Back in January the stock sprung a leak on weak earnings and our research suggested that investors tread lightly. The fast growing fresh foods retailer traded at a high valuation and the market for organic foods might take a breather in 2013. The stock further tumbled on another disappointing earnings report in March and provided guidance below analyst estimates.
Now that the stock appears to have bottomed out around $40 is the stock a value? Or with several key executives leaving is the stock still overvalued even after a 30% decline?
What went wrong?
The company has missed estimates the last two quarters and subsequently several executives have left to pursue other opportunities. The key is figuring out whether this is a broken company or a broken stock as it still has plenty of room for expansion if it can stop the bleeding.
The Fresh Market Inc (NASDAQ:TFM) blamed the short fall in Q4 to a sudden drop in customer activity around the holidays that picked up in January. The analysis suggested no store-specific issues and the company concluded the issue was isolated to consumers concerned about economic issues.
Small investors have no way of doubting management statements other than to require them to prove those comments via performing in the next couple of quarters. Unless you happen to be a weekly customer that can qualitatively tell the difference with customer patterns; something that can be difficult to accurately ascertain on a countrywide basis based on only one store.
The Fresh Market Inc (NASDAQ:TFM) has plenty of growth remaining with only 130 stores in 25 states, located mostly in the Southeast, Midwest, and Mid-Atlantic. The company just opened the first store in California and is only now moving into Texas. It sees a future store footprint of 500 stores providing for a long-term store base growth of nearly 300%.
The forecast for 2013 is an increase of 20 stores or roughly 15% growth. With the CFO and VP of Real Estate recently leaving, one has to wonder if an issue existed in store selection, location development, or forecasting.
Earnings estimates plunging
The Fresh Market Inc (NASDAQ:TFM) has missed earnings estimates the last two quarters and the CEO was clear that the store-opening plan for 2013 is back end loaded causing a 2% decline in earnings growth due to the timing.
The company guided towards earnings in the $1.55 range for 2013, dramatically below the previous analyst estimates of $1.69. Consequently, analysts dropped the fiscal 2015 estimates from $2.10 to $1.90. The long-term earnings growth rate went from 24% back in January to now only 20.3%.
For a company that only saw a holiday slowdown, the numbers sure have been slashed suggesting a more serious deterioration in the prospects or a major increase in the competitive landscape.
Competition heating up
Considering the drop in forward earnings, the dynamic suggests a bigger competitive impact than the company admitted to during the Q4 earnings report back in early March. Major competitor Whole Foods Market, Inc. (NASDAQ:WFM) beat Q4 estimates and saw only minor deterioration in earnings estimates for the current year and beyond.
Whole Foods Market, Inc. (NASDAQ:WFM) also has a store base of roughly 350 locations with larger footprints providing some indication that The Fresh Market Inc (NASDAQ:TFM) could hit that 500 store target. Whole Foods Market, Inc. (NASDAQ:WFM) is the behemoth in the sector with a revenue base of around $12 billion. Any attempts to squash the much smaller Fresh Market could be a concern in the future.
Recent IPO Fairway Group Holdings Corp. ((NASDAQ:FWM) added plenty of cash after collecting the proceeds from the offering. The company only operates 12 stores in the New York City area, but it plans to add two more this year. Per the prospectus, Fairway Group Holdings Corp. ((NASDAQ:FWM) has a goal of opening 300 stores in the future.
Another competitor in the organic and fresh foods retail sector plans to come public later in 2013. Apollo Global Management LLC (NYSE:APO) expects to take Sprouts Farmers Market and its $2 billion in annual sales public while the market is hot for the sector. The company operates 150 stores mostly in west coast states where Fresh Market doesn’t operate, though Sprouts operates in California and Texas, placing the two on a collision course going forward.
Bottom line
The Fresh Market Inc (NASDAQ:TFM) appears to be facing pressure from a weak consumer even prior to a potential onslaught of competitive pressure from organic and fresh foods grocers with a bevy of IPO money. As an example in the local market, Sprouts opened a store in the last few weeks only a year or so after Fresh Market entered the market. Sprouts even announced plans for a second location later this year. The competitive landscape is heating up, right as the Fresh Market has to replace several key executives.
With the stock trading at over 20x next year’s earnings, The Fresh Market Inc (NASDAQ:TFM) is no bargain considering the recent stumbles by the company. As mentioned in the last article, the sector might need a breather after strong gains in the last couple of years. In fact, with all of the new stores investors might want to focus on the organic food suppliers such as Annie’s and Hain Celestial Group while investors wait to figure out if Fresh Market is a broken stock or a broke company.
The article After the Selloff is The Fresh Market a Value Now? originally appeared on Fool.com and is written by Mark Holder.
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