The Fresh Market: 1 Note Of Caution

| About: The Fresh (TFM)

On Wednesday, The Fresh Markets (NASDAQ:TFM) released worse than expected third-quarter earnings and the stock plummeted nearly 17% on the news. Analysts were expecting net-income of $.26 per share, while the company reported only $.23 per share. Though this sizable drop in the stock's price is important, it is important to not allow a single day of trading skew the long-term perspectives of a company. The company's third quarter revenue and earnings are as follows:

(Click to enlarge)

(The Fresh Markets Earnings Release)

These results show substantive increases in revenue, gross profit, and net income both for the third-quarter and year-to-date. This being said, the expectation of growth for The Fresh Market is extremely high and can be evidenced by its valuation metrics. Earlier this month, Whole Foods Market (NASDAQ:WFM) reported strong earnings that in many ways mirror the results of The Fresh Market. Whole Foods Market reported a 24% sales increases and an 8.5% increase in identical store sales. For The Fresh Market this poses a situation where it consistently outperform Whole Foods Market because of its higher valuation and smaller market-cap. This marks a pivotal time for The Fresh Market as it is now approaching an expansionary state where it will be moving into areas like Houston Texas and Sacramento California. For investors this means keeping a close eye on The Fresh Market's performance in these regions as they will be the largest indication of whether the company can continue to drive revenue and earnings to the level expected by Wall Street. If The Fresh Market is unable to deliver revenue and earnings growth at or above that of Whole Foods Market it will quickly fall from its current "premium" spot in specialty food retail.

In May I wrote an article entitled: The Fresh Market: A Better Buy Than Whole Foods where I outlined that The Fresh Market was positioned to outperform Whole Foods Market due to 1. Its relatively small footprint and position for growth and 2. Its favorable valuation and key financial metrics as compared to Whole Foods Market. The situation has changed instep with Whole Foods incredible ability to drive identical store sales growth along with keep margins high in the wake of a growing geographic footprint along with rising costs. The Fresh Market's performance is strong and points to nothing but continued success from a company perspective, but from an investment perspective the company is on less sturdy ground. These financial metrics illustrate the changing tide between The Fresh Market and Whole Foods Market.

Forward Price/Earnings:

  • TFM: 29.59
  • WFM: 26.50

PEG Ratio:

  • TFM: 1.91
  • WFM: 1.89

Profit Margin:

  • TFM: 4.91%
  • WFM: 3.98%

Return on Assets:

  • TFM: 19.21%
  • WFM: 9.87%

Return on Equity:

  • TFM: 46.26%
  • WFM: 13.71%

Quarterly Revenue Growth:

  • TFM: 20.60%
  • WFM: 23.60%

Quarterly Earnings Growth:

  • TFM: 26.90%
  • WFM: 49.40%

Though many of these metrics remain the same and favor that of The Fresh Market, the growth that Whole Foods Market has seen in both revenue and earnings growth is unparalleled and speaks to the company's strategy for growth and pursuit of its long-term goal of reaching 1,000 stores. The Fresh Market has continued to experience dramatic growth, but to maintain the aforementioned metrics the company will need to perform at or above that of Whole Foods.

WFM Chart
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WFM data by YCharts

As The Fresh Market expands into more populated and competitive markets, its true strength or weakness will be revealed. There is no doubt as to whether The Fresh Market is a strong and stable company, but the caution lies in whether it can stay instep with the unstoppable Whole Foods Market. Investors should keep a close eye on the performance of The Fresh Market's locations in Sacramento and Houston as they are a strong indication of whether the company can perform to the level necessary to maintain its high valuation and prime position in the specialty food market.

(All financial metrics referenced above are obtained from Yahoo Finance, CNBC Analytics, S&P Capital IQ and Thomas Reuters.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.