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The Fresh Market Is in Better Shape Than You Think

Is The Fresh Market (NASDAQ: TFM  ) ripe for investment? The company is a major player in one of the hottest spaces within the food industry—natural and organic retailing. In its recent earnings, the company didn't post very appealing metrics and discouraged investors with news that a store expansion strategy wasn't working, but are these conditions indicative of long-term, fundamental issues, or just a misstep? If it's the latter, investors may have an interesting opportunity to buy into a well-run company at its most appealing valuation in some time. Here's what investors need to consider regarding The Fresh Market.

Sales woes
In The Fresh Market's fourth quarter, both top- and bottom-line figures came in below analyst expectations, largely due to some of the worst same-store sales growth in years. Same-store sales grew just 3.1%, which in isolation isn't a terrible number, but when compared to peers in the industry is quite weak. Even the industry behemoth Whole Foods Market posted 5.4% growth. The Fresh Market management pointed toward a 1% hit due to extreme weather, but that was not an issue unique to the company.

Revenue did increase -- up 15.1% to $425.8 million, but these gains did not carry down through the income statement as net earnings declined 9% year over year to $0.39 per share. Analysts had expected $430 million in sales with an average of $0.42 per share in earnings.

Topping off the negative report, management announced some restructuring efforts -- closing underperforming stores in Texas and California and halting its new market expansion efforts.

In the current year, The Fresh Market anticipates 11%-19% earnings growth, with 23-25 new store openings and same-store sales growth of 1.5%-3.5% -- a still-anemic figure by most counts.

So, if The Fresh Market isn't competing well with its peers, why does the lower valuation even matter?

Not so fast
There needs to be some perspective here as to why The Fresh Market has had a bad run for three quarters in a row. For one thing, the company was heading into 2013 with very difficult comparable quarters and a ton of market hype. There's no denying that its sales figures in recent periods haven't been up to snuff, but the reaction was multiplied because the market had overvalued this company so steeply for so long. As happens so often in these situations, reality caught up with unreasonable expectations.

As far as the store closures, management made an expensive mistake. The company tried a new tactic of jump-starting market awareness and branding in places like Sacramento and Houston. This is sharp departure from the gradual, cautious approach it had taken to other new markets. The company put too much emphasis on a shock-and-awe market entry and neglected the requisite market and demographic research.

Still, shouldn't investors celebrate a management team that knows when a mistake has been made and can react quickly to move forward? As the company exits this failed experiment, the growing, extremely profitable core market stores will shine bright once again. The company also has a foothold in areas in the Midwest (using the traditional strategy) that it will continue to push.

At 18 times forward earnings, The Fresh Market trades at a steep discount to all of its peers. Whole Foods trades at nearly 28 times forward earnings, and Sprouts Farmers Market trades at an insane 48 times earnings. The Fresh Market can and will come out of its slump, and at today's price offers investors an appealing deal on long-term growth in the red-hot natural foods industry.

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Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On March 11, 2014, at 1:53 PM, Borisbmx wrote:

    Looks like the weakest of the 4, and the other 3 are coming in for the kill.

  • Report this Comment On March 11, 2014, at 2:27 PM, Stockems wrote:

    Boris-Their core market earnings were up nearly 20% last year and they had solid net cash flow last year even with the terrible performance in the new markets. Hardly indicative of the others coming in for the kill--I think TFM just hurt themselves much like Target did with Canada.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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The Fresh Market CAPS Rating: ***
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