No Eateries Are a Boon for Apollo’s Fresh Market and Bondholders

The Fresh Market Inc. has regained some lost ground after years of falling behind bigger rivals, a rare success story when heavily indebted retailers and restaurants are getting battered by pandemic shutdowns.

If anything, the 159-store chain may be getting a boost from the Covid-19 outbreak as consumers demand more healthy and organic food to eat at home, according to analysts.

First-quarter sales at the high-end grocery store backed by Apollo Global Management Inc. jumped 12% from a year earlier, as lockdowns set off panic buying and some competitors temporarily shut down, according to a company representative.

Fresh Market’s aisles include cauliflower hummus, mushroom-asiago chicken sausages, Lacinato kale and vast selections of bulk dried fruits and nuts. Even with this gourmet array, it has struggled with too few sales and too much debt left over from Apollo’s 2016 leveraged buyout.

No Eateries Are a Boon for Apollo’s Fresh Market and Bondholders

Still, the chain managed to avoid the fate of some of its peers, with Fairway Group Holdings Corp. and Earth Fare Inc. among chains that filed for bankruptcy before the pandemic took hold. Now grocers like Fresh Market are getting more business as eateries and bars remain partially or completely closed.

“They are filling the void left by restaurants,” said Miguel Gomez, director of Cornell University’s Food Industry Management Program.

Fresh Market may have an edge over some larger supermarkets with its focus on organic and high-quality products, Gomez said. U.S. organic produce sales soared 22% in March at the pandemic’s start, according to an Organic Produce Network and Category Partners report.

The potential for a turnaround has caught the attention of investors. Fresh Market’s 9.75% first-lien notes due 2023 are the second-biggest gainers year-to-date in the ICE BofA index of distressed companies, soaring to about 86 cents on the dollar. That’s up from a 39-cent low in March.

While the private company doesn’t publicly report earnings, Fresh Market told bondholders that first-quarter sales were strong in an April 15 investor call, said the company representative.

Smaller Stores

Fresh Market operates in 22 states from its headquarters in Greensboro, North Carolina, according to its website. The stores are smaller than traditional rivals, ranging from 18,000 to 23,000 square feet, which is about half the size of a typical supermarket.

It’s controlled by Apollo, the giant New York private-equity firm, which paid about $1.4 billion to buy the chain in 2016 and financed it largely by floating new debt. But investors were shaken in 2017 after online behemoth Inc. bought Whole Foods Market, which then slashed prices.

About half of Fresh Market’s stores were within five miles of a Whole Foods outlet, and it closed 15 locations in 2018. Last March, Fresh Market replaced Chief Executive Officer Larry Appel after two and half years with Jason Potter, 49, citing his turnaround experience.

Potter spent 26 years at Canada-based Sobeys Inc., where he oversaw about 800 outlets under the Sobeys, Safeway, Foodland and Thrifty banners, according to a statement. He was one of the top executives who led a restructuring project at Empire Company Ltd., which owns Sobeys, that saved $500 million by the end of fiscal 2020. The project is expected to top its goal, Empire said in a statement.

New Hire

In May, Potter hired Kevin Miller, the chief marketing officer at organic retailer Natural Grocers Inc., for a similar role at Fresh Market.

Potter wants to make the store a convenient “go-to” for perishables and interactive customer service, he said when he was hired. The company has promoted its “Market Meal Kits” during the pandemic, which come with packaged ingredients and step-by-step recipe instructions.

The company also refinanced $125 million in loans in March, pushing out some of its debt repayments for five years. It’s still carrying about $935 million in debt, according to data compiled by Bloomberg.

Click here for Fresh Market’s debt calendar

Fresh Market reported $141 million of unrestricted cash and $26 million of restricted cash on its balance sheet at the end of the first quarter, according to a person with knowledge of the results.

Increased demand for pre-packaged food could help with the turnaround effort, said Anne Palmer, director of Johns Hopkins University’s Food Communities & Public Health program. “They appeal to people who are coming in and trying to get a fair number of their meals prepared,” Palmer said. “They dedicate a lot of their space to prepared meals and deli foods.”

Analysts have speculated that the nationwide surge in sales for some retailers may have been due to people stocking up for the pandemic, and they’ve wondered if the gains may peter out.

“Business was kind of booming during the peak period of Covid because people were panicking a little bit,” Palmer said. “But I do wonder if they will be able to sustain their growth.”

©2020 Bloomberg L.P.

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