At the end of 2012, The Fresh Market Inc (NASDAQ:TFM) could do no wrong as the stock traded at $62 with a lofty forward PE in the 30s. The stock had doubled in a 12-month period from the lows in August 2011.
Back in January the stock sprung a leak on weak earnings and our research suggested that investors tread lightly. The fast growing fresh foods retailer traded at a high valuation and the market for organic foods might take a breather in 2013. The stock further tumbled on another disappointing earnings report in March and provided guidance below analyst estimates.
Now that the stock appears to have bottomed out around $40 is the stock a value? Or with several key executives leaving is the stock still overvalued even after a 30% decline?
What went wrong?
The company has missed estimates the last two quarters and subsequently several executives have left to pursue other opportunities. The key is figuring out whether this is a broken company or a broken stock as it still has plenty of room for expansion if it can stop the bleeding.
The Fresh Market Inc (NASDAQ:TFM) blamed the short fall in Q4 to a sudden drop in customer activity around the holidays that picked up in January. The analysis suggested no store-specific issues and the company concluded the issue was isolated to consumers concerned about economic issues.
Small investors have no way of doubting management statements other than to require them to prove those comments via performing in the next couple of quarters. Unless you happen to be a weekly customer that can qualitatively tell the difference with customer patterns; something that can be difficult to accurately ascertain on a countrywide basis based on only one store.
The Fresh Market Inc (NASDAQ:TFM) has plenty of growth remaining with only 130 stores in 25 states, located mostly in the Southeast, Midwest, and Mid-Atlantic. The company just opened the first store in California and is only now moving into Texas. It sees a future store footprint of 500 stores providing for a long-term store base growth of nearly 300%.
The forecast for 2013 is an increase of 20 stores or roughly 15% growth. With the CFO and VP of Real Estate recently leaving, one has to wonder if an issue existed in store selection, location development, or forecasting.
Earnings estimates plunging
The Fresh Market Inc (NASDAQ:TFM) has missed earnings estimates the last two quarters and the CEO was clear that the store-opening plan for 2013 is back end loaded causing a 2% decline in earnings growth due to the timing.
The company guided towards earnings in the $1.55 range for 2013, dramatically below the previous analyst estimates of $1.69. Consequently, analysts dropped the fiscal 2015 estimates from $2.10 to $1.90. The long-term earnings growth rate went from 24% back in January to now only 20.3%.
For a company that only saw a holiday slowdown, the numbers sure have been slashed suggesting a more serious deterioration in the prospects or a major increase in the competitive landscape.
Competition heating up
Considering the drop in forward earnings, the dynamic suggests a bigger competitive impact than the company admitted to during the Q4 earnings report back in early March. Major competitor Whole Foods Market, Inc. (NASDAQ:WFM) beat Q4 estimates and saw only minor deterioration in earnings estimates for the current year and beyond.