The Fresh Market A Better Long-Term Pick Than Whole Foods

| About: The Fresh (TFM)

The Fresh Market (NASDAQ:TFM), a regional specialty grocer, went public back in November 2010. The company competes against specialty grocers like Whole Foods (NASDAQ:WFM) and Trader Joe's. Along with specialty grocers, the company also competes against large grocers like Kroger (NYSE:KR). The company is currently trading at low levels compared to Whole Foods and going unnoticed by long term growth investors.

Fresh Market recently reported second quarter earnings. The company saw earnings per share increase 26.4% to $0.28. Sales increased 20.6% to $313 million. Net income increased to $13.3 million from $10.5 million in the previous year.

The company continues to see strong sales at stores previously opened. Same store sales increased 8% in the second quarter. Of this 8% increase, 5.3% was from transactions and 2.5% was from transaction size. The increase marks a string of positive increases for the company. The company has forecast for same store sales to increase 4-5% each year. One of the contributing factors to same store sales growth is the introduction of new products. In the second quarter, the company introduced over 40 new products, and plans on offering 110 new items in the third and fourth quarters.

In the second quarter, the company opened five stores, including:

· Wichita, Kansas

· Tulsa, Oklahoma

· Bedford, New Hampshire

· New Orleans, Louisiana

· Rogers, Arkansas

Since the end of the quarter, the company has also opened three additional locations in Florida and Ohio. The Fresh Market has opened 11 locations in this fiscal year, with plans to open 3-5 more in the third and fourth quarters. Looking forward to next year, the company has 16 leases in its development plan that will translate into openings in the next fiscal year. The company will be opening its first stores in California in the third or fourth quarter, as it expands to the west coast. The Fresh Market ended the second quarter with 121 locations in 24 states.

Here is a look at a comparison between The Fresh Market, Whole Foods, and Kroger:

The Fresh Market Whole Foods Kroger
Share Price $57.73 $96.90 $22.29
52 Week Share Range $33.82-$65.69 $60.39-$98.47 $20.98-$24.83
Market Capitalization $2.8 billion $17.87 billion $12.14 billion
Dividend Yield 0 0.6% 2.1%
Current PE 41.8x 38.5x 9.4x
Forward PE 33.0x 33.4x 8.8x
Number of Stores 121 (q2 end) 329 (July 25) 2425
Click to enlarge

Whole Foods sits close to its fifty two week high as the company sees strong sales in its stores. The company also announced plans to open 1000 stores, tripling its current count. I think that Whole Foods is expensive today and The Fresh Market offers a great opportunity going forward and here is why:

· Whole Foods has a market capitalization more than six times the amount of The Fresh Market. This valuation comes with 2.7 times the amount of stores as rival Fresh Market. Looking at a store value, Whole Foods market capitalization values its current stores at $54.3 million each. The Fresh Market's valuation sees each of its 121 stores worth $23.1 million each.

· The Fresh Market has plans to open 500 stores across the United States. With 121 stores open to date, the company is 24% towards its store count goal. Whole Foods on the other hand has 329 of its 1000 stores open, placing it at 33% of its target goal.

· The Fresh Market has strong institutional ownership with three firms owning 22% of the company. Fidelity (8.7%), Wells Fargo (7.3%), and T. Rowe Price (7.2%) are all backing this small specialty retailer. Whole Foods has strong institutional ownership but it is from smaller firms and no one owns over 7% of the company.

· The Fresh Market has not expanded in key regions yet. The company will open its first store in California in the third or fourth quarter. Stores in California have the potential to greatly expand the company's average sales per store. Whole Foods has over 30 locations in California and now sees The Fresh Market expanded into western states where they have excelled.

The Fresh Market is forecasting earnings per share of $1.33-$1.38 for the current fiscal year. Analysts on Yahoo Finance see the company earning $1.38 in this fiscal year on $1.34 billion in revenue. The following year, analysts see the company earning $1.75 on $1.59 billion in revenue.

Look for shares of The Fresh Market to outpace Whole Foods going forward. The company has the stronger growth plan and is trending higher with its positive same store sales.

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.