Which Is the Healthiest Grocer of Them All?

One of the most powerful trends sweeping across the nation is the trend toward healthy living. Few industries stand to benefit from consumers' growing health-conscious needs more than grocery stores. Companies like The Fresh Market (NASDAQ: TFM  ) and Whole Foods Market (NASDAQ: WFM  ) are in prime position to capitalize.

However, both companies have struggled in recent months and their shares are off significantly from their respective all-time highs. Which healthy grocer deserves your money?

Healthy food, healthy growth
The business of eating healthy is a good one. Both The Fresh Market and Whole Foods have been increasing their sales and earnings at robust levels over the years and that trend is projected to continue. The following is a breakdown of expected growth for both companies in 2014: 

Company

The Fresh Market

Whole Foods Market

Revenue Growth 2014

17.1%

12.6%

EPS Growth 2014

19.3%

15%

Although the comparison is close, The Fresh Market is projected to experience more growth in 2014 than Whole Foods. This is somewhat expected considering that Whole Foods is a much larger company with a market capitalization of $20.91 billion, which is more than ten times the $1.91 billion market capitalization of The Fresh Market. 

Most importantly, the solid growth expectations for both companies indicate that healthy grocers are doing well in general and that the trend toward healthy living is ongoing and still very powerful.

Expensive food, expensive valuations
Unfortunately, with above-average growth comes above-average valuations. Although not ridiculously expensive, both The Fresh Market and Whole Foods trade at elevated P/E multiples. The following is a breakdown of both companies' valuation multiples: 

Company

The Fresh Market

Whole Foods Market

Trailing P/E

27.48

38.2

Forward P/E

22.87

28.2

Once again, The Fresh Market pulls ahead of Whole Foods, as its trailing 12-month and future 12-month P/E ratios are significantly lower than those of its larger competitor.

However, also worth mentioning is that Whole Foods pays a dividend of $0.48 per share, which is equal to a yield of 0.90%. Unfortunately, The Fresh Market does not pay any dividends at the current time. 

The disparity
Judging by growth and valuation alone, The Fresh Market seems like the better investment. The smaller company is projected to grow the fastest on both a revenue and an EPS basis and still trades at much cheaper valuation multiples.

However, stock performance tells a different story. Whole Foods is up over 23% year-to-date while The Fresh Market is down over 15%.  What can account for the disparity between the two?

A major reason is that The Fresh Market has missed the average analyst EPS estimate twice in the last year and only exceeded the average estimate once. Whole Foods has exceeded the average analyst EPS estimate every time in the last four quarters. 

This may partly be a case of analysts simply expecting too much growth from The Fresh Market. With shares off over 30% from yearly highs, the lofty expectations for the company have largely been reset.

However, shares of The Fresh Market have also struggled throughout the year on management's weak guidance for fiscal 2013, which was lowered at the end of the company's second quarter to a range of $1.50-$1.57 from a previous estimate of $1.57. Interestingly, management explained that the lowered guidance is mostly a result of higher costs associated with opening newer stores faster than previously anticipated. 

This is one of those rare instances where lowered guidance can be looked at as a positive. Earnings are expected to take a hit in the short-term in order to bolster the company's growth in the long term, which is an attractive trade off.

Which is the healthiest grocer of them all?
Both The Fresh Market and Whole Foods seem to make for appealing investments over the long term. However, the question of which grocer is better is entirely dependent on what question an investor is asking.

An investor interested in more aggressive growth would probably be better off with shares of The Fresh Market. The small-cap company is one-tenth the size of Whole Foods, growing revenue and earnings per share at more robust levels and still trades at significantly cheaper valuation multiples.

Despite being significantly more expensive, Whole Foods appears to be the safer investment as its business is more efficient and dependable. The company exceeds its growth estimates on a regular basis, pays a respectable dividend, and has rewarded investors on a more consistent basis.

One thing is certain: both companies appear set to continue riding the ongoing trend toward healthy living in the United States. Accordingly, investors interested in long-term growth can put both The Fresh Market and Whole Foods on their grocery lists.

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  • Report this Comment On December 10, 2013, at 9:30 PM, PatCampbell wrote:

    Good analysis.

    Would like to see some Amazon/Grocery comparisons. Personally I think WFM and similar grocers are relatively immune from Amazon while Safeway and Walmart type operations are more vulnerable.

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