Is The Fresh Market a Good Investment?

Is The Fresh Market a Good Investment?

Consumer sentiment in the U.S. fell from the previous month to a reading of 72 in November. Also, the U.S. savings rate increased from 4.7% to 4.9% in September. This shows that people are concerned about saving their money right now despite an increase in their personal income. This has affected a number of retailers who offer high-priced products.

For example, The Fresh Market is a specialty retailer which offers natural and organic foods for health conscious customers. Therefore, it caters to a niche market of consumers who will pay a premium for healthy offerings. Unfortunately, declining consumer confidence and restricted spending affected Fresh Market's third-quarter results. Its numbers did not meet the Street's estimates, which led to a plunge in its stock price.

The not-so-poor performance
Although Fresh Market's revenue did not meet expectations, it still grew 13% over last year to $364.5 million as 10 new stores added to the top line. Also, sales at existing stores also grew as evidenced by the 3.1% rise in the comparable-store sales metric. The growth mostly came from higher customer traffic as well as an increase in transaction size.

However, the company's increase in revenue did not have an equal impact on its earnings. Its bottom line remained flat at $0.23 per share due to an increase in SG&A expenses. The costs of opening new stores also affected Fresh Market's net income. However, the natural foods retailer managed to expand its gross margin by 40 basis points over last year's quarter to 33.5%.

Strong competitors
On the competitive front, The Fresh Market faces stiff competition from Whole Foods Market and Sprouts Farmers Market . Both competitors have been outperforming the organic-food retailer.

Whole Foods Market's same-store sales growth stood at 5.9% in its recently reported quarter. This is much higher than that of Fresh Market. Moreover, it managed to beat the earnings expectation of $0.31 per share. However, its revenue growth was not up to the mark despite the addition of 12 new stores during the quarter. Whole Foods has resorted to deep discounts and new store openings in order to boost its top line. This strategy might affect Fresh Market's sales since discounts have been quite attractive to customers, given their budget constraints.

Sprouts has provided even tougher competition as the company has grown commendably since its IPO. Its recent quarter was a blockbuster with a 24% increase in its top line and a 117% surge in its bottom line. This report sent Sprouts' stock price north. To add to the merriment, its comparable-store sales grew 10.2%, which outperformed both of its rivals as a large number of customers visited its stores. Moreover, Sprouts provided a bright outlook for the year that contrasted with Fresh Market's lowered guidance, which disappointed investors.

Growing steadily
The Fresh Market is indeed having a tough time overcoming its rivals since its growth has been slow. Nonetheless, the company is trying to take some measures to increase revenue as it sticks to its plan of opening 22 new stores during the year. It has also been promoting its private label foods, which should help widen its margins further.

Bottom line
Along with the growing demand for organic foods, there has been an increase in competition in the sector. This is making survival difficult for industry players. Moreover, weak consumer sentiment has played an important role. With few promotions and discounts, Fresh Market might lose customers' interest. Therefore, staying on the sidelines or investing in other companies might be a safer bet.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Pratik Thacker 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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Originally published