Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of The Fresh Market (NASDAQ:TFM), the specialty retailer focused on perishable product categories, ended the week 6% lower. On Wednesday, the company reported its second quarter results.

Second Quarter Results

The Fresh Market reported second quarter revenues of $313.0 million, up 20.6% on the year. Revenues came in ahead of consensus of $308.3 million. Comparable store sales increased by 8.0%, driven by a 5.3% increase in the number of transactions, and a 2.7% increase in the size of a typical transaction.

Gross margins expanded by 140 basis points to 34.1% as a result of improved supply chain efficiency. The gross margin improvement was largely offset by a 100 basis point increase in selling, general & administrative expenses. One-time items, including a legal settlement, largely resulted in higher expenses.

Net income rose 26.9% to $13.3 million. GAAP earnings per diluted share rose from $0.22 last year to $0.28 this year. Earnings per share beat analysts consensus by a penny.

During the quarter, the company opened five new stores in Kansas, Oklahoma, New Hampshire, Louisiana and Arkansas. In total, The Fresh Market operates 121 stores in 24 states.

CEO Craig Carlock commented on the results:

"We are extremely pleased with our strong second quarter performance for both sales and earnings growth. Our comparable store sales grew 8.0% in the second quarter, led by customer transactions and continuing the sales momentum we've seen over the past several quarters."

Outlook

For the full year of 2012, The Fresh Market plans to open 14 to 16 new stores. It expects to spend $95-$105 in million capital expenditures.

Comparable store sales are expected to increase by 5.5-6.5% for the full year. The guidance implies a slowdown, in comparable sales in the second half of 2012, as sales growth in the first half of 2012 came in at 8.1%. Full year diluted earnings per share are expected to come in between $1.33 and $1.38 per share.

The outlook comes in a bit light compared to analysts consensus. On average, analysts are expecting the company to earn $1.43 per diluted share on revenues of $1.35 billion.

Valuation

The Fresh Market ended its second quarter with $11 million in cash and equivalents. The company operates with $46 million in short and long term debt, for a net debt position of $35 million. For the first six months of 2012, net sales came in at $638 million. The company net earned $32.6 million, or $0.68 per diluted share.

Currently, the market values The Fresh Market at $2.8 billion. Based on an annual revenue expectation of $1.3 billion, this values the firm at 2.2 times annual revenues. The company trades at 42 times expected annual earnings.

The valuation compares to a revenue multiple of 1.8 times for Whole Foods Market, Inc. (NASDAQ:WFM), which trades at 41 times trailing annual earnings.

Currently, The Fresh Market does not pay a dividend.

Investment Thesis

Year to date, shares of The Fresh Market trade with gains of 45%. Shares steadily rose from lows of $40 in January to $60 in recent weeks.

The Fresh Market went public at $22 by the end of 2010. The offering price was at the high end of its preliminary offering range of $18-$20 per share. Shares have nearly tripled in merely two years time, trading at $58 at the moment. The company grew its annual revenues from $862 million in 2008 to an expected $1.3 billion in 2012. Earnings grew from $49 million in 2008 to an expected $65 million in 2012.

Despite the long-term attractiveness of the prospects of specialty grocery stores, I would not consider initiating a long position in The Fresh Market. The company already reports net margins approaching 5%, which is unique in the supermarket industry. As margin expansion will be difficult, further growth has to come from store openings and organic sales growth.

With organic sales growth slowing down to around 4% in the second half of this year, the valuation of 40 times annual earnings is way too high. Active investors who are not fearing a possible take-out by a larger competitor, might even consider taking a short position.

Source: The Fresh Market: Great Company, But Too Expensive After Shares Tripled In 2 Years