The Fresh Market Goes Stale

There was a time when a man couldn't even find a $10 bag of kale chips, let alone a $6 bag -- thank goodness for our modern age. I now have a range of stores to fill my dried kale needs, and investors have a wide selection of businesses to invest in that play on that weird consumer desire. Sadly, The Fresh Market is having a hard time moving its high-end goods. Well, it's actually doing fairly well, but not as good as the market would like.

In its second quarter earnings statement released yesterday, Fresh Market dropped its expectations for earnings per share over fiscal 2013 and said that it anticipated current sales and economic trends to continue. Overall, the business looked pretty good for the quarter, but its outlook was less than stellar.

Fresh Market's second-quarter numbers
The best news was the increase in year-over-year comparable-store sales that Fresh Market managed last quarter. The company had hit a speed bump back in the fourth quarter of fiscal 2012, but this time around it managed a respectable 3.4% increase. That was a small increase in the pace that the company had set in the first quarter, and it was solidly in line with internal expectations for the start of the year.

Revenue increased at 13.3% and some excellent cost management helped bump earnings per share up by 17%. Gross margin increased due to some relief in occupancy costs, but was tempered by an increase in production costs. Fresh Market said that it expects those cost issues to continue through the year.

Those costs and the additional store opening costs are pushing the company's 2013 earnings expectations down. Part of that is good news. The business is going to increase its store opening rate beyond its previous expectations. In the first quarter, it looked like 2013 would end with between 19 to 22 new locations. The bottom of that range was pushed up to 21 in yesterday's release.

The future of Fresh Market
The company still has a long way to push into new territories like Texas and California. Those two states have been strongholds for Whole Foods Market in the past, and Fresh Market is hoping for good revenue growth from them. For all its chasing, Fresh Market is still well behind Whole Foods in the sales growth race. Comparable year-over-year sales grew 7.5% at Whole Foods last quarter, and it is forecasting annual growth of no less than 7.2%.

Fresh Market said that it's confident in its competitive ability in the new markets it's entering, but it simply doesn't have the brand strength that Whole Foods does -- yet. Whole Foods has been a national chain for longer, and the business is now having an easier time growing based on that strength. The company has a pipeline of 94 new locations that it's planning on opening over close to a three-year period.

Looking at Whole Foods' rate of store openings and its comparable-sales growth, it's easy to see why investors were upset with Fresh Market's showing. At midday, the stock was down almost 10% while Whole Foods had risen 1.5%. Whole Foods continues to pace the S&P 500, while Fresh Market has fallen behind, and if results continue to lag behind, Fresh Market may simply continue falling.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

The article The Fresh Market Goes Stale originally appeared on Fool.com.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market. It recommends and owns shares of 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.