A Great Play on a Healthier America

It is usually very difficult to predict the future trends and preferences of American consumers. One exception to this is in food retail, where there has been a clear trend toward healthier diets. There are several good ways to play this, including food manufacturers and restaurant chains, but on the retail end of things, and by far the best way to go in my opinion is The Fresh Market (NASDAQ: TFM  ) . The Fresh Market is a fast-growing company, and the market certainly prices it as one at around 38 times earnings.  Don't let the high valuation fool you... The Fresh Market isn't close to fulfilling its potential if the trend continues.

U.S. dietary trends
The trend toward healthy eating is clear, but is still in its infancy. Americans in general are becoming more aware of what they eat, which has tremendously expanded the market for vegetarian, organic, and health-food choices in grocery stores and restaurants.  Items such as Greek yogurt and Quinoa now have a massive presence in their respective sections, while they were both essentially unheard of up until a couple of years ago.  Recent trends such as organic fruits and vegetables and new diet philosophies such as the "Paleo" diet have been showing up on restaurant menus all over the country. Research shows, however, that most Americans still have some bad habits, indicating that the health-food trend still has plenty of room to sweep through the U.S. population.

For instance, research shows that about 60% of Americans still eat snack foods on a regular basis, and get about 20% of their calories from snacking. Snacking is most prevalent in children, as would be expected, and the major sources of calories from snacks are dessert-type foods and sweetened beverages. Even with the increased presence of artificial sweeteners these days, Americans still consume 14% more sugar than they did four decades ago. What this means to us as investors is that the healthy grocery chains still have a huge potential customer base that they could capitalize on as the dietary-awareness trend reaches more consumers.

Look at the restaurant chains and you'll notice a trend
If you follow food-service stocks at all, you probably have recognized that some of the best performers have been the healthier "fast-casual" chains such as Panera Bread (NASDAQ: PNRA  ) and Chipotle Mexican Grill (NYSE: CMG  ) .  Both of these offer fresh ingredients and a generally healthy menu, while offering quick service that you can't get at a traditional "sit-down" restaurant. 

Both of these companies have performed exceptionally well, with American consumers flocking to the concept of "fast, fresh food." Chipotle's revenue has grown by a staggering 764% over the past decade, and Panera's has ballooned by about 500% in the same time periodAll data obtained from S&P Capital IQ analyst reports.

Even traditional fast-food companies like McDonald's (NYSE: MCD  ) have been adjusting their offerings to the changing preferences of the population. The company just recently announced that it will begin to offer alternatives such as salads instead of french fries in its extra value meals, as well as vegetarian options on its menu ttp://www.marketspress.com/mcdonalds-includes-vegetarian-choices-on-its-menu-2745/michael.html. Every since the company got rid of the "super-size" option several years ago, McDonald's menu has gradually been gravitating toward healthier items, like egg white breakfast sandwiches and an emphasis on salads. 

It really seems like an "adapt-or die" situation is playing out in the food-service industry. Restaurant chains all over are required to do things like list calorie content on their menus, which was unheard of just a few years ago. If you prefer to play the restaurant side of healthier eating, keep an eye out for other chains that seem to be adapting well.

The Fresh Market and its future
The Fresh Market has grown tremendously since its founding just over 30 years ago, and now operates almost 130 stores in 25 states. Growth has accelerated in recent years as a result of healthier diets, and the company's sales have nearly doubled since 2007.

Source: Company reports.

Even after the recent growth, the company still has ambitious expansion plans, aiming to increase its total square footage by about 15% this year. The Fresh Market currently has 30 signed leases on new store locations, meaning that it is well on track to reach that goal. Long term, the company has stated it sees the potential for 500 stores in the U.S., and this could be rather conservative if the dietary trends continue.

The leader in the segment, Whole Foods (NASDAQ: WFM  ) , is a good example of the potential of the Fresh Market.  Whole Foods currently has about 350 stores in 40 states and is still growing rapidly.  The company is very well-run and has employed excellent strategies to improve their business, such as emphasizing perishable foods to increase the frequency of their customers' visits.  I tend to prefer the Fresh Market because even though it has much more potential for growth at currently about one-third of Whole Foods' size, shares are surprisingly cheaper.  Whole Foods trades for a slightly higher P/E of 40, and is projected to grow a little slower than the Fresh Market over the next few years, which makes sense, given its size. 

As Fresh Market expands, margins should improve as a larger-scale operation provides more opportunities for efficiencies. For example, the company will be able to source products in greater quantities, improve shipping efficiencies, and spread out existing fixed costs among its stores.

Summary
The trend toward healthier eating is clear in the way that long-established companies are adapting, and in the way that the new companies mentioned have been so successful.  So, while The Fresh Market's P/E of around 38 may seem excessive when compared to other grocery stores, which have multiples in the 12-15 times TTM earnings range the revenue growth and long-term potential more than justify it.

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  • Report this Comment On October 07, 2013, at 3:19 PM, hog152 wrote:

    You ruined your credibility with this article. TFM is probably the weakest player in the sector. I think you'd have a hard time finding anyone of note who would agree with you. Go into the store before you write about it and you'll see what I mean.

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