That grocery store is The Fresh Market Inc (NASDAQ:TFM). The huge decline in the share price was due to the fact that its fourth-quarter earnings results have missed analysts’ estimates. However, The Fresh Market is in the portfolios of several famous institutions including Fidelity Management, T. Rowe Price Group, Inc. (NASDAQ:TROW), and Vanguard Group. Should investors get in The Fresh Market at its current price? Let’s find out.
Consistent growth in operating performance with little leverage
The Fresh Market Inc (NASDAQ:TFM) is considered a high growth specialty retailer, offering high quality and fresh food products to shoppers with around 129 stores in 25 states in different areas including the Southeast, Midwest, Mid-Atlantic, Northeast, and West regions of the U.S.
The majority of its revenue, around 65.8% of total 2012 revenue, was generated from perishable products, while non-perishable products accounted for 34.2% of total revenue. The business has been quite seasonal, with sales peaking in the fourth quarter.
In the past three years, The Fresh Market Inc (NASDAQ:TFM) has experienced decent comparable store sales growth in the range of 5% to 5.7%. In 2012, its comparable store sales increased 5.7%. Since 2010, its comparable store sales per gross square foot have advanced steadily, from $480 to $524.
What investors like about The Fresh Market Inc (NASDAQ:TFM) is its consistent growth in both top line and bottom line. While revenue increased from $798 million in 2008 to $1.33 billion in 2012, its net income rose from $19 million, or $0.40 per share, to $64 million, or $1.33 per share during the same period.
The company is also a cash cow, with an increasing operating cash flow from $60 million to $92 million in the past five years. Moreover, The Fresh Market Inc (NASDAQ:TFM) has quite a conservative capital structure. As of January 2013, it had $198 million in total stockholders’ equity, $9 million in cash, and only $42 million in long-term debt.
Kroger is a much better pick
Compared to its much bigger peers including Whole Foods Market, Inc. (NASDAQ:WFM) and grocery retailer The Kroger Co. (NYSE:KR), The Fresh Market is the worst performer on the market of late. While it experienced a significant decline of nearly 18%, Whole Foods declined only 5.6%. The Kroger Co. (NYSE:KR), on the other hand, has been the best performer with an appreciation of as much as 30% since the beginning of the year.
Whole Foods has higher comp store sales growth
Whole Foods Market, Inc. (NASDAQ:WFM)’ market value decline was due to the weak 2013 guidance. The company estimated that its full year 2013 revenue would be around $12.9 billion to $13 billion, lower than analysts’ estimates of $13.2 billion. It is one of the most well known natural and organic foods retailers in the U.S., operating around 345 stores in the U.S., Canada, and the U.K.
Whole Foods Market, Inc. (NASDAQ:WFM) has a much higher comparable store sales growth than The Fresh Market. In the past three years, its comparable sales growth were 7.1%, 8.5%, and 8.7% in 2010, 2011, and 2012, respectively. At $86 per share, Whole Foods is worth around $15.9 billion. The market values Whole Foods at as much as 13.7 times EV/EBITDA. Interestingly, The Fresh Market Inc (NASDAQ:TFM)’s EV multiple, at 13.6, is equivalent to Whole Foods’ multiple.
Kroger is still quite cheap
The Kroger Co. (NYSE:KR) has the longest history among the three companies. It is among the largest retailers in the world based on annual revenue, operating 2,424 supermarkets and multi-department stores, 1,169 of which have fuel centers. The Kroger Co. (NYSE:KR)’s fourth-quarter EPS of $0.88 exceeded analysts’ estimates of around $0.70.
In fiscal 2012, The Kroger Co. (NYSE:KR) generated around $96.75 billion in revenue, nearly $1.5 billion in income, and more than $2.8 billion in operating cash flow. The Kroger Co. (NYSE:KR) is trading around $34 per share, with a total market cap of $17.6 billion. Interestingly, despite the significant increase in share price since the beginning of the year, Kroger is still valued cheaply in the market, at nearly 6 times EV/EBITDA.
My Foolish take
The Kroger Co. (NYSE:KR) seems to be a good pick at its current price because of its lowest valuation and the highest dividend yield at 1.8% while Whole Foods Market, Inc. (NASDAQ:WFM) offers only 0.9% dividend yield. The Fresh Market does not pay any dividends.
If I have to choose between Whole Foods Market, Inc. (NASDAQ:WFM) and The Fresh Market Inc (NASDAQ:TFM), I would choose the former. Whole Foods, despite a high EV multiple, is still quite a compelling long-term investment opportunity due to its leading position in an organic retail niche market and a much higher comparable store sales growth than The Fresh Market.
The article Grocery Retailing Could Be Quite Appetizing originally appeared on Fool.com and is written by Anh Hoang.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
