended January 27, 2019. The decrease was attributable to reduced real estate capital expenditures and a lower investment in strategic initiatives, partially offset by increased maintenance capital expenditures.

Financing Activities

Cash (used in) provided by financing activities consists principally of proceeds from the issuance of debt and borrowings, payments under our various credit facilities, and a one-time dividend payment.

 

    Thirteen Weeks Ended     Year Ended  
    May 2,
2021
    April 26,
2020
    January 31,
2021
    January 26,
2020
    January 27,
2019
 
                (53 weeks)     (52 weeks)     (52 weeks)  
    (in thousands)  

Proceeds from issuance of New Superpriority Secured Notes

  $  —       $ 133,650   $ 133,650   $ —     $ —  

Proceeds from issuance of Superpriority Secured Notes

    —         —         —         —         122,500

Payments made on Superpriority Secured Notes

    —         (123,125     (123,125     (1,250     (625

 

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    Thirteen Weeks Ended     Year Ended  
    May 2,
2021
    April 26,
2020
    January 31,
2021
    January 26,
2020
    January 27,
2019
 
                (53 weeks)     (52 weeks)     (52 weeks)  
    (in thousands)  

Payments made on New Superpriority Secured Notes

    (337     —         (1,011     —         —    

Payments made for the redemption premium on Superpriority Secured Notes

    —         (4,925     (4,925     —         —    

Payments made for debt issuance costs

    —         (1,325     (1,338     —         (1,480

Payments made for Senior Secured Notes

    —         —         (54,638     —         —    

Payments made on financing lease obligations

    —         —         —         —         (910

Dividends paid in cash

        (7,381     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

  $ (337   $ 4,275     $ (58,768   $ (1,250   $ 119,485
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities for the thirteen weeks ended May 2, 2021 was related to payments made on our New Superpriority Secured Notes. The net cash provided by financing activities for the thirteen weeks ended April 26, 2020 was related to the net cash proceeds associated with the issuance of the New Superpriority Secured Notes, largely offset by the redemption of the Superpriority Secured Notes, including a make whole redemption premium payment of $4.9 million.

Net cash used in financing activities for the year ended January 26, 2020 was $58.8 million. The primary driver of the net cash used in financing activities was the $54.6 million in Senior Secured Notes purchased at the Company level during the fiscal year and $7.4 million in dividends paid in cash.

In March 2020, we redeemed all of our outstanding Superpriority Secured Notes, including a redemption premium of $4.9 million, in connection with the issuance of New Superpriority Secured Notes.

Net cash used in financing activities for the year ended January 26, 2020 was $1.3 million related to payments made on our Superpriority Secured Notes.

Net cash provided by financing activities for the year ended January 27, 2019 was $119.5 million primarily related to $122.5 million in proceeds from the issuance of our Superpriority Secured Notes.

See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Condensed Consolidated Financial Statements and Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

Senior Secured Notes

See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Condensed Consolidated Financial Statements and Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

New Superpriority Secured Notes

See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Condensed Consolidated Financial Statements and Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

 

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Superpriority Secured Notes

See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Condensed Consolidated Financial Statements and Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

Termination of Revolving Credit Facility

See our Consolidated Financial Statements, Note 3, “Long-Term Debt” in our Notes to the Consolidated Financial Statements, for further details.

From time to time, the Company, its subsidiaries or any stockholder of the Company and their respective affiliates may purchase, repurchase or retire portions of the Company’s outstanding debt in open market purchases, privately negotiated transactions, tender offer transactions or otherwise. Any repurchase or retirement by the Company or its subsidiaries is dependent on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, and other factors.

Revolving Credit Facility Commitment

On July 13, 2021, The Fresh Market entered into a commitment letter with the Banks with respect to the Revolving Credit Facility. It is expected that the Revolving Credit Facility will be in place concurrently with the closing of this offering, subject to the satisfaction of certain closing conditions, and will mature on the date that is five years after the closing of this offering (subject to a springing maturity if certain material indebtedness is not refinanced prior to the maturity date thereof).

The banks party to the commitment letter, each of whom will act as a joint lead arranger, consist of the Banks. Credit Suisse will act as agent for the Banks under the Revolving Credit Facility. Each of the Banks is an affiliate of an underwriter in this offering.

The Revolving Credit Facility will allow The Fresh Market to borrow from time to time in an aggregate amount outstanding not to exceed $100.0 million (subject to provisions for increases in such amount). Loans may be used for general corporate purposes and up to $40.0 million of the Revolving Credit Facility will be available to back letters of credit issued under the facility. We expect to use letters of credit under the Revolving Credit Facility to replace approximately $22.5 million of outstanding cash-collateralized letters of credit, which will release the cash currently securing such letters of credit. Loans will bear interest at floating rates based on adjusted LIBOR or ABR, as applicable plus a specified margin.

