Is The Fresh Market A Good Buy Near 52-Week Lows?

| About: The Fresh (TFM)


The Fresh Market is in a soup due to stiff competition from peers.

The Fresh Market is trying to execute a comeback with a smart store opening strategy.

The Fresh Market is also looking to improve productivity, and its bottom line is expected to grow at above industry averages going forward.

Organic and natural foods company The Fresh Market (NASDAQ:TFM) has seen its stock price cut almost in half over the last one year. Recently, after a ratings downgrade from Goldman Sachs (GS), the stock plunged further, and is currently trading near its 52-week low. Goldman cited stiff competition and higher input costs as the reason behind downgrading The Fresh Market to "sell" from "neutral," but the good thing is that management is making moves to address these issues.

Opening stores strategically

First of all, Fresh Market is aggressively opening stores to capture the organic food market. It opened seven stores during the first quarter, and followed up with another three after the quarter ended; one each in Florida, New York, and Texas. For the full year, The Fresh Market expects to open around 23-24 stores, seven of which will be in Florida.

The company has planned for expansion into new markets as well, and Canada will be one of them. The Fresh Market is also investing in promotional activities that will drive long-term sales and earnings growth.

Although expansion is one of Fresh Market's key focus areas, the company is proceeding with caution by adding only a few stores at a time. This will help the retailer to know the taste and preferences of consumers in regions where it is entering, and also give some time to train and build a good employee base. This will also provide the company with sufficient time to establish its brand image among the customers. This may seem like a long process, but it should yield good returns in the future and also reduce the risk of failure since the company is treading cautiously.

Focus on store productivity

Fresh Market's first focus is store productivity, and this is another reason why the company is not just going out and opening a huge number of stores. In fact, sales of six of the seven stores that it opened during the first quarter were off to a great start. According to The Fresh Market, sales from six of its new stores on the first day "rank in the top one-third of all new store openings." So, the company is making a smart move by taking its time while opening new stores.

To further reduce its risk on site selection, The Fresh Market has adopted a new strategy that will shift more of the capital burden to its landlords. The landlords have been accepting the deal because of the value created by The Fresh Market for their space. The company has also exited some capital intensive deals, and would further reduce the number of such stores that have high occupancy costs. In fact, The Fresh Market has partnered with a real estate analytics firm that will enable it to identify the theoretical capacity of the Fresh Market's stores in a given geographical area.

A look at the competition

Apart from store expansion, it is also increasing its product line by adding new items to its deli and prepared foods segment. Also, to enhance the customer experience, The Fresh Market is remodeling its stores. This is a highly competitive industry, and with these efforts, the company is trying to establish an edge over its peers. But, we cannot neglect the fact that competition has affected its performance. For example, in the previous quarter, its earnings declined 25% year over year, even though revenue increased almost 18%.

For example, Whole Foods Market (NASDAQ:WFM) also has an aggressive store opening plan. It intends to open around 38 new stores in 2014, and will also be remodeling stores that are more than a decade old. In addition, as reported by Fox, Whole Foods will also embark on an advertising campaign across the U.S., apart from introducing features such as online ordering and home delivery. So, The Fresh Market will need to execute properly to combat the increasing competition.

A good buy at 52-week lows?

However, management is confident about The Fresh Market's prospects going forward, and expects the situation to improve. In a statement to the press, Craig Carlock, the CEO, said, "We're confident that as we more effectively merchandize and promote our products, manage our shrink, and increase our buying power, we will better be able to leverage fixed costs and maximize profitability."

Moreover, 52-week lows sometime open enticing opportunities for investors, and The Fresh Market surely looks like one. For the next five years, its earnings are expected to grow at a CAGR of almost 17%, which is ahead of the 13.5% industry average. So, investors should take a closer look at a beaten down The Fresh Market as it can make a comeback in the long run.

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