Shares of The Fresh Market
How it got here
Nothing magical has driven The Fresh Market to new highs recently, just a "slow and steady wins the race" mentality that appears to be paying off. After a few bumpy quarterly reports after the company's 2010 IPO, it appears to be smooth sailing at the moment. In three of the past four quarters, earnings have met or exceeded expectations, and the one outlier was a miss by only a penny.
The foundation of The Fresh Market's success is that the grocery business has more to do with shifting consumer trends than anything else. Organic-food sales are growing 5 times as fast as total food sales, affluent customers are willing to pay up for quality, and improvements in the economy allow consumers to put away the ramen noodles and splurge on fresh produce once in a while.
The move from traditional grocery stores to higher-end stores such as The Fresh Market and Whole Foods Market
And the financial results speak for themselves. Growth and profit are well ahead of those of the competitors.
|
Company |
5-Year Revenue Growth Rate |
Profit Margin |
Price/Sales |
Forward P/E |
|---|---|---|---|---|
| The Fresh Market | 13.7%* | 4.6% | 2.2 | 32.3 |
| Whole Foods Market | 10.7% | 3.6% | 1.5 | 31.9 |
| Kroger | 6% | 0.7% | 0.2 | 9.5 |
| SUPERVALU | (2.1%) | (1.4%) | 0.04 | 5.0 |
Sources: Fool.com and Yahoo! Finance.
*Note: The Fresh Market has been public for only two years.
The bang for your buck
The grocery business has always been a tough, low-margin business, but Whole Foods and The Fresh Market have shown you can make it with strong margins and be rewarded with a high premium on the stock market. The question is whether we can continue to expect strong growth and profits in the future. A forward P/E ratio of 32 is awfully pricy, though taking a look at Whole Foods, that seems to be the price that high-end organic food is commanding these days.
By comparison, Kroger is looking fairly valued, while SUPERVALU, despite falling revenue, is looking dirt cheap.
What's next?
A full 94% of CAPS members who have rated the stock think it will outperform the market, and my Foolish colleagues agree. Fellow Fool Rick Munarriz recently highlighted that paying up for high-margin grocers has paid off handsomely over searching for value. He may be right, but I'm not willing to pay this much for a company that grew revenue 13.7% last year. I think the market has gotten ahead of itself here and would look to get in on a pullback to a more reasonable valuation. That said, I would much rather own The Fresh Market than traditional grocers scraping out a profit margin of less than 1%.
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