The Revolving Credit Facility will require The Fresh Market to maintain a specified minimum net first lien leverage ratio, measured on a quarterly basis (starting with the first full quarter after the closing of the Revolving Credit Facility) if the aggregate amount of outstanding borrowings under the Revolving Credit Facility and letters of credit issued thereunder (excluding $25 million of undrawn letters of credit and cash collateralized letters of credit) as of the last day of the applicable fiscal quarter is greater than 35% of the Revolving Credit Facility commitments. In addition, it will include customary covenants, including restrictions on indebtedness, dividends and stock repurchases, investments, acquisitions and dispositions, liens, and transactions with affiliates.

The Revolving Credit Facility will be guaranteed by all existing and future wholly owned material domestic subsidiaries of The Fresh Market (subject to customary exceptions) and secured on a first priority basis (subject to permitted liens) by a lien on the same assets that secure the Senior Secured Notes. The Revolving Credit Facility and Senior Secured Notes will be subject to a customary intercreditor agreement for pari passu debt.

The closing of the Revolving Credit Facility is subject to the closing of this offering, the refinancing of the New Superpriority Secured Notes and certain other customary closing conditions.

 

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Off-Balance Sheet Arrangements

Our off-balance sheet arrangements at May 2, 2021 consist of outstanding standby letters of credit. 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.

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

Our financial performance is impacted by relative rates of inflation or deflation at cost and retail, which are subject to competitive market conditions. Although we may experience periodic effects on sales, gross profit, gross margins and cash flows as a result of inflation and deflation, we do not expect the effect of deflation or inflation to have a material impact on our ability to execute our long-term business strategy. We believe the effects of inflation and deflation on our results of operations and financial condition were moderate for fiscal 2020 and the first quarter of fiscal 2021. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation and deflation in the future.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances and are affected by management’s application of accounting policies. On an ongoing basis, management evaluates its estimates and judgments. Actual results may differ significantly from these estimates. Future results may differ from our estimates under different assumptions or conditions.

We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements.

For further information on our critical and other significant accounting policies, see the notes to our consolidated financial statements included elsewhere in this prospectus.

Leases

The most significant estimates used by management in accounting for leases and the impact of these estimates are as follows:

Expected lease term - Our expected lease term includes both contractual lease periods and cancelable option periods that are determined to be reasonably certain to be exercised. The expected lease term is used in determining whether the lease is accounted for as an operating lease or a finance lease. An increase in the expected lease term will increase the probability that a lease may be considered a finance lease. Lease expenses for finance leases are charged to interest and depreciation expense. The expected lease term is also used in determining the depreciable life of the asset for a finance lease.

Incremental borrowing rate - We use the incremental borrowing rate to determine the present value of minimum lease payments not yet paid. The present value is used on the lease commencement date to establish the lease asset and liability on its Consolidated Balance Sheets.

 

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The incremental borrowing rate is also used in determining whether the lease is accounted for as an operating lease or a finance lease. A lease is considered a finance lease if the net present value of the minimum lease payments is greater than 90% of the fair market value of the property. An increase in the incremental borrowing rate decreases the net present value of the minimum lease payments and reduces the probability that a lease will be considered a finance lease.

For finance leases, the incremental borrowing rate is used in allocating our rental payments between interest expense and a reduction of the outstanding lease obligation. If our calculation of the net present value of minimum lease payments is greater than the fair value of the leased asset, the incremental borrowing rate is adjusted so the net present value of the minimum lease payments does not exceed the fair value of the leased asset.

Fair market value of leased asset - The fair market value of leased retail property is generally estimated based on comparable market data as provided by third-party sources. Fair market value is used in determining whether the lease is accounted for as an operating lease or a finance lease. A lease is considered a finance lease if the net present value of the minimum lease payments equals or exceeds 90% of the fair market value of the property. A higher fair market value reduces the likelihood that a lease will be considered a finance lease.

Inventories

The Company’s inventories are stated at the lower of cost or net realizable value. The cost is valued using the first-in, first-out (“FIFO”) basis. The FIFO value of inventories includes cost of goods and freight, net of vendor rebates and discounts.

The Company performs physical counts of all store inventories at least once a quarter. The Company records a shrink estimate for the period between the last physical count and the balance sheet date, where applicable.

Goodwill and Tradename Intangible Asset

The excess of the purchase price over fair value of net identifiable assets and liabilities of an acquired business (“goodwill”) and the indefinite-lived tradename intangible asset are not amortized, but rather tested for impairment at least annually. The Company assesses the recoverability of the carrying amount of its goodwill and indefinite-lived tradename intangible asset annually as of the first day of the fourth quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.

