Paying Up for Groceries Is Paying Off

There's some serious lettuce to be made in premium groceries. Upscale supermarket operator The Fresh Market (Nasdaq: TFM  ) posted healthy growth in its fiscal fourth quarter this morning.

Net sales climbed 16% to $320.8 million, as reasonable expansion and a 7% spike in comps -- the company's strongest store-level sales performance in five years -- pushed the high-end grocer's top line higher. Things get even better on the bottom line, as adjusted net income soared 26% to $0.38 a share.

There's not a whole lot of consensus around Fooldom when it comes to the stock. Bears aren't sold on The Fresh Market's lackluster sales-per-square-foot performance, trailing the industry average. However, the fast-growing chain delivers margins that make its larger rivals jealous. The Fresh Market scored net margins of 5.7% during the holiday quarter and 4.6% for all of fiscal 2011.

If that doesn't seem like much, you're probably not familiar with the supermarket industry. Net margins usually clock in from 1% to 3%, as grocers work on high turnover to offset meager markups. Whole Foods Market (Nasdaq: WFM  ) -- the upscale organic grocer -- posted net margins of 3.5% during the same holiday quarter that found The Fresh Market checking in at 5.7%.

Margins get even tinier when we turn our attention to traditional chains. Kroger (NYSE: KR  ) -- the country's largest stand-alone operator -- posted net margins of 0.7% last year. Sure, pension plan consolidation weighed down on the bottom line, but the prior year's net margins of 1.4% shouldn't impress you either.

The Fresh Market is still early in its growth cycle. It has just a third as many stores as Whole Foods, and The Fresh Market stores are just a little more than half the size of a typical Whole Foods. It opened 13 new locations last year, and currently has 115 boutique markets that specialize in fresh, premium-priced fare. Another 14 to 16 stores should open this year, and The Fresh Market sees comps climbing 4% to 6%. Adjusted earnings should climb 18% to 22%, but that brings us to the valuation argument.

If The Fresh Market lands in the middle of its bottom-line profit guidance of $1.26 a share to $1.31 a share, we're looking at a company trading at a hefty 35 times this year's earnings.

That certainly doesn't seem cheap. Whole Foods also happens to be fetching 35 times this year's income target, but sleepy Kroger is at a more reasonable multiple of 10.

Is it justified? As a high-end option with chunky margins to match, The Fresh Market deserves a market premium. Teavana (Nasdaq: TEA  ) -- the boutique mall retailer selling high-end teas -- commands a forward earnings multiple of 37.

Teavana is growing faster than The Fresh Market, but Blue Nile (Nasdaq: NILE  ) -- the upscale online jeweler that specializes in diamond engagement rings and trades at 38 times this year's net income target -- is not.

Weigh The Fresh Market as a premium retailer. Give it props for its expanding margins. The stock isn't cheap, but that doesn't mean it's expensive.

Checking out
The Fresh Market is trading marginally higher since I recommended it to Rule Breakers newsletter subscribers a year ago, but now it's time to discover the next rule-breaking multibagger. It's a free report. Want it? Get it.

The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Whole Foods Market, The Fresh Market, and Blue Nile. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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