The Fresh Market Gets Hit, but Not Enough

The Fresh Market Gets Hit, but Not Enough

Purveyor of natural and organic foods The Fresh Market delivered a mixed bag of results for the past quarter, and ended up disappointing Wall Street with its outlook for the remainder of 2013. For a mature grocery chain, The Fresh Market's results would have been absolutely stellar, but the market expects big growth out of the company and its stock price, and has baked in those expectations with high P/Es and the like.

When management lowered its guidance for the remainder of the year, the Street had a mild panic attack -- punishing the stock by more than 10% in just one day. Does the recent discount in Fresh Market's shares make it a more appealing buy today? Let's take a closer look to find out.

Earnings recap
For the first quarter of The Fresh Market's fiscal 2014, the company saw revenues grow 13.3%, while earnings per share grew even more -- by 17%. In isolation, these numbers would be enough to send the stock to even richer valuations. The results came in relatively in-line with Wall Street's estimates, though revenues were projected to be about $1 million higher.

The company is aggressively opening new locations, increasing its physical footprint by 15% this year alone, with more to come. While that is a good thing, and certainly what investors and analysts want to see to try to justify the stock price, earnings aren't yet reflecting a compelling return on investment for these new stores. Now, with management reducing guidance to a high end of $1.55 per share for the remainder of 2013, the Street is clearly second guessing its sky-high valuation of The Fresh Market.

So what's an investor to do?

Sorry to disappoint
Following a Peter Lynch mentality, I love The Fresh Market, and would be tempted to jump in on the stock, especially after its 12% haircut. Walking into the stores, to me, is more enjoyable than shopping in rival Whole Foods Market. The stores have a more intimate feel, the products seem less marketed to the yuppie yoga-goer and more to a general quality-seeking food shopper. The prices are even a bit less offensive than those at the Whole Empire. Looking around the store, people seem to enjoy perusing the aisles -- it's a nice experience.

Unfortunately, its ultimate price -- the stock price -- is just too high. With this week's discount, both in stock price and in 2013 earnings guidance, The Fresh Market trades at over 30 times this year's projected earnings. That's about equal with Whole Foods, which has the luxury of boasting better margins, and being the King of All Things Natural.

The Fresh Market is one of those companies -- well managed, in a great business, with an attractive future -- that an investor should love to own. At its current price, which assumes hiccups (like this quarter's earnings correction) won't happen, there just isn't enough of a reason to buy.

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Fool contributor Michael Lewis 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. 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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