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The Fresh Market: Should You Buy in the Wake of Yet Another Earnings Miss?

By Joseph Solitro – Mar 13, 2014 at 2:45PM

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The Fresh Market has just reported another quarterly earnings miss, so let's see what shares are doing now.

The Fresh Market (TFM), a natural and organic grocer, has just released its fourth-quarter report to complete fiscal 2013. The results disappointed analyst expectations and the stock has reacted by moving about 2.5% lower. Let's take a look at the quarter and the company's outlook for the year ahead to determine if this weakness is our opportunity to buy or if we should continue avoiding this beaten down stock. 

Source: The Fresh Market

Breaking down the results
The fourth-quarter report was released on March 6, and it widely missed analyst expectations; here's a breakdown and year-over-year comparison:

Metric Reported Expected
Earnings Per Share $0.39 $0.44
Revenue  $425.80 million $433.31 million

Source: Benzinga

Source: The Fresh Market

Earnings per share decreased 9.3% and revenue increased 15.1% year over year, driven by comparable-store sales rising 3.1%. The gross profit increased 13.3% to approximately $142.7 million. But the gross margin declined 53 basis points to 33.5%, as the company faced higher costs. In addition, management stated that it faced several hurdles during the quarter, the most notable of which were a shortened holiday calendar, extreme winter weather, and a cautious consumer.

Many companies have been using weather as an excuse for weak performance, and I think this is pitiful. Jon Taffer, a food and beverage industry expert, says that using weather as an excuse is a pet peeve of his. He goes on to ask, "Somebody's making money in a snowstorm, why not you?" I could not agree more with Mr. Taffer and have three additional comments:

  1. People do not stop eating because of extreme weather.
  2. People are likely to buy extra food products before winter storms, especially water and canned goods, in case they are without power and stranded for an extended period of time.
  3. Restaurant operators like Darden Restaurants have used the same excuse; so if people are not buying groceries and not going to sit-down restaurants, where are they going? Chipotle Mexican Grill?
In summary, Fresh Market's quarter was disappointing, and I am less than pleased with management's excuses. However, the negativity did not stop there, as then the company handed over its guidance for fiscal 2014...

Outlook for the year ahead
For fiscal 2014, Fresh Market expects adjusted earnings per share in the range of $1.56-$1.66, an increase of 11.4%-18.6% from fiscal 2013; this falls just below the consensus analyst estimate of $1.68. The company added that it expects comparable-store sales growth of 1.5%-3.5% and a record number of new stores to be opened; here's the current expansion plan for the year:

Time Period New Store Openings
First Quarter 7
Second Quarter 5-6
Third & Fourth Quarter  10-12


Source: The Fresh Market

The Fresh Market noted that the majority of the new stores will be opened in its existing markets, with only eight coming in new markets. This is a very smart move by management because adding stores to a market in which it already has a consumer base and brand awareness will lead to quicker success. Overall, the outlook is strong; but after two consecutive earnings misses and two prior mixed quarters, I would be cautious when considering an investment today.

Industry-wide struggles
Fresh Market is not the only natural and organic grocer having trouble meeting analyst expectations; Whole Foods Market (WFM), the largest player in the industry, recently reported disappointing first-quarter results for fiscal 2014. Here's a breakdown of the report:

Metric Reported Expected
Earnings Per Share $0.42 $0.44
Revenue $4.24 billion $4.29 billion

Source: Benzinga

Source: Whole Foods

Whole Foods' earnings per share increased 7.7% and revenue rose 9.9% to a quarterly record of $4.24 billion; however, both of these missed the consensus analyst estimates. Comparable-store sales also missed expectations, growing 5.4%; the company noted "softer" shopping patterns by its customers. Whole Foods used the same excuse as The Fresh Market, citing "severe winter weather" in December as the main reason for its weak results.

The soft quarter led the company to cut its outlook for the full year, now expecting earnings per share in the range of $1.58-$1.65 from the previous range of $1.65-$1.69. The earnings miss and reduced outlook caused the stock to fall more than 7% on the day of the release, but it has since rebounded from the lows. Whole Foods' quarter proves that The Fresh Market is not the only one showing slowed growth, but this is still not a situation investors should want to get involved in.   

The Foolish bottom line
The Fresh Market has fallen more than 16% year to date, and weak earnings have been the primary reason for this decline. Its fourth-quarter report was very disappointing, and its outlook for 2014 is not promising when you consider its weak track record. For these reasons, Foolish investors should avoid any new investments in The Fresh Market today.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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