When assessing the recoverability of goodwill and indefinite-lived tradename intangible asset, the Company may first assess qualitative factors. If an initial qualitative assessment indicates that it is more likely than not that the carrying amount exceeds the fair value, a quantitative analysis may be required. The Company may also elect to skip the qualitative assessment and proceed directly to the quantitative analysis.

Recoverability of the carrying value of goodwill is measured at the reporting unit level. The reporting unit level is The Fresh Market, Inc. as the Chief Operating Decision Maker does not evaluate financial results at the geography level and the Company operates under one name. In performing a quantitative analysis, the Company used a combination of the expected present value of future cash flows (income approach) and comparable public companies (market approach) to determine the fair value of the reporting unit. These approaches use primarily unobservable inputs, including discount rates, sales growth rates, and gross margin rates, which are considered Level 3 fair value measurements. See the description of the fair value hierarchy in our Consolidated Financial Statements, Note 5, “Fair Value Measurements” in our Notes to the Consolidated Financial Statements, for further details. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections, and terminal value rates. The discount rates, growth rates, terminal value rates, and cash flow projections are the assumptions most sensitive and susceptible to change, as they require significant management judgment, including expected operating performance as well as overall trends in

 

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the grocery and supermarket industry. If the carrying amount of the Company’s reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded to write down the carrying amount of goodwill equal to the excess carrying amount of the reporting unit compared to its fair value.

In performing a quantitative analysis, the Company tests its indefinite-lived tradename intangible asset for impairment utilizing the relief from royalty method to determine the estimated fair value for the intangible asset, which is classified as a Level 3 fair value measurement. The relief from royalty method estimates the Company’s theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rate, growth rates, tax rates, sales projections, and terminal value rates. The discount rates, royalty rate, growth rates, terminal value rates, and sales projections are the assumptions most sensitive and susceptible to change, as they require significant management judgment. Discount rates used are similar to the rates estimated for the weighted average cost of capital considering any differences in company-specific risk factors. See our Consolidated Financial Statements, Note 5, “Fair Value Measurements” in our Notes to the Consolidated Financial Statements, for further details.

In fiscal 2020, 2019, and 2018, we performed the quantitative analyses for our annual goodwill and indefinite-lived tradename intangible impairment tests as of the first day of the fourth quarter and determined the fair value of the Company’s reporting unit and indefinite-lived tradename intangible asset exceeded the respective carrying amounts. Therefore, no impairment charges were recorded. In its most recent impairment tests, the Company determined that the fair value of goodwill exceeded its carrying value by approximately 42% and the fair value of the indefinite-lived tradename intangible asset exceeded its carrying value by approximately 50%.

Impairment of Long-Lived Assets

We assess our long-lived assets, principally property and equipment, for possible impairment whenever events or changes in circumstances indicate the carrying value of a long-lived asset or group of assets may not be recoverable. Impairment evaluations for individual stores take into consideration a store’s operating cash flows, the period of time the store has been open, and management’s expectations of operating performance. Recoverability is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If impairment is indicated, a loss is recognized for any excess of the carrying value over the estimated fair value of the asset.

Our judgment regarding the existence of circumstances that indicate an asset’s carrying value may not be recoverable, and therefore potentially impaired, is based on several factors, including a decision to close a store or negative operating cash flows. Determining whether impairment exists requires that we use estimates and assumptions of projected cash flows and operating results for the asset or assets being assessed. Our cash flow projections look several years into the future and include assumptions concerning variables such as the potential impact of operational changes, competitive factors, inflation, and the economy. Our estimate of fair value used in calculating an impairment loss is based on market values, if available, or our estimated future cash flow projections discounted to their present value, which are considered Level 3 inputs. Using different assumptions could result in a change in our estimates of cash flows and fair value and those differences could produce materially different results.

Store Closure Costs

Store closure costs include related ongoing occupancy costs, employee severance costs, write-down and loss on disposal of assets, and other costs.

Prior to the adoption of ASC842, Leases, store closure costs also included lease obligation costs related to closed stores, which represented the present value of the remaining noncancelable lease payments required under operating leases for the closed stores, less an estimate of subtenant income.

 

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Insurance Reserves

We use a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile and general liability, product liability, directors’ and officers’ liability, employee health care benefits, and other risks, including casualty and property risks. Liabilities associated with the risks that are retained by us are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.

Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. A 10% change in our insurance liabilities at May 2, 2021 would have affected our annual operating income by approximately $3 million.

