Living in Whole Foods' Shadow

It hasn't been the fast-growth year that The Fresh Market (NASDAQ: TFM  ) had in mind. While comparable sales increased in the last quarter, the two previous quarters had slower growth than either the company or the market was hoping for. Even with the increase last quarter, Fresh Market was unable to match the pace of growth set by Whole Foods (NASDAQ: WFM  ) . The rest of 2013 is supposed to be strong for The Fresh Market, but there are still plenty of challenges for this grocer to overcome.

Sales
The year-over-year comparable sales increase at The Fresh Market last quarter was 3%. That's actually not a great pace for the company, as in the same quarter a year ago it managed an 8.2% increase. The recent increase was good news and bad news. The good news was that 3% was a step up from the year-over-year increase that the company had in the fourth quarter, which had been hurt by a slowdown in customer traffic.

The bad -- not horrible, just not good -- news is that most of the increase (2.4 percentage points of the 3% increase) came from an increase in average ticket size. Only 0.6% came from an increase in the number of transactions. In a perfect world, the business would be driven by an increase in transactions, which indicates that new customers are coming into existing stores. While it's good to see that the business is managing to increase the average ticket, it would be comforting for investors to know that more customers were coming in the door.

The Whole Foods model
To contrast, Whole Foods grew comparable sales by 6.9% year over year in its comparable quarter. The company reported that the increase was driven by equal parts transaction-count increases and average ticket size. That means that Whole Foods is pulling in customers that could be Fresh Market customers and increasing what it sells to its existing clientele.

For the coming year, Fresh Market is planning to push traffic up more. Part of the shortfall from last quarter was due to a very positive increase in footfall in the comparable quarter a year prior. In its last earnings report, The Fresh Market updated its annual comparable sales forecast to an increase between 2.5% and 4.5%.

That's solid, but not enough to justify a trailing P/E ratio of 38, when Whole Foods is putting up such solid gains and trading at a P/E of 37. Investors interested in Fresh Market should keep an eye out for expansion in California, which could kick off a new phase of growth for the company, but for now, Whole Foods seems secure in its position at the top.

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