Long-term objectives & short-term opportunity:
For investors, the fundamental strengths of The Fresh Market previously mentioned are essential for long-term success, but short-term gains will come from strong comparable store sales and net revenue growth along with investors perception of The Fresh Market’s valuation. For comparison, The Fresh Market and Whole Foods are contrasted below based on several key metrics:
Forward Price/Earnings: 27.05
- Whole Foods: 30.91
PEG Ratio: 1.57
- Whole Foods: 4.03
EV/EBIDA: 15.20
- Whole Foods: 32.54
Profit Margin: 4.83%
- Whole Foods: 4.13%
Short % of Float: 14.10%
- Whole Foods: 2.60%
These metrics show both companies as being “expensive” when compared to traditional retailers, but The Fresh Market is “cheaper” based upon forward price/earnings, PEG ratio, and its EV/EBIDA. This does not point to a inexpensive stock, but rather to a company that is priced inline with its major peer. The short percent of float is important because it signifies that a substantial percentage of options investors are betting against the stock and, consequently, against The Fresh Market’s forward momentum. If the Fresh Market is able to continue to drive profitability and sustain its capital expenditures in cultivating new stores, these investors will be forced to cover. This covering will result in The Fresh Market’s market cap increasing markedly over time.
The aforementioned metrics show clear strength for both the short-term trader and the long-term investor. Although The Fresh Market has not seen the stock-price growth that Whole Foods has over the past three years, The Fresh Market is showing signs of fundamental strength that will result in increased stock price performance if the company continues on its current growth trajectory. This trajectory is based upon the companies ability to profitably grow and The Fresh Market has illustrated this critical expertise.
Why buy against the more “mature” Whole Foods and the more “traditional” kroger?
The case for The Fresh Market resides in the company’s ability to maintain profit margins above those of the more “mature” Whole Foods and the more “traditional” The Kroger Co (NYSE:KR). Whole Foods and Kroger represent the superstars of the retail grocery industry. Whole Foods has managed to capture the high end market, while Kroger has successfully achieved same-store sales growth quarter after quarter. Although Kroger poses a risk to both the Fresh Market and Whole Foods, there is room for specialty grocery within the changing retail landscape. What the Fresh Market brings is a store format that has appealed to customers due to its easy to shop nature and interesting product variety, while also maintaining profit margins at near 5%.
In comparison, Whole Foods is operating on roughly 3.5% and Kroger on roughly 2%. This illustrates The Fresh Market’s ability to provide a strong customer value proposition while simultaneously operating efficiently and effectively. These attributes place The Fresh Market in a position to continually grow its store base while maintaining high margins due to a solid operating structure. Although The Fresh Market has not yet proven its ability to mature in the way Whole Foods or Kroger has, the company provides an interesting investment opportunity for those that believe in its proven track record and its differentiated business model.
Conclusion
The first quarter of FY13 illustrates The Fresh Market’s fundamental strength and underlying relevance as the market for grocery products continues to change. The Fresh Market is in the right sector at the right time and has proven its worth from both a profitability and customer perspective — a mix that is difficult to achieve and a recipe for long-term investor returns.
The article The Fresh Market: Poised For Success in The Changing Food Retail Market originally appeared on Fool.com.
Justin Weinstein 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. Due to the uniqueness of each individual investors tolerance for risk and circumstance, Justin Weinstein does not advocate the purchase or sale of any stock aforementioned. Justin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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