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 amounts 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 fiscal year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in income tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In this process, certain relevant criteria are evaluated including: the taxable income in prior carryback years that can be used to absorb net operating losses and credit carrybacks, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, prudent and feasible tax planning strategies, and future expected taxable income. We establish a valuation allowance for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be realized.

We apply the provisions of the authoritative guidance on accounting for uncertainty in income taxes that was issued by the Financial Accounting Standards Board, or FASB. Pursuant to this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance also addresses other items related to uncertainty in income taxes, including derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Share-based Compensation

We expense the fair value of share-based compensation awards granted to our employees on a straight-line basis over the period that services are required to be provided in exchange for the award, which typically is the period over which the award vests. We measure share-based compensation expense related to our stock options at the time of grant.

Recent Accounting Pronouncements

See our Consolidated Financial Statements, Note 2, “Summary of Significant Accounting Policies” in our Notes to the Consolidated Financial Statements, for further details.

 

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Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

As of May 2, 2021, our principal exposure to market risk relates to changes in interest rates on borrowings under our New Superpriority Secured Notes. These agreements carry floating interest rates that are tied to LIBOR, Eurodollar, the federal funds rate or the base rate, and therefore, our statements of operations and our cash flows will be exposed to changes in interest rates to the extent that we have outstanding balances under such agreements and do not have effective hedging arrangements in place. Based upon a sensitivity analysis at January 31, 2021 a hypothetical 1.0% change in interest rates would change our annual interest expense by approximately $1.3 million and there is no material change to this analysis as of May 2, 2021. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.

 

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BUSINESS

Who We Are

We are a specialty retailer offering a variety of high quality, fresh foods and difficult-to-find items in a small, convenient, intimate store footprint (average 21,000 sq. ft.) where guests can see all the sightlines across the store. The store ambiance is like an Old-World European marketplace layout with an elevated, sensory experience with fresh aromas, classical music, spotlights, and exceptional cleanliness. High-touch guest service is a hallmark of The Fresh Market, as our team members strive to make guests feel like they are at home. Our combination of premium food, strong reputation for special occasions, personalized guest service, and omni-channel capabilities has resulted in comparable store sales growth of 22.3% in fiscal 2020 (compared to comparable store sales growth of (1.8)% and 0.4% for fiscal 2019 and fiscal 2018, respectively). Comparable store sales growth was 7.3% for the first quarter of fiscal 2021 (compared to 12.9% for the first quarter of fiscal 2020). While our fiscal 2020 and early fiscal 2021 results may be attributed in part to the impact of the COVID-19 pandemic, we believe they also demonstrate the effectiveness of our strategy and the initiatives we have taken, as well as broader changes in the food-at-home and food-away-from-home markets. Based on our results to date in fiscal 2021 as the pandemic has begun to subside, we believe we are well positioned for continued strong performance.

Our Product Offering

We are focused on providing high-quality, premium offerings across both our fresh and non-perishable departments. We believe the following product categories are the key differentiating elements of our business:

 

   

Fresh produce with seasonal specialties that are hand-picked to ensure each item is perfectly ripe to achieve the best taste and texture;

 

   

Meat counter with in-store butchers that offer personalized guest service to create a local butcher shop feel;

 

   

High-quality prime meats with minimum 14-day dry-aged beef;

 

   

Fresh, on-ice seafood counters committed to freshness and variety;

 

   

Convenient, ready-to-cook or ready-to-heat meal offerings with restaurant-quality ingredients;

 

   

Hard-to-find ingredients and curated specialty foods that encourage a fun treasure hunt discovery shopping experience that is unique to The Fresh Market;

 

   

Expertly curated floral offerings, including rare and exotic orchids; and

 

   

Curated seasonal assortments that focus on special occasions and holidays.

Our focus is on delivering the very best for our guests’ fresh food trip, special occasions, and dinner tonight. Approximately 70% of our sales in fiscal year 2020 and fiscal year 2019 have come from fresh foods. This highly curated assortment, primarily consisting of produce, meat, seafood, dairy, and ready-to-cook or ready-to-eat meal offerings, is supported by specialized and difficult-to-find non-perishable items that account for approximately 29% of our sales, while general commoditized consumer goods, which a consumer finds in conventional retailers, account for less than 1% of our sales over the same time period. Our team members and quality experts have a merchandising approach that requires careful assembly of the food experience with consideration to numerous food attributes. Creative and visually appealing merchandising sets us apart and inspires our guests to create intricate meals for their home, best exemplified by waffles, whipped cream, and strawberries placed together on the produce floor for a delicious, chef-quality dish.

