The natural foods industry has taken off in recent years, and The Fresh Market (UNKNOWN:TFM.DL) has looked to claim its share of the natural and organic grocery space with its rapidly growing network of stores. Yet coming into Thursday afternoon's fiscal first-quarter financial report, Fresh Market shareholders had endured recent declines in the value of their investment, as some questioned whether increasing competition from Whole Foods Market (NASDAQ:WFM) and other players in the industry would eat into Fresh Market's business.
For its part, Fresh Market produced sales and earnings growth, but changes to guidance reflect some of the uncertainty among investors. Let's take a closer look at Fresh Market to see what's ahead for the grocery company going forward.
Picking out the best business
Fresh Market's results continued its track record of steady growth. Revenue for the quarter was up 7.2%, to $462 million, falling short of the 10% growth rate that investors had hoped to see from the company. The biggest disappointment was a drop in comparable-store sales of 0.1%.
On the bottom line, Fresh Market made $15.2 million on a GAAP basis, reflecting one-time charges due to store closures and other items of $14.9 million. After accounting for those items, adjusted earnings came in at $0.50 per share, $0.01 higher than those following the stock had expected, and up from $0.43 per share in the year-ago quarter.
Looking at the report in more detail, Fresh Market continued its efforts to make the most of its business. Gains of four-tenths of a percentage point in gross margins were encouraging, with Fresh Market proving that it was able to pass through cost increases to customers, and retain a greater markup for itself.
Reduced supply-chain costs also played a part in cutting overall expenses, and Fresh Market reaped gains despite also investing in changing its product mix to reflect customer wishes in higher-potential areas. Overhead costs fell slightly as a percentage of overall sales, but most of that came from a slower pace of opening new stores, and therefore incurring fewer pre-opening expenses. Fresh Market opened only two new locations during the quarter compared to seven a year ago.
Interim CEO Sean Crane continued to praise Fresh Market for its positive movement. "These results demonstrate our ability to leverage expenses with relatively flat comparable-store sales," Crane said, "and we believe this flexibility will enable us to invest in initiatives and help increase customers frequency and attract new customers."
Can Fresh Market fertilize its growth?
Unfortunately, Fresh Market wasn't able to give investors as positive a picture of the future as they would have liked. The grocery company reiterated its earnings guidance for the fiscal year, with the company expecting adjusted earnings of $1.85 to $1.93 per share. The new projection adds in another $0.08 per share due to the inclusion of a 53rd week in the company's fiscal year.
On the sales front, though, investors got bad news. Fresh Market said that, while total net sales growth could remain at between 9% and 11%, comparable-store sales would only rise 1% to 3%, down half a percentage point from its previous projection.
Most of Fresh Market's growth is getting back-loaded into the second half of the year, with the company expecting as many as a dozen new stores to open after July compared to just two new stores during the first quarter. As Crane put it, Fresh Market wants to "further leverage our cost structure to fund incremental investments that will support building brand awareness, enhancing our culture, and improving our long-term prospects." Meanwhile, the grocer is focusing on remodeling efforts during the first part of the fiscal year, with plans to remodel or refresh 10 stores, most of them coming in before the end of July.
Fresh Market shareholders didn't react strongly to the news, with shares falling only slightly in the first hour of after-market trading following the announcement. The main concern for shareholders is that Whole Foods is moving to capture the lower end of the market with a new chain aimed at more price-conscious shoppers. While that could end up cannibalizing its own business, it could also pose threats to Fresh Market.
Until investors get a bigger-picture view of what Fresh Market will do to respond -- and who will lead up its efforts -- the stock could have trouble bouncing back fully.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Apple and Whole Foods Market. The Motley Fool recommends Apple, The Fresh Market, and Whole Foods Market. The Motley Fool owns shares of Apple and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. 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.