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The Fresh Market Inc. (TFM) is a specialty grocery retailer that has returned 47% so far this year. Furthermore, it appears to have enough potential for even further upside, as is evident from its robust long-term earnings growth projection of 23.1%.

Management's focus on expanding the store base, driving comparable-store sales and improving margins are strengthening this Zacks #2 Rank (Buy) stock. This is exemplified in The Fresh Market's second-quarter fiscal 2012 results, which included year-over-year earnings per share growth of 26.4%, a positive surprise of 3.7% and a raised guidance for the full year.

Profit Surges, Guidance Up

On August 29, The Fresh Market posted second-quarter fiscal 2012 earnings of 28 cents per share, topping the Zacks Consensus Estimate by a penny and jumping from last year's 22 cents.

Net sales of $313 million exceeded the Zacks Consensus Estimate of $309 million and improved 20.6% from $259.5 million a year ago. Comparable-store sales climbed 8%, attributable to a 5.3% jump in the number of transactions and a 2.7% rise in average transaction size. The Fresh Market opened 5 new outlets in the quarter, and plans to open 14 to 16 new stores in fiscal 2012.

Gross profit grew 25.6% to $106.7 million, whereas gross margin expanded 140 basis points (bps) to 34.1%. Operating income increased 27.8% to $21.7 million, while operating margin increased 40 bps to 6.9%.

Buoyed by the strong performance, The Fresh Market raised its outlook for the second time in fiscal 2012. Management now envisions comparable-store sales growth between 5.5% and 6.5%, and projects earnings of $1.33 to $1.38 per share. Earlier, the company had forecasted a comparable-store sales increase of 4.5% to 6.5% and earnings between $1.28 and $1.34 per share.

Earnings Estimates Climbing

The Zacks Consensus Estimate for fiscal 2012 rose 2.2% to $1.39 per share over the last 60 days, implying year-over-year growth of 29.8%. The current estimate is a penny above the upper-end of the company's guidance range. For fiscal 2013, the Zacks Consensus Estimate is $1.73 per share, increasing approximately 3% over the same time frame and marking year-over-year growth of 24.9%.

Premium Valuation

The Fresh Market currently trades at a forward P/E of 42.28x, reflecting a substantial premium to the peer group average of 14.97x. Also, on a price-to-book basis, the stock trades at 17.41x, a sizable premium to the peer group average of 1.54x. However, the return on equity (ROE) for the stock looks very attractive. It has a 1-year ROE of 44.1% compared with 12.4% for its peer group.

Chart Overview

The 12-month EPS chart below indicates that the stock price has now started to correlate with the increasing trend in estimates. The current momentum appears to be driven by The Fresh Market's outstanding performance in the first-half of fiscal 2012, and on the belief that it will sustain the same rhythm in the second half of fiscal 2012. The consensus estimates for fiscal 2012 and fiscal 2013 are portraying a steep upward trend. Currently, the stock price is in the range of $55.00-$60.00, and has generated a solid year-to-date return of 47%, significantly higher than the S&P 500's return of 13.1%.

Founded in 1981 and headquartered in Greensboro, North Carolina, The Fresh Market is a specialty grocery retailer of perishable and non-perishable products such as meat, seafood, produce, deli, bakery, floral, traditional grocery and dairy products, as well as specialty foods that include coffee and candy, and beer and wine. As of July 29, 2012, the company operated in 24 states through 121 stores. The Fresh Market, which competes with The Kroger Co. (KR) and Whole Foods Market Inc. (WFM), currently has a market cap of $2.82 billion.


Source: The Fresh Market: Estimates Climbing