A Second Chance to Capitalize on Organic Food

The market for organic and natural foods continues to gain strength, and this trend will only get stronger as the economy continues to rebound. As more people find jobs, they'll have more money to spend. Part of that increased income is likely going to go toward eating fresh and natural products.

Adding validation to the movement, Wal-Mart has announced plans to enter the organic foods market. Many investors missed the tremendous move in Whole Foods Market   (NASDAQ: WFM  ) shares over the last five years. But there could be another organic food retailer poised for a similar run. That company is The Fresh Market (NASDAQ: TFM  ) .

The Fresh Market growth story
The Fresh Market is still early in its expansion opportunities. Whole Foods has 375 stores compared to The Fresh Market's 150 store base. It plans to add a record number of stores this year, with the long-term goal of hitting 500 stores. Its other top competitor, Sprouts Farmers Market (NASDAQ: SFM  ) , also has around 150 stores. The key for The Fresh Market is to expand beyond its core market. Nearly half of its stores are located in three states: Florida, North Carolina, and Georgia.

 
The Fresh Market is opening its stores earlier to try and take traffic away from Whole Foods and others. Most of its locations will now be open nine additional hours per week. This move could boost The Fresh Market's comparable-store sales. Both Family Dollar and Dollar General extended their hours back in 2009--as a result, they saw 100 to 150 basis point growth in their comparable-store sales.

The organic foods market
The beauty of the organic foods industry is that its higher cost and quality products help insulate companies from weak economic conditions. The higher cost products attract a higher-income customer who is less likely to trade down when the economy weakens.

Whole Foods shares have been in free fall this year. The organic foods retailer posted comparable-store sales that were weaker than expected last quarter. It blamed intensifying competition, where its stores are seeing overlapping from the likes of The Fresh Market and Sprouts Farmers Market.

Then there's Sprouts, which recently had a strong quarter. This was despite the competitive pressures that Whole Foods felt. Its most recent quarter showed that earnings per share beat consensus by 15%. Comparable-store sales were up 12.8%, which was well above what Whole Foods posted. And while Whole Foods lowered its guidance, Sprouts increased its outlook.

How shares stack up
The Fresh Market trades at a P/E ratio of 18 based on next year's earnings estimates. That's lower than either Whole Foods or Sprouts Farmers, which trade at 23 and 33, respectively. When you factor in Wall Street's growth estimates, The Fresh Market has a P/E to growth (PEG) ratio of 1.2. That's well below Whole Foods' 1.8 and Sprouts Farmers' 1.6.

On the plus side for investors of Whole Foods, the company offers a 1.2% dividend yield, while The Fresh Market does not. Whole Foods also has virtually no debt compared to The Fresh Market's debt-to-equity ratio of 20% and Sprouts Farmers' at 76%.

Bottom line
The organic foods market is still a young growth story. One of the companies at the forefront of the growth story is The Fresh Market. It still has plenty of store expansion opportunities and the potential to improve comparable-store sales. For investors looking to gain exposure to the organic and natural foods market, The Fresh Market is worth a closer look.

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