The Foolish Fundamentals
While some investors believe that the success of specialty grocers like The Fresh Market Inc (NASDAQ:TFM) and Whole Foods is simply the result of clever store designs, smart marketing and creative product placement, both companies have some solid fundamentals to back up their growth.
Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Operating Margin | Profit Margin | |
The Fresh Market | 26.75 | 1.82 | 39.49% | 21.23 | 7.71% | 4.83% |
Whole Foods Market | 61.28 | 0.78 | 14.61% | 0.74 | 6.71% | 4.13% |
Safeway | 9.78 | 0.13 | 20.96% | 206.04 | 2.48% | 1.45% |
Kroger | 11.25 | 0.19 | 36.87% | 210.70 | 2.88% | 1.55% |
Advantage | Safeway | Safeway | The Fresh Market | Whole Foods Market | The Fresh Market | The Fresh Market |
Source: Yahoo Finance, 5/30/2013
Comparing The Fresh Market and Whole Foods to Safeway and Kroger is a simple matter of comparing growth stocks to value ones. Although Safeway and Kroger look fundamentally cheaper, they are weighed down by much higher debt and lower margins than their smaller rivals.
Both specialty grocers have higher margins, since they offer more expensive food products which are popular with affluent customers in times of economic prosperity. Therefore, the recent upticks in U.S. retail sales and consumer confidence indicate that their pricey forward multiples could be sustainable.
Both The Fresh Market Inc (NASDAQ:TFM) and Whole Foods Market, Inc. (NASDAQ:WFM) have a long ways to go before they catch up to Kroger and Safeway, which have 2,424 and 1,641 grocery stores, respectively.
The Fresh Market Inc (NASDAQ:TFM) intends to open 19 to 22 stores in fiscal 2013. During its earnings release, COO Sean Crane announced that the two new stores it added during the first quarter – in Virginia and South Carolina – “opened at 85% productivity”, which bodes well for future store openings. The company expects its full-year earnings to rise 14% to 19% year-on-year, with same-stores sales rising 2.5% to 4.5%.
Whole Foods Market, Inc. (NASDAQ:WFM) plans to add 15 more stores by the end of the year. The company has a lofty long-term goal of nearly tripling its current store count to 1,000 locations in the United States. It also expects robust earnings growth between 13% to 15% for the full year. Same-store sales are expected to rise between 6.7% and 7.5%.
The continued success of specialty grocers relies on the economy, above all else. While these higher-end supermarkets flourish in times of robust consumer confidence, they decline very rapidly when the economy starts to crumble. A comparison of Whole Foods and Kroger’s stock prices over the past ten years reveals just how vulnerable high-end supermarkets are in a recession.
In conclusion, interested investors should pay close attention to The Fresh Market, since it has all the qualities of a younger Whole Foods Market. The Fresh Market Inc (NASDAQ:TFM) is expanding conservatively, introducing its own private label brands, and successfully cultivating a healthy, alternative image that has proven popular with younger, affluent shoppers. Meanwhile, Whole Foods Market, Inc. (NASDAQ:WFM) is a fundamentally attractive growth stock, but its premium valuations indicate that it could be prone to some wild swings if the market stalls out. In other words, if you believe that the economy is on the path to recovery, invest in specialty grocers. If you think that we’re headed toward a recession, stick with Kroger or Safeway instead.
Leo Sun 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.
The article Is It Time to Invest in Specialty Grocers? originally appeared on Fool.com.
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