Will Fresh Market's Skyrocketing Debut Drive Heightened IPO Interest?

Includes: DG, RUE, TFM, VSI
by: World Market Pulse

In a market sentiment where a number of national retailers have shied away from going public, The Fresh Market Inc. (NASDAQ:TFM), the Greensboro, North Carolina-based grocery chain, posted this year’s second biggest first-day gain for an initial public offering by a U.S. company as the IPO market extended its rebound. The company's stock opened at $35 a share on the Nasdaq Composite Index, up 59% from its initial public offering price of $22.

Fresh Market is a small grocery chain; it operates 100 stores, half of which are in Florida, North Carolina and Georgia and focuses on higher-margin foods and services, such as imported cheeses, organic produce and on-site butchers. About two-thirds of its sales are for perishable goods. Fresh Market’s profit increased 45 percent to $41.1 million in the first nine months of the year, from $28.4 million in the year-earlier period, according to its SEC filing.

The Fresh Market USP: Fresh Market is a small grocery chain operating smaller stores that average a half to a third of the square footage of many supermarket chains, a tactic it says replicates a neighborhood grocery feel. It has one-third the number of stores that Whole Foods Market Inc. (WFMI) controls, but its gross margins, at 33%, are closer to Whole Food's 35% than to Safeway Inc.'s (NYSE:SWY) 28%.

The retailers to go public since the beginning of 2009 were much larger, like discounter Dollar General (NYSE:DG), 500-store teen-fashion retailer rue21 (NASDAQ:RUE), and 400-store Vitamin Shoppe (NYSE:VSI). By comparison, Fresh Market’s 20,000-square foot stores are still mostly on the East Coast, with a smattering of units in major Midwest towns. They are the first consumer company to try an IPO in 2010, a gutsy move for a small regional chain. The company, which opened its first store in 1982, believes that the American market could support at least 500 Fresh Market stores countrywide, giving it plenty of room for expansion. It has opened eight new locations in 2010.

The IPO isn’t entirely without precedent in the world of grocery as Wild Oats Markets (OATS) had just 35 stores when it went public in 1996. The company has managed to throw pigeons among the cats as investors stocked up on shares on its first day of trading with the stock climbing a phenomenal 59% on debut.

Downside: The company warns that the global economic downturn and economic uncertainty continue to hurt consumer confidence and discretionary spending, something that could hit Fresh Market hard if shoppers start to move away from its stores to lower-cost alternatives. But the company's sales, gross profit and net income have risen throughout the economic downturn.

Can Grocer Fresh Market Success Drive US IPO Interest?

While Chinese companies have accounted for 13 percent of the $19.2 billion raised by IPOs in the U.S. this year, according to data compiled by Bloomberg, that excludes closed-end funds and investment companies. What more, as many as eight companies are seeking to raise a combined $855 million next week. Fresh Market was the first American company to complete an IPO this week after four offerings from companies based in China, Israel and Greece. Non-U.S. companies account for five of the ten best-performing IPOs on New York exchanges this year. “The sun’s coming out for IPOs as investors have tended to take the possibility of a double-dip off the table,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees about $55 billion.

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