Fresh Market Earnings: Decent Company, Not-So-Great Stock


Source: The Fresh Market.

Upscale grocer Fresh Market came out with earnings this week, and the verdict -- both from myself and Wall Street -- is pretty clear: This a decent company that's significantly overvalued.

Before earnings came out, I identified three metrics that investors should keep their eyes on. Those metrics are listed below, as well as benchmarks that I thought would show healthy growth that matched the company's stock price.




Met Expectations?

Profit margins




Sales per square Foot




Comparable-store sales




Source: SEC filings.

In my opinion, these mixed signals lead me to two key conclusions: The stock is overpriced, and the company's core message and offerings aren't resonating with customers.

Pricey stock
It's tough to get an apples-to-apples comparison for Fresh Market. The company operates in 25 states and has 139 stores total. Though it has a much smaller store-format size, and slightly different offerings, Whole Foods essentially goes after the same customers as Fresh Market. Recently IPO'd Sprouts Farmers Market could also be thrown into the same grouping.

When we look at Whole Foods, we see a company with a much larger presence -- more than 350 locations -- and a more mature store base. Despite this, the company has been able to achieve same-store sales increases of between 6.9% and 8.9% for the past six quarters -- much higher than Fresh Market's -- with superior profit margins to boot.

Whole Foods trades for 36 times earnings. Even after a 10% drop post-earnings, Fresh Market still trades for 34 times earnings. In other words, investors pretty much think Fresh Market's prospects are as good as Whole Foods' moving forward. Given recent results, that makes no sense.

If you want to get a look at a small grocer that's growing in a way that might warrant such a valuation, Sprouts offers an interesting case study. Operating primarily in the American Southwest, the grocer released earnings this month showing same-store sales had increased an incredible 10.8%!

What's at the core of this company?
I've already written before about how Fresh Market seems to be lacking a purposeful core. The stores are certainly nice, but traffic seems to be slow. When I visit the nearby location, I get the feeling that -- since focusing on expansion -- Fresh Market is nothing but a knock-off of Whole Foods, but without the impassioned focus on healthy eating, education, and sustainable/ethical sourcing.

If we dig a little further, we might see that other shoppers -- many of the same demographic that would frequent Whole Foods -- feel the same way. Of the company's 3.4% increase in same-store sales, only half of it -- or 1.8% total -- came from increased traffic. That's not great for a chain with a relatively young fleet of stores. Sprouts, for comparison's sake, increased traffic by 5.4%, while Whole Foods didn't break out this metric in its most recent report.

On the conference call, analysts were also quick to question why new Fresh Market stores were only showing a 79% productivity rate. New store productivity is a measure of how productive a new store's revenue is compared with established stores. Fresh Market executives aim for a range with a midpoint of 85%.

Taken as a whole, the message is clear: The Fresh Market isn't a "bad" company, but it's not an inspiring one, either. And in the grocery business, if you aren't inspiring, you certainly don't deserve such a high premium.

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Fool contributor Brian Stoffel owns shares of Whole Foods Market. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool 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.

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