The Freshest IPO of the Year

This article is part of our Rising Star Portfolios Series.

I generally like investing in IPOs about as much as I like trying to figure out what health-care plan to go with: You never really know what you are getting. There sure was a lot of hype with General Motors' do-over, but I still have my doubts about that one. I gotta say, though, The Fresh Market's (Nasdaq: TFM  ) recent IPO has got me interested, in part because of my shopping experiences there when I was in college. And while that was a few years ago, that alone makes me interested in the stock.

A fresh opportunity?
In a land where Whole Foods (Nasdaq: WFMI  ) rules, it is nice to see another opportunity in the specialty grocer space. While Whole Foods and The Fresh Market do have their differences, they cater to the market looking for something special. Something different. Something, dare I say ... fresh?

The Fresh Market was founded back in 1982 in Greensboro, N.C., by Ray and Beverly Berry, with a simple idea: to create a truly sensory grocery shopping experience, similar to European-style markets, with a focus on superior service and quality -- and that's still the focus today. Wide aisles and an "open air feel" store with old-style butcher shops and delicatessens add to the experience, keeping customers coming back for more.

Getting fresh
The argument for the IPO is pretty simple: The Fresh Market is just getting started. The Berrys have gone from the one-store operation in Greensboro to 100 stores in 20 states, and they see a market that can ultimately support up to at least 500 stores. Given that half of the current stores are located in Florida, North Carolina, and Georgia, there is plenty of space out there to make their mark.

As a grocer, The Fresh Market faces a slew of competition, from international behemoth Wal-Mart (NYSE: WMT  ) to national chains like Kroger (NYSE: KR  ) . But to be fair, it isn't necessarily targeting that particular shopper. Perhaps one of the most overlooked and possibly unknown competitors is privately held Trader Joe's. Trader Joe's has 344 stores open in 25 states and Washington, D.C., and sells more than twice as much per square foot as Whole Foods:

Store Chain

No. of Stores

2009 Revenue/Sq. Ft.

2009 EBIT Margin

The Fresh Market

100

$441

6.7%

Whole Foods

298

$802

4.6%

Trader Joe's

344

$1,750

N/A

Long-lasting freshness
The most enticing aspect of The Fresh Market (for investors at least) is the potential for growth. Revenue in 2007 was $728 million, growing to $941 million over the last 12 months, while operating margins have averaged close to 6% over this same period. And if the company is only at about 20% of maximum store count as management says, there could be a long tail of additional stores which could really juice top-line revenue for some time to come.

Competition can keep things fresh
There is already a lot of competition in this space, and The Fresh Market has its work cut out. In many cases, though, this can be a matter of geography. And if The Fresh Market can place stores in areas where there is no real alternative, I think there's room to peacefully coexist. Take Peachtree City, Ga., for example, where The Fresh Market has a store opening up, slated for sometime in 2011. The closest Whole Foods in that area is almost 30 miles away, and the same goes for Trader Joe's.

As is common with many IPOs, it looks as if The Fresh Market's stock is priced for perfection. The initial offering price of $22 looks like a steal at this point since shares recently traded around $36.That's about 45 times trailing earnings and 25 times free cash flow. Simply put, it looks as if the market expects big things, and I do, too. But the cheapskate in me is telling me to wait for a better price because I know it'll happen at some point.

The fresh bottom line
I was initially a little surprised to see The Fresh Market going public, as I didn't realize they had such plans for growth. But I think that more and more consumers are looking for this kind of shopping experience. My bet is that down the road we are going to see The Fresh Market as a much bigger company than it is today. Agree? Don't agree? Swing on by my Rising Stars discussion board and lemme know what you think. You can also follow me on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned, but he does shop at Trader Joe's and is particularly fond of their potato tots. Wal-Mart is a Motley Fool Inside Value pick. Whole Foods is a Motley Fool Stock Advisor selection. Wal-Mart is a Motley Fool Global Gains recommendation. The Fool owns shares of Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2010, at 9:53 PM, jsbonardi wrote:

    JMo - I like reading your stuff. you have done your homework, but the prose also flows. Listen, The Fresh Market is to Wal-Mart, Kroger, and Giant what Chipotle and Qdoba is to Taco Bell. I don't want my fruit from Target and Wal-Mart. However, what do you think about these bigger chains that look like Whole Foods? I am talking about Wegmans and Harris Teeter. Do they pose a threat to the growth of Fresh Market?

  • Report this Comment On December 02, 2010, at 9:13 AM, TMFJMo wrote:

    Thanks for the kind words. jsbonardi...hhmmm, the name sounds familiar...

    Anyway, so yes, there is no question that TFM would see some level of competition from stores like Wegmans and Harris Teeter. Though HT is more like a Kroger, Wegmans is more along the lines of TFM.

    Wegmans has 76 stores, HT has 192. It is tough to see exactly what they think their growth prospects are as they are private companies, but HT seems to rely more on acquisitions now as opposed to organic growth...in other words they are buying their way into new markets. Nothing wrong with that as long as they make good deals.

    Wegmans is much more like TFM, though they cover completely different geographies (at least for now). I go back to the comment that it is a matter of geography and TFM will need to choose areas where there is no alternative. I don't think they are going to just run right into a Wegmans market and try to steal share. Wegmans is in NY PA, NJ, VA and MD and I don't know that they are looking to expand beyond that region.

  • Report this Comment On December 10, 2010, at 1:50 PM, Borisbmx wrote:

    There seems to be alot going for the company. First of all the smaller footprint is better then WFMI. Second and most importantly, Fresh Markets is succeding against Publix in Florida, something that WFMI has been unable to do. The economy is picking up steam over the next few quarters for the expansion, and food inflation is going to help comps. That said the valuation vs. existing square footage seems to be 2x wfmi.

  • Report this Comment On December 14, 2010, at 4:44 PM, Admanager wrote:

    interesting analysis. What wasn't mentioned in the article was that the IPO for the Fresh Market was only to provide the current owners with cash - the funds raised will not be used for expansion or debt. Source: Supermarket News, Nov. 1, 2010.

    (Founders Retain Control in Fresh Market IPO

    Nov 1, 2010 12:00 PM, By MARK HAMSTRA)

    Annual revenue per square foot is surprisingly low. The industry average is according to the Food Marketing Institute over $11.70 weekly, or over $600 per square foot per year. With the emphasis TFM has on perishables and wine, they should be much better than this. MUCH better.

    As a correction - Harris Teeter is publically traded. They are the largest component of Ruddick Corp. Symbol RDK. Harris Teeter is getting all their growth from new store openings and are very aggressive. They are not buying their way into any market - it's all organic!

    With the knowledge gained from a 30 year career in retail grocery marketing, my personal investments will not go to TFM. Margins are below average, sales are low, and in my personal dealings with management, they make promises and don't deliver. Maybe when they look for money other than to pay back owners I'll consider them.

    By the way, I enjoy shopping TFM when I can.

  • Report this Comment On December 15, 2010, at 1:56 PM, Borisbmx wrote:

    TFM does well vs. Publix in Florida.

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