It’s Full Speed Ahead for The Fresh Market

After reporting its latest earnings, The Fresh Market (TFM) showed it's working to rapidly grow its network of stores.

The Fresh Market is spending the majority of its cash on opening or remodeling its stores. So far in fiscal 2013, operating cash flow was $69.6 million with $51.7 million spent on capital expenditures that included real estate activities. Compared to its larger rivals, the company has attractive metrics, and it will be interesting to see how these numbers hold up as the company grows. 

Source: Morningstar.com

Accelerating store construction for the remainder of 2013
During the second quarter, The Fresh Market opened five new stores, bringing its total operations to 136 stores in 26 states. The average capital cost per store is $5 million. Capital costs were higher than expected, in part due to two leased locations that required new construction. The company signed 30 new leases during the quarter for future store locations.

For the remainder of fiscal 2013, it plans to accelerate the construction of certain stores with planned 2014 openings. For instance, 10 to 11 new stores are expected to be ready in the third quarter, bringing the total of new stores for 2013 to 21 to 22. The Fresh Market forecasts an increase in same-store sales of 3% to 4.5% and diluted EPS of $1.50 to $1.55. Due to the company's accelerated growth plans and increased capital spending, flat operating margin growth is expected.

Sprouts beating out competitors
Sprouts Farmers Markets (SFM 1.44%) directly competes with The Fresh Market and holds the number-two spot in the natural and organic food space, after Whole Foods Market. It has been able to compete effectively against its rivals by offering cheaper food prices at its 160 stores. According to Instore Trends, the company's similar quality produce is priced 25% to 30% lower than Whole Foods; this area has been key in driving its growth.

Sprouts went public on August 1 with shares priced at $18. Since then, shares have traded as high as $41.85. In the company's second quarter ended June 30, net sales were $622.4 million, up 45% from last year. Diluted EPS rose 100% from 2012 to $0.10. Pro forma same-store sales grew 10.8%. Sprouts' full-year 2013 estimates include net income of $44 million to $47 million and adjusted diluted EPS of $0.41 to $0.43. Pro forma same-store sales are estimated at 8.5% to 9%.

Natural Grocers wants to grow like Whole Foods
Another growing specialty food retailer is Natural Grocers By Vitamin Cottage (NGVC 0.25%). Similar to The Fresh Market, Natural Grocers operates a smaller store format. According to the company's website, customers are offered a variety of organic and all-natural products and are also provided with science-based nutrition information to guide their health and nutrition choices. Natural Grocers has a market cap of $839.5 million and operates 70 stores in 13 states.

Rapid expansion is also a goal for the specialty retailer, with two signed leases for store openings in 2013 and 11 more in 2014. Based on independent research, the company predicts the U.S. market can support a minimum of 1,100 stores, very similar to Whole Foods Market's target of 1,000 stores.

Natural Grocers' comparable-store sales fell sharply during the recession but bounced back to pre-recession levels in 2012. The company is focused on keeping costs under control by monitoring staffing expenses and investing in a bulk-food repackaging facility and distribution center that is expected to support growth for the next five-plus years. The company also expects to capitalize on economies of scale as its number of stores grows, giving it greater purchasing leverage.

For the latest third quarter, reported net income was $2.9 million, an increase of 31%, and diluted EPS was $0.13. Year-to-date, net income increased 46.7% to $8.3 million with diluted EPS of $0.37. Same-store sales rose 11.6% to $10.1 million. For fiscal 2014, the company forecasts its number of new stores at 15. Sales growth of over 25% is expected and net income is expected to grow by more than 30%.

My Foolish conclusion
As the economy continues to improve and shows more signs that the housing and job markets are returning to "normal," these specialty food retailers should perform well over the long term as long as they're able to keep their customers away from the competition, primarily Whole Foods.

Natural Grocers is following a smart strategy of giving equal weight to both managing costs and growing its number of stores. This is something The Fresh Market may want to make a note of, since expanding too rapidly can spell disaster down the road.