 

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LOGO   LOGO

Each of our stores cuts, seasons and prepares our food daily for optimal taste and freshness and a convenient guest experience. For example, our Peak of Flavor program allows a guest to purchase a ripe avocado or banana to eat that night, in addition to fruit that will peak in the next day or two. In order to deliver on our mission with guests and our stores, our supply chain and distribution partners supply us with the highest quality and freshest food from farm to shelf in 14 days or less. We source from both a leading national specialty distributor, along with 40 family-run farms within 100 miles of our stores, providing us the ability to offer our guests the high quality, fresh food. Before any new item is displayed in our stores, our buyers hold “tastings” where potential new items are tasted and evaluated. We also have partnerships with certain growers that allow us to bring in limited edition offerings, like batches of berries with exceptional sweetness as well as international specialties, such as Tasmanian cherries or stone fruit flown in from South America to maximize freshness.

We also have a dedicated team that curates and sources local products based on a series of specifications to ensure differentiation from conventional retailers. For instance, this focus on working with local farmers and bakers whenever possible allows us to offer our guests Louisiana King Cake for Mardi Gras, North Carolina pickles, or milk in glass bottles from Battenkill Valley Creamery in upstate New York. We also source our own private label through our small- and medium-sized vendors with the goal of offering the “best” product in select categories. We believe smaller batch sizes and proprietary formulas and recipes allow these items to outperform leading brands in terms of quality of ingredients, flavor variety, and taste. Furthermore, we take pride in making a variety of guests’ favorites on a daily basis including roasted chicken salad, fresh-baked nut breads, and flavored gourmet coffee.

We strive to procure sustainably farmed produce and humanely raised meats while promoting environmentally conscious brands that are in line with our values. Our private label canned tuna is sourced from the first tuna fishery to become MSC Certified Sustainable, utilizing pole and line caught fish. We also partner with growers who are vested in taking care of the environment, such as Fair Trade Certified squash and avocados, Rainforest Alliance Certified grapes and Fair for Life apples. Our seasonal fresh produce is purchased from 40 family-run farms within 100 miles of our stores. These examples are a small part of our commitment to creating a better future for our planet. In fiscal 2020, we donated 2.5 million pounds of food to Feeding America’s network of food banks while reducing our footprint by recycling all cardboard used in our stores.

Our Guests and Their Experience

We attract guests from a high-income demographic who seek out and have a higher willingness to pay for high quality, fresh food. Approximately 62% of our guests have an average household income above $75,000. Households that have shopped with us have exhibited higher monthly grocery spending than households that do not shop with us.

 

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Our guests understand what sets us apart from other food retailers, both in terms of our offering and the special experience that we work hard to provide. In 2019 Consumer Reports rated us in the top 10 of food retailers in each of our markets, and in the top 15 nationally, despite our presence only on the East Coast and in the Midwest. More recently, approximately 80% of shoppers indicated on an internal survey that they were satisfied with our offerings overall. Results from the Integrated Insight Survey demonstrated that we are executing on our strategy of attracting guests for three important trips: (i) fresh food, (ii) food for special occasions, and (iii) curated meal offerings for the home. According to the Integrated Insight Survey, our product’s quality and freshness received more “excellent” ratings than competitors in our core markets and we received the highest ratings for being a trusted destination for special occasions and holidays. Our guests specifically ranked our meat and seafood departments as market leaders in some of our core markets for their freshness, quality, and taste. In addition, seven out of the top 10 reasons that these survey respondents listed for shopping with us were related to the fresh food that we offer and its unique and seasonal attributes. Over 70% of our regular shoppers said our curated meal offerings were among the top three options in their market. Additionally, the Integrated Insight Survey ranked us as a top-rated food retailer for store ambiance and store cleanliness, both of which are integral to our brand reputation.

Our Stores and Operations

We operate 159 small-box stores (each approximately 21,000 square feet) that provide our guests with a convenient shopping experience and a more personal level of guest service. We strive to create a warm and inviting atmosphere within our stores by crafting a sensory experience for our guests. Classical music and spotlights create an elevated environment which is further supported by the aromas of flowers upon entry and our fresh baked bread. Unique merchandise pairings inspire our guests while providing a curated environment, where rose wine is located next to dessert options, and dark chocolate chips are conveniently placed near the waffle mix. Approximately 92%, 93% and 99% of our operating stores were profitable in fiscal 2018, fiscal 2019 and fiscal 2020, respectively. We believe this store-level profitability is primarily driven by our differentiated product mix that commands 40+% merchandise margins as well as the productive small-store layout that optimizes fixed costs such as occupancy and store labor expenses.

