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Fresh Market's Stock Gets Rancid

NEW YORK ( TheStreet) -- As with the duopoly that exists in home-improvement retailers, Lowe's (LOW) and Home Depot (HD), the rising popularity of organic and natural foods have spurred a heated rivalry between Whole Foods (WFM - Get Report), whose name has always been associated with health and wellness and The Fresh Market (TFM - Get Report), who now wants to take that title.

However, in the wake of Fresh Market's disappointing third-quarter earnings results, aspirations of dethroning Whole Foods -- which at one point