The Fresh Market (Nasdaq: TFM), a specialty grocer with a focus on – surprise -- fresh produce, reported results for the quarter ended July 31 on Wednesday, before the bell. Shares fell more than 5% for the day. Should investors follow suit and put their bear hats on, or is this a nice opportunity to pick up a few extra shares? Let’s try to read between the lines and see what the numbers tell us about the company’s prospects.
The breakdown
Net income rose 27% to $13.3 million, from $10.5 million in the year ago quarter, as the $0.28 EPS figure beat analyst estimates by a penny per share. Revenues came in at $313 million -- growing by 20% from last year -- beating analyst expectations by nearly $5 million.
Comparable store sales grew at an 8% clip, and the company’s operating margin reached 6.9%, which is exceptional for grocers. With a net profit margin at almost 5%, The Fresh Market outperforms most of its competition, with average net margins for the industry hovering at 2%. Inflated food prices, due to the recent drought this year, could hurt the company’s high margins, though they would also affect other competitors in the industry.
Good metrics aside, Fresh Market stock ain’t cheap. With FY 2012 EPS projected to come in between $1.33 and $1.38, it currently trades at over 40 times forward earnings.
So, while there appears to be a high amount of growth priced into the stock already, I agree with fellow Fool Andrew Marder when he writes about the company’s potential growth due to expansion initiatives underway on the West Coast. The Fresh Market is about a sixth of the size of the national high-margin grocer Whole Foods Market (Nasdaq: WFM), which may be one of the reasons the Fresh Market trades at a premium.
So, what happened?
It’s confusing when companies beat expectations and their shares subsequently sell off. So why did Fresh Market shares fall so dramatically after reporting such impressive results?
In some cases, this is due to the "whisper number," which is a number – which often differs from official analyst estimates -- which Wall Street professionals often grow to expect as conditions at the company change during the quarter, or analyst estimates are thought to be dated. This may be the cause for Fresh Market’s fall.
There are certainly worse grocers to invest in, though. SUPERVALU (NYSE: SVU), for example, which is down around 70% for the year. Its margins are -- wait, did you say margins? SUPERVALU doesn’t have those, silly! It loses $0.03 on every $1.00 of sales, and has negative returns on equity, assets, and investment. Talk about needing a cleanup on aisle three.
The rise of high-quality grocers doesn’t appear to be over, yet. Whole Foods stock has gone up around 40% this year, and Fresh Market shares are up over 50% year to date, spurred on by margins far higher than the industry average. Both companies are definitively for growth investors; neither pays a dividend, and both trade around 40 to 50 times earnings. Basically, we're dealing with two stocks that are likely to be much more volatile than the market, so keep this in mind before investing.
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