Don't Be Fooled: The Fresh Market, Inc. Isn't Worth It

The Fresh Market,  (NASDAQ: TFM  ) reported earnings yesterday, and they don't offer up a whole lot of hope for investors who have ridden shares down 45% since hitting all-time highs in late 2012.

Even if the stock looks cheap compared to fellow natural/organic grocers, there are three big red flags investors need to be aware of moving forward.

Closing stores
While The Fresh Market has been around for more than three decades, it only recently began expanding beyond its core markets of North Carolina. But the company announced yesterday that it would be closing four of its stores by the end of the month: three in Sacramento and one in Houston.

This isn't a good sign for the company. Take a look at when the stores were opened and what the median household income was in each neighborhood, and there's really no excuse why The Fresh Market wasn't able to capitalize.

Location

Store Opening

Median Household Income

Elk Grove, Calif.

2013

$72,133

Sacramento, Calif.

2013

$38,505

Roseville, Calif.

2012

$69,745

Houston, Texas

2013

$64,202-$108,068

Sources: Company release, Census Bureau. Range for Houston specific to four locations being closed was not immediately given.

What's worse, these seem to show that the company has done a poor job of researching its potential markets before moving in. The company admitted as much in its release, saying it has "deployed new analytics and forecasting methods designed to improve the site selection process and enhance the accuracy of sales forecasting."

Ceding the West

Source: The Fresh Market.

The company's decision to move out of certain California and Texas locations wasn't isolated, either. The Fresh Market announced that it would now be focused on expanding in established markets instead of expanding into new ones. Specifically, the company said that its primary focus would be on locations located east of the Mississippi River.

What does this really mean? In my opinion, it's that The Fresh Market is getting beaten out by larger brands like Whole Foods Market (NASDAQ: WFM  ) , and has little chance of moving into territory that smaller niche players like Sprouts Farmers Market (NASDAQ: SFM  ) and Natural Grocers (NYSE: NGVC  ) already occupy.

Source: Sprouts Farmers Market.

Source: Natural Grocers by Vitamin Cottage.

The first map represents Sprouts, the second, Natural Grocers. While Whole Foods is a nationwide chain, a look at the spread of locations of the three smaller players shows that The Fresh Market is largely giving up the West.

The deathblow
In the grocery industry -- and retail in general -- there is one metric that stands above the rest in importance: same-store sales. Anyone can grow their revenue by opening up new locations. But it takes a store that has truly struck a chord with its customers to consistently grow sales in existing locations.

Over the last quarter, Whole Foods, Natural Grocers, and Sprouts grew same-store sales by 5.4%, 10.6%, and 13.8%, respectively. And Whole Foods' lower number is largely due to its larger base of stores that have hit their market saturation point.

So where does The Fresh Market come in? It grew sales last week by 3.1%. Even worse, it is predicting same-store sales between 1.5% and 3.5% in the coming year. For an industry that's as hot as this one is, those numbers are downright abysmal.

A final verdict
Tie in those sales numbers with the fact that the company thinks it can somehow do better in already-established markets and you've got a recipe for underperformance. The Fresh Market might trade hands for a lower multiple than its peers, but that's for good reason, and I wouldn't go anywhere near the stock right now.

Stocks to own for life
I certainly wouldn't qualify The Fresh Market as a "stock to hold for life."  As it stands now, however, Whole Foods is one of my largest personal holdings, accounting for about 6% of my retirement portfolio, and I have no intentions of selling anytime soon. Everyone needs such stocks in their portfolio.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On March 08, 2014, at 2:14 PM, djlresearch wrote:

    You don't need to be a genius to know where to put these stores - high traffic, six figure incomes, high education levels, strong population density, and minimal similar competition. That doesn't leave a whole lot of locations to expand to which tells me, don't expand. Just keep the good location you have now and be happy. Growing for sake of growth always backfires. Build them one at a time, maybe one every quarter or two, not a whole bunch at once at random locations.

  • Report this Comment On March 08, 2014, at 3:37 PM, DavidTheJust wrote:

    I would encourage investors to listen to the conference call or to read the transcript.

    First, the issue about closing the stores is not nearly as cut and dried as Brian makes it seem. These stores were opened differently than previous stores. Management tried something new and it didn't work. That's not good, but management acknowledged that they made a mistake and are moving on rather than trying to prove that they could make this approach work. That is what rational management teams do.

    Second, yes - it would be great to have booming same sales growth. What makes TFM's more modest same sales growth so palatable, however, is that the stores are so exceptionally profitable. TFM's operating margin is more than twice that of KR. Or compare TFM to SFM. Brian is all excited about SFM's ability to grow same store sales, but TFM has a ROA of 16.21% and ROE of 22.38% compared with SFM's ROA of 7.8% and a ROE of 11.4%. The good news is that you can buy SFM, with its meaningfully poorer financial characteristics, for a p/e that is nearly three times as high as the p/e of TFM (Wait a moment - maybe that isn't such good news for SFM investors).

    One could argue that the slower same store sales growth means that TFM is no longer a fast growing company. But they have laid out a reasonable plan to grow sq ft by 15% this year. Add in 1-3% same sales growth and you have sales growth of 16-18% per year - and this growth can be funded almost entirely from the company's own cash flow. This is why TFM's share count is essentially the same today as it was in 2008. This makes a huge difference for those of us who own the company.

    Bottom line: I don't know if TFM is a stock that I will hold for the next twenty years, but I have a very high degree of confidence that the whims of fund managers will swing back its way over the next three years. TFM will string together two quarters w/o bad news, perhaps same store sales will even exceed the low guidance and the p/e ratio will rapidly expand over a meaningfully higher e. In the short term (the next few years) I am happy to own a business that is growing sales faster than 15% per year without diluting my ownership by issuing new shares.

    Best wishes,

    David

    long TFM

  • Report this Comment On March 09, 2014, at 9:58 PM, Borisbmx wrote:

    growing this format's square footage 15% might be a mistake.

  • Report this Comment On March 10, 2014, at 10:29 AM, Stockems wrote:

    Put another way--If you back out Cal/Tx, TFM's earnings grew ~20% even with their worst comp store performance in 4 years (1.33 to 1.60ish). Considering they are trading a much lower premium to WFM and an insanely lower premium to Sprouts, not worth writing off entirely.

  • Report this Comment On March 10, 2014, at 5:55 PM, WellTraveled wrote:

    Great article Motley Fool, the trend is not TFM's friend.

    But also, look at it from the Peter Lynch perspective. If you frequent these stores and have watched how the "war for food" is playing out, you've seen that TFM used to have two competitive advantages: 1) unique products; 2) superior service. However, over the last two years, traditional grocery competitors have improved their offerings in terms of variety of product and quality of product so that TFM is now only offering comparable products at a higher price. Moreover as they have expanded into new markets, their hiring and training practices have not been sound. The result is that their service is worse in many stores than are their discount competitors.

    The geographic market doesn't matter - there is no place where you can offer the same products as your competitors with poor service while charging a much higher price and still succeed.

    Stick a fork in TFM, they are done.

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