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The Fresh Market Inc (TFM): Poised For Success in The Changing Food Retail Market

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Grocery retailing has long been dominated by traditional grocers such as The Kroger Co (NYSE:KR) and Safeway Inc. (NYSE:SWY) that have captured the market through their superior locations and ability to appeal to a widespread audience. Today, however, this is simply not the case. The aforementioned traditional grocers are being squeezed by discount grocers on the bottom end and by specialty grocers on the top end. Last Thursday, Rabobank released a report indicating that American households are “becoming less interested in mid-market products” and are transitioning into buying habits that favor discount and high-end specialty retailers. This analysis is not based upon superficial trends, but rather a societal shift toward accepting lower end staples from stores such as Aldi and Wal-Mart Stores, Inc. (NYSE:WMT) and splurging on items that matter most from retailers such as Whole Foods Market, Inc. (NASDAQ:WFM) and The Fresh Market Inc (NASDAQ:TFM). Ultimately, this trend favors the retailers at the extremes and requires investors to look critically at what companies are preparing for this evolving market for food retail.

The Fresh Market Inc (NASDAQ:TFM)

The Fresh Market fits the bill

The Fresh Market Inc (NASDAQ:TFM) released its first-quarter earnings on May 29, which highlighted the retailer’s fundamental strength to not only grow profitably, but to serve the high end niche that is beginning to represent a larger portion of the market. The Fresh Market Inc (NASDAQ:TFM) specializes in providing customers with both packaged and fresh products that are high-quality and difficult to find in traditional retailers. This creates a niche and a differentiated go-to-market strategy against its primary competitor; Whole Foods Market, Inc. (NASDAQ:WFM), which specializes in healthy and organic offerings. The Fresh Market Inc (NASDAQ:TFM) reported a net-sales increase of 12.9% year-over-year along with diluted earnings per-share increasing 14.6% year-over-year. These numbers — along with those below — point to The Fresh Market Inc (NASDAQ:TFM)’s ability to grow revenue and earnings in tandem, along with opening new stores that cater to the expectations of customers in this new age of grocery retail. The company’s first quarter results are as follows:

(The Fresh Market FY13Q1 Earnings Report)

A differentiated retail strategy

These results are the tangible manifestation of a retail strategy that has worked over the past several years to appeal to a shopper looking for a specialty experience and specialty products. As previously mentioned, The Fresh Market Inc (NASDAQ:TFM) is often compared to Whole Foods, but this comparison is only valid based upon the customer demographic shopping within the store. Whole Foods is a more mature retailer that has achieved higher rates of saturation in its markets. From a fundamental perspective, both retailers are in a strong position.

The Fresh Market, however, offers a different investor opportunity. In light of The Fresh Market only operating in 25 U.S. states with roughly 150 stores, the room for growth in this ever expanding sector of specialty retail is vast, thus making The Fresh Market a more growth oriented stock than that of Whole Foods. The Fresh Market has 30 stores planned, with 15 anticipated to open in the second half of FY13. This is a steady and sustainable growth rate that will be augmented if the company is able to sustain its tandem growth in revenue and profitability.

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