 

 

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Our small-box stores enable us to operate in established neighborhoods in close proximity to our target high-income guests (annual household incomes in excess of $75,000) and supporting our guests’ preference to efficiently and conveniently shop for their families. This small-box format in high population density areas near our guests’ homes also supports our growing curbside pickup business, which is an important component to providing our guests with an omni-channel shopping experience. Moreover, we have a strong geographic

 

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presence in the attractive Southeast markets and our stores benefit from key advantages such as lower labor costs, attractive demographics, lower lease costs and significant real estate availability. Although curbside pickup and delivery are becoming a growing part of our business, our stores are a highly differentiated showcase of an epicurean experience for inspiration and special occasion shopping that draws our guests to shop in a clean and enjoyable environment. Our team members focus on offering solutions to our guests through food pairings and inviting displays.

We were named the #1 customer’s best supermarket in the 2021 USA Today 10Best Reader’s Choice poll. The poll included all the top national supermarket brands and was open for voting this spring and the winners were announced on April 23, 2021. The survey covered consumer experiential brands across multiple industries such as food, lodging and travel destinations. Further, Consumer Reports rated us amongst the cleanest grocery stores in American in 2019 and Newsweek/Statista rated us #5 for best guest service in grocery in America in 2020. We believe our exceptional store conditions gained the trust of our guests especially during the COVID-19 pandemic as guests demanded and relied upon a safe environment where they could shop. We believe we were one of the first retailers to require all team members and guests to wear personal protective equipment in our stores. In addition, during the peak of the COVID-19 pandemic, our stores underwent a deep cleaning every day to ensure the safety of our team members and guests and continue to foster their trust.

States we are currently present in have seen strong population growth of over two times the national average over the last several years, including in particular the south, where the CAGR of population growth from 2010-2020 was 1.0%, compared to 0.9%, 0.4% and 0.3% over the same period for the west, northeast and midwest, respectively. Additionally, in Florida, Georgia and North Carolina, the CAGR of population growth over the same period was 1.4%, 1.0% and 0.9%, respectively, compared to the United States with 0.7%. As a result of COVID-19, we have seen an increase in households, as individuals change residence to the states in which we operate. According to interstate moving data, Florida and the Carolinas are among the top 10 states benefitting from inbound moves in 2020, which are two of our strongest markets (48% of our stores are located within Florida and the Carolinas).

Our approximately 10,000 non-union team members are our brand ambassadors that showcase the best of our offerings. The Fresh Market experience is brought to life because of the high-touch service provided to our guests. Approximately 50% of our team members are full-time which demonstrates our commitment to providing an exceptional work environment and ongoing support to our team. According to an internal survey of customers, 96% of our guests are highly satisfied or satisfied with our service experience. In each of our stores, our team members are constantly ensuring our products meet our high-quality fresh standards. We have dedicated team members in each store who cut our fresh produce daily, our butchers prepare meats to our guests’ specifications and our chefs prepare ready-to-eat and ready-to-cook meals. Through a simplified organizational structure that provides a visible path to promotion, numerous training opportunities and increased store-level bonus eligibility, our team members are motivated and incentivized to create a memorable guest experience.

 

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Our growing eCommerce platform leverages our store network to provide an omni-channel experience as the needs of our guests evolve. While most of our guests enjoy shopping in our stores and experiencing the sight

 

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and feel of our specialty offering, we have partnered with Instacart as the backend software provider for our digital platform to meet incremental guest demand for an integrated omni-channel offering. We are continuously improving the platform’s design to make it easier to navigate and complete purchases, while also enabling a sense of discovery of a new menu or “tonight’s meal.” We have implemented personalization algorithms based on our guests’ purchase history that enhances discovery. We have completed the rollout of curbside pickup to all 159 stores (approximately 35% of eCommerce fulfillment). Our curbside orders are hand-picked by our store team members whom we call Personal Shoppers, which enhances the guest experience and ensures a high-quality basket backed up with a 100% Satisfaction Guarantee for all items. For fiscal 2020, our eCommerce penetration was 5.6% and we plan to continue investing in enhancing our guests’ digital experience. We are also launching our new loyalty program in the fall of 2021, which is a key factor in our goal of providing a convenient, seamless digital experience through The Fresh Market app and website that goes hand in hand with our brand reputation for personalized guest service whether guests shop in-store or online. We extensively tested our loyalty program in fiscal 2020, which showed member guests would visit more often, spend more on each visit, and shift more of their visits to our stores from competitors’ stores.

