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The Fresh Market Inc (TFM): Great Business, Premium Price

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Similar to its larger, more well-known peer, The Fresh Market Inc (NASDAQ:TFM) has traded at lofty valuations, riding the wave of the organic-food boom of the past several years in the United States. Though it’s a well-run company with attractive growth prospects, the grocer suffers from market hysteria. This became more apparent over the last 12 months as slowed growth frightened investors paying nearly 30 times earnings. Now, it looks as if all is forgotten as the company posted an impressive earnings release. How does the company’s valuation measure up today? Let’s take a closer look at earnings to find some clues.

The Fresh Market Inc (NASDAQ:TFM)

Earnings recap
For the first quarter of 2013, The Fresh Market Inc (NASDAQ:TFM) brought in top-line revenue of $366.6 million — a near 13% increase from the prior year’s quarter, yet short of analyst estimates (approximately $373 million). The reason for the big gain was maybe the best reason for a grocery store: big comparable-sales growth. Moving down the income statement, gross profit improved a staggering 14.8% to $129.3 million, driven (again) by same-store sales growth.

On the bottom line, the company beat the Street by bringing in $0.46 per share — a 14.6% gain over the prior year and $0.02 higher than consensus estimates. Margins improved slightly across the board, based on favorable accounting measures and merchandise margins.

Same-store sales grew by 3%, coming off the back of a 1.9% gain in the prior-year’s quarter.

All in all, it was a strong quarter, and if you step into a The Fresh Market Inc (NASDAQ:TFM), you can tell these guys have a great formula. It’s homier than Whole Foods Market, Inc. (NASDAQ:WFM), with a slightly lower price point on some items. Unfortunately, though, a great company is not always a great stock. Is The Fresh Market still too hot to touch?

Looking down the road
Encouragingly, The Fresh Market Inc (NASDAQ:TFM)’s management bumped guidance to reflect traffic increases at the stores. Same-store sales growth is now projected at 2.5% to 4.5%. Investors can expect earnings to grow more substantially in the back half of the year, yet EPS guidance remains unchanged (and represents about 19% growth over the prior year). The company plans to open up to 22 new stores throughout the year, and with a long growth runway ahead, as well.

Again, there is no doubt this is an A-plus operation, but what are we paying for it?

The stock currently trades at 26 times forward one-year earnings. In the mind of Peter Lynch, that means (assuming no more growth thereafter — obviously not the case) your investment will take 26 years to pay back. Now, of course The Fresh Market Inc (NASDAQ:TFM) will keep growing, but this should give investors some context. There are, without doubt, investments with stronger economics than this one, when using the Lynch P/E.

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