3 Things to Watch in The Fresh Market's Upcoming Earnings Announcement

Earnings season has almost come to a close, but there are still a few companies left to report. One of those companies is The Fresh Market (NASDAQ: TFM  ) , a grocer with 131 stores in 25 states that focuses on high-end customers by providing a "farmer's market feel" with several specialty goods. The grocer will be reporting earnings on Wednesday, after the market closes.

Source: The Fresh Market .

Following are the bare bones of what the market is expecting from The Fresh Market, but read further to find out what three metrics investors should keep their eye on to really see if this grocery store is worth your investment dollars.

Expected Earnings Per Share

Expected Revenue

 $0.32

$357 million

Source: E*TRADE.

Profit margins
Because grocers often only bank a penny or two of profit for every dollar spent in-store, even small changes in one's profit margin can mean big things for a company's bottom line. If we look at how The Fresh Market has performed during the second quarter of the past three years, we see a solid move toward more profitability.

Source: SEC filing. 

It should be noted that the dramatic increase between 2010 and 2011 was partially due to my having to estimate what income taxes would have been paid during 2010. At the time, The Fresh Market was treated as an entity in which shareholders paid taxes, and the company did not.

Either way, the improvement of 21 basis points was a positive step for the company, especially given its lofty valuation. Given expectations, Wall Street is expecting these margins to expand beyond 4.30%. If The Fresh Market is able to come in ahead of these expectations, it would be a very good sign.

Sales per square foot
Because the grocery business has such tough economics, efficiency is key. Profit margins tell part of the story, but by monitoring sales per square foot, you can get a better idea of how the physical space is being used. This is especially important for The Fresh Market, as its stores average just 21,000 square feet -- far below that of traditional grocery stores.

Last year during the second quarter, The Fresh Market had $127 worth of sales per square foot, or SSF. To see whether the company is keeping up with larger trends, let's look at how some peers performed over the last quarter. Whole Foods (NASDAQ: WFM  ) , Fairway (NASDAQ: FWM  ) , and Sprouts Farmer's Market (NASDAQ: SFM  ) all represent newer-age grocery stores that, like The Fresh Market, focus on fresh, locally sourced, and organic goods.

Company

Q2 2012 SSF

Q2 2013 SSF

Change

Whole Foods

$218 

$225 

 3.2%

Fairway

$251 

$243 

(3.2%)

Sprouts

$108 

$141 

 30.5%

The Fresh Market

$127

 ???

 

Source: SEC filings.

Obviously, these stats show a great variance in SSF. Whole Foods is a much bigger, nationwide competitor, while Sprouts is focused in the American Southwest, and Fairway is limited to the Northeast.

The Fresh Market operates in 25 states right now, so it's somewhere between these two extremes. I would say that if The Fresh Market could show a 5% increase in SSF -- or about $133 -- that would be a solid sign for investors.

Comparable-store sales
The one major problem with SSF is that new stores that open during the middle of a quarter are counted, even though they might not have been operating for the full quarter. That was the case for Fairway, which was the only store of our group showing a negative trend.

Because The Fresh Market definitely fits in the "growth" category for grocery stores, there may be no more important indicator than growth in same-store sales, which tells you whether the value The Fresh Market offers is catching on with consumers.

Again, let's look at how The Fresh Market's peer group has fared this past quarter to get some perspective.

Company

Comparable-Store Sales

Whole Foods

7.5%

Fairway

1.4%

Sprouts

10.8%

The Fresh Market

???

Source: SEC filings.

Currently, The Fresh Market trades for about 40 times earnings. That's more than Whole Foods, a grocer with a stronger brand, larger footprint, and less store growth potential than The Fresh Market. If The Fresh Market is going to maintain such a lofty valuation, it's going to have to show strong comparable-store sales. Last quarter's 3% rise just isn't going to cut it, and the company is going to need to show, at the very least, a 5% pop in comparable-store sales.

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  • Report this Comment On August 27, 2013, at 2:02 PM, DavidTheJust wrote:

    Thank you for your thoughtful article.

    Given that TFM is a growth stock, one of the things investors will be looking at is how well the opening of new stores seems to be going. There will naturally be a great deal of interest about the company's plans to expand in California

    Three quick thoughts:

    1. Sprouts is a better comparison than Whole Foods or Fairway in terms of Sales/Square-foot. This is both because of the differences in business models and also because, in the case of FWM, where the stores are located. If you operate in the very expensive market of New York City, you have to achieve much higher sales/sq ft just to be profitable.

    2. Given that TFM generally has much better financial metrics than Sprouts, it should be encouraging to TFM investors that Sprouts sells at a meaningfully higher price/sales ratio. While I think that Sprouts is over-valued - the valuations of the this publicly traded peer company should support the price of TFM.

    3. One of the great things about TFM is that they earn back the cost of opening new stores so rapidly (around 18 months). This means that the company can keep opening new stores without diluting current shareholders.

    Best wishes,

    David

    long TFM

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