Recent Financial Performance

We have spent the last few years bringing The Fresh Market back to its roots of providing a highly differentiated specialty food offering and improving the in-store and omni-channel experience. Along with the Apollo Funds’ support and a strengthened new management team, with five additions to the senior leadership team in 2020 (including both Jason Potter as President and Chief Executive Officer and Jim Heaney as Chief Financial Officer), we have recently delivered exceptional financial performance. We believe our results for fiscal 2020 and our results for fiscal 2021 to date, while partly attributable to the positive impact of the COVID-19 pandemic on grocery retailers, also demonstrate the effectiveness of these initiatives in addressing challenges we faced at and immediately after our take-private transaction by the Apollo Funds in 2016, as well as broader changes in the food-at-home and food-away-from-home markets. We believe we are well positioned for continued strong performance. For fiscal 2020 compared to fiscal 2019, we achieved the following results:

 

   

Increase in sales from $1,523 million to $1,887 million, representing period-over-period growth of 24.0%;

 

   

Increase in net (loss) income from $(65.4) million to 26.9 million;

 

   

Total comparable store sales growth of 22.3%, which we believe is one of the highest growth rates compared to other publicly traded specialty retailers and traditional retailers in the food retail industry. This compares with a change in comparable store sales of (1.8)% for fiscal 2019. Transaction count (i.e., the number of discrete sales transactions during the applicable time period) changed (3.0)% for fiscal 2020, compared to (3.4)% for fiscal 2019; and

 

   

Increase in Adjusted EBITDA from $118.0 million to $219.4 million, representing period-over-period growth of 86.0%.

For the first quarter of fiscal 2021, our comparable store sales grew 7.3% compared to 12.9% for the prior year, with transaction count growth of 13.7%, and tonnage was up 4.6% compared to the prior year. Sales were $489 million (compared to $447 million in prior year), net income was $10.5 million (compared to $(15.6) million in prior year), Adjusted EBITDA was $55.8 million (compared to $52.6 million in prior year) and Adjusted EBITDA margin was 11.4% (compared to 11.8% in prior year).

Adjusted EBITDA is a non-GAAP financial measure. For a description of our non-GAAP financial measures and a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

 

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Our Industry

Our distinctive offering allows us to compete in both consumer occasions for food-at-home and food-away-from-home. During fiscal 2020, we believe our increased net sales resulted from market share gains from food competitors (grocery and restaurants) due to our premium and fresh offerings as well as the increased food-at-home spending during the COVID-19 pandemic. Additionally, the closure of more than 70 competing stores in our core markets contributed to these gains.

We believe that consumer focus on high-quality fresh and specialty foods, as well as natural and organic offerings, will continue to benefit our brand. Based on research from the Specialty Food Association and calculations from the USDA, Economic Research Service, specialty food spending grew at a historical CAGR of 7.1% from 2017 to 2020 versus total food-at-home spending of 4.9% (Note that the foregoing CAGR includes the positive impact on food retailers of the COVID-19 pandemic in 2020; for 2019-2020, specialty food spending grew 13.3% and food-at-home spending grew 8.5%). For purposes of this study, “specialty food spending” is defined as spending on food, beverages, and confections that are of the highest grade, style, and/or quality in their respective categories, and the “broader industry” as supermarkets and grocery stores that retail general lines of food product, as well as delicatessens primarily retailing food. According to Nielsen, our core product categories of meat, produce, and prepared foods have grown 7.4%, 7.6%, and 6.2%, respectively, from 2017 to 2020. We believe there is no other retailer offering our differentiated assortment, with many conventional grocers primarily sourcing from commoditized consumer brands in contrast to our specialty, value-added fresh food and locally relevant product offerings.

 

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We believe, based in part on our performance to date in fiscal 2021, that we will continue to benefit from industry trends through alignment with changing consumer preferences:

 

   

Consumer focus on high-quality fresh foods—over 60% of grocery shoppers indicate that high-quality fresh food is the most important consideration when choosing a food retailer according to R5 independent research conducted in 2020. We have unique, seasonal heirloom produce, which is hand sorted by our quality control experts. We offer only fully mature produce with optimal texture and level of sugars.

 

   

Natural and organic offerings—sales of natural and organic food have grown at a CAGR of 6.8% from 2017 to 2020, reaching a total market size of $252 billion in the United States and are expected to continue to grow at a CAGR of 6.0% from 2020 to 2023. Our penetration of organic produce is 6.0% of our total sales in fiscal 2020.

 

   

Omni-channel capabilities—while more guests are willing to do their grocery shopping online, our guests prefer and attain pleasure from visiting our store. Our specialized, fresh-focused offering drives trip frequency and is supported by our integrated omni-channel capabilities for those that also prefer to pick-up at our store or have product delivered to their home. We believe our experiential and fresh offering provides clearly less competition from online threats. For example, one tin of berries deteriorates eight hours of life for every hour unrefrigerated.

