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The Fresh Market: Fresh or Rotten?

By Philip Saglimbeni - Apr 13, 2014 at 7:37AM

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With shares of The Fresh Market near 52-week lows, the time seems right to consider the small company for long-term growth.

Sometimes my experiences with a company as a consumer do not match my experiences with the same company as an investor. These situations can be frustrating because I often find many investment opportunities through my own personal experiences.

In the case of The Fresh Market (TFM), the location near me has everything going for it. It is in a well-established area with high foot traffic and a plethora of health-conscious consumers. Although it is in close proximity to a Mrs. Green's Natural Market and a Trader Joe's, the store is still usually busy at all hours.

In fact, everything I see with my own eyes seems in direct contrast with the overall company's performance. Shares of The Fresh Market are only up 10% since the company went public in late 2010 and shares are down over 12% year-to-date. This performance lags significantly behind that of larger competitor Whole Foods Market (WFM).

Source: The Fresh Market

Fresh or rotten?
Despite a troubling performance so far, the growth story behind The Fresh Market appears to be intact. The major trend is of course the changing eating habits of the American consumer. As the nation becomes more health-conscious and seeks natural/organic alternatives to processed foods in efforts to ward off medical problems typically associated with being overweight, grocers like The Fresh Market and Whole Foods Market should continue to have large and growing consumer bases.

The Fresh Market appears to have substantially more room to grow than its much larger competitor too. As of January 26, 2014, The Fresh Market had 151 stores in 26 states, 20 of which it opened in fiscal 2013 alone. 

Meanwhile, Whole Foods Market has more than double the store count of its peer with 373 stores at the end of the first quarter, 10 of which it opened in the first quarter. Impressively, Whole Foods has another 107 stores in its development pipeline and it is on pace to cross the 500-store mark in 2017. Even more impressive is that management anticipates demand for 1,200 stores in the American market. 

However, in The Fresh Market's most recent earnings release the company's management explained, "Following an in-depth analysis of our stores and the markets in which we operate, we made the strategic decision to close four stores. In addition, we are refining our real estate plan to focus on increasing penetration in existing markets while slowing the pace of our expansion in new markets." 

While the company has made the choice to slow the pace at which it opens new stores, the expansion of locations is still set to continue going forward. The company expects to open 23-25 new stores in fiscal 2014, with seven in the first quarter and five or six in the second quarter. However, it will concentrate its new store openings in core markets instead of new areas, which suggests that management is apprehensive about branching out too quickly. 

Cheap growth?
Despite a slowdown in new store openings for The Fresh Market, analysts still expect solid growth from the company in 2014, better in fact than what they expect from Whole Foods Market. They expect the company to grow revenue 15.1% and EPS 13.6% in the year ending January 2015. These projections compare favorably to those for Whole Foods Market which call for growth rates of 11.3% and 10.2% for the year ending September 2014. 

The Fresh Market also costs significantly less than Whole Foods. The former's forward P/E of 18.7 is a lot less expensive than the latter's at 25.8. 

Bottom line
Investors who seek high growth and value in the healthy-grocery space may have a viable opportunity in The Fresh Market. The company has not performed well lately but it should remain a beneficiary of the trend toward healthy living in the United States.

However, the company's recent trepidation in regard to new store expansion is worrisome, especially in contrast with Whole Foods' rapid expansion plans. When combined with the company's poor stock performance, this indicates that The Fresh Market does not have the brand strength of its main competitor.

While both companies appear fresh, Whole Foods looks to be the better long-term investment going forward.

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