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

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.

Long-term objectives & short-term opportunity:

For investors, the fundamental strengths of The Fresh Market previously mentioned are essential for long-term success, but short-term gains will come from strong comparable store sales and net revenue growth along with investors perception of The Fresh Market’s valuation. For comparison, The Fresh Market and Whole Foods are contrasted below based on several key metrics:

Forward Price/Earnings: 27.05

  • Whole Foods: 30.91

PEG Ratio: 1.57

  • Whole Foods: 4.03

EV/EBIDA: 15.20

  • Whole Foods: 32.54

Profit Margin: 4.83%

  • Whole Foods: 4.13%

Short % of Float: 14.10%

  • Whole Foods: 2.60%

These metrics show both companies as being “expensive” when compared to traditional retailers, but The Fresh Market is “cheaper” based upon forward price/earnings, PEG ratio, and its EV/EBIDA. This does not point to a inexpensive stock, but rather to a company that is priced inline with its major peer. The short percent of float is important because it signifies that a substantial percentage of options investors are betting against the stock and, consequently, against The Fresh Market’s forward momentum. If the Fresh Market is able to continue to drive profitability and sustain its capital expenditures in cultivating new stores, these investors will be forced to cover. This covering will result in The Fresh Market’s market cap increasing markedly over time.

The aforementioned metrics show clear strength for both the short-term trader and the long-term investor. Although The Fresh Market has not seen the stock-price growth that Whole Foods has over the past three years, The Fresh Market is showing signs of fundamental strength that will result in increased stock price performance if the company continues on its current growth trajectory. This trajectory is based upon the companies ability to profitably grow and The Fresh Market has illustrated this critical expertise.

Why buy against the more “mature” Whole Foods and the more “traditional” kroger?

The case for The Fresh Market resides in the company’s ability to maintain profit margins above those of the more “mature” Whole Foods and the more “traditional” The Kroger Co (NYSE:KR). Whole Foods and Kroger represent the superstars of the retail grocery industry. Whole Foods has managed to capture the high end market, while Kroger has successfully achieved same-store sales growth quarter after quarter. Although Kroger poses a risk to both the Fresh Market and Whole Foods, there is room for specialty grocery within the changing retail landscape. What the Fresh Market brings is a store format that has appealed to customers due to its easy to shop nature and interesting product variety, while also maintaining profit margins at near 5%.

In comparison, Whole Foods is operating on roughly 3.5% and Kroger on roughly 2%. This illustrates The Fresh Market’s ability to provide a strong customer value proposition while simultaneously operating efficiently and effectively. These attributes place The Fresh Market in a position to continually grow its store base while maintaining high margins due to a solid operating structure. Although The Fresh Market has not yet proven its ability to mature in the way Whole Foods or Kroger has, the company provides an interesting investment opportunity for those that  believe in its proven track record and its differentiated business model.

Conclusion

The first quarter of FY13 illustrates The Fresh Market’s fundamental strength and underlying relevance as the market for grocery products continues to change. The Fresh Market is in the right sector at the right time and has proven its worth from both a profitability and customer perspective — a mix that is difficult to achieve and a recipe for long-term investor returns.

The article The Fresh Market: Poised For Success in The Changing Food Retail Market originally appeared on Fool.com.

Justin Weinstein has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Due to the uniqueness of each individual investors tolerance for risk and circumstance, Justin Weinstein does not advocate the purchase or sale of any stock aforementioned. Justin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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