 

   

Significant shift from food-away-from-home to food-at-home—the environment during the COVID-19 pandemic has initiated a strong shift to increase spend on food-at-home. This has led to food-at-home spending, as measured by the USDA, to grow 8.5% in calendar year 2020 and we believe a significant portion of this will continue at least in the near term as (i) consumers have become accustomed to and re-

 

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discovered the enjoyment of cooking at home and (ii) more than 110,000 restaurants, or 17% of restaurants, have closed down and it will take time for the restaurants to recover (following the 2007-2009 Great Recession, the restaurant industry took two years to recover to its prior peak). We have made investments in high-quality prepared food to capitalize on disruption in the restaurant industry. Our restaurant quality ready-to-eat and ready-to-heat meal offerings are creating new meal occasions that bring guests frequently into our stores. Guests consistently give our prepared foods offering a high-quality ranking and we believe we have created a significant, long-term opportunity to take share from the food-away-from-home category.

Our Performance Improvement Initiatives as a Private Company

As a private company, we have undertaken significant performance-improvement initiatives to improve in-store execution and provide high-quality products to our guests, which has contributed to the recent financial performance and created a foundation for our future growth. The key initiatives include:

 

   

Refocused our offering with our mission to serve as a premium specialty retailer with a strong focus on fresh food—Since our acquisition by the Apollo Funds in 2016, we have improved and refocused our offering toward high-quality, premium products across both our fresh and non-perishable departments. Our biggest focus has been ensuring that we offer produce and meat that exceed the quality of our competitors. Our guest satisfaction scores in every department have continuously improved since 2019. Over the past year, our guest approval ratings have improved five percentage points or more to over 80% satisfaction in quality and friendliness of staff. We have also concentrated on emphasizing the specialty nature of our product offering generally by differentiating ourselves through value-added products, hard-to-find ingredients and specialty foods to replace commoditized consumer packaged goods. For example, over the last few years we have returned to many of our previous growers and relationships, as well as developed new ones, and have focused on purchasing a larger spec for our produce items (e.g., bigger apples and lemons or sweeter cherries and stone fruit). Given our merchandising initiatives, we believe a significant percentage of our products are not available in conventional grocers.

 

   

Introduced new offerings to address our guests’ needs for a curated meal offering—We have greatly expanded our pre-existing curated meal offerings by introducing a variety of products that caters to both individuals and families at different price points and serves every occasion. This includes Market Meal Kits (provides ingredients and recipes for 20-minute one-pan preparation, perfect for convenience focused guests looking for daily meal ideas), Little Big Meals ($25 offering to feed a family of four, offering a high-quality meal at exceptional value), and the special dinner programs (restaurant quality dinner programs especially highlighting our superior meat and seafood offerings). We continue to introduce new, innovative offerings to create an enhanced guest experience with regard to curated meal offerings, which includes our new “Kitchen Square” in our stores. We are piloting this new concept in three stores this year by re-designing the layout of the floorspace to allow for a completely new restaurant look and feel. This will become a convenient destination for dine-in, order-ahead, and ‘grab-and-go’ focused guests. We plan to open two to three stores by the end of fiscal 2021 and two to three stores in fiscal 2022.

 

   

Strengthened leadership team—Our leadership team comprises seven highly experienced and proven individuals, with six joining in the last two years. Our management team is led by Jason Potter, President and Chief Executive Officer, who brings over 30 years of experience in the grocery industry, most recently at Sobeys Inc. (a Canadian grocer focused on fresh offerings), and a track record of enhancing stockholder value. Our leadership team is also led by Jim Heaney, Senior Vice President and Chief Financial Officer, who most recently was the Chief Financial Officer of Carnival Cruise Line and brings over 30 years of experience in distinguished experiential businesses such as Disney Parks and Resorts and Sea World. Jim’s tenure in leading experiential entertainment companies is highly relevant for our focus on creating an exciting guest shopping experience.

 

   

Built a culture of excellence—Our new leadership team has revamped our team’s culture to ensure our store team members feel that they are true ambassadors of our brand with a sense of ownership and pride. We

 

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have created a nimble organization with a consistent playbook for adding innovative programs that drive profitable growth. At the corporate level, we have elevated our Head of Food Safety to directly report to our CEO given our enhanced focus on guest experience and guest loyalty. In the stores, we have streamlined and simplified direct reports to our store managers so that they can better focus on assisting guests and delivering on our in-store experience. Store team members have access to a number of educational resources and are encouraged to grow within the organization. We also foster an environment of transparency, where all store and office team members participate in weekly town halls with the CEO and management team.

 

   

Built omni-channel capabilities—Historically, we have been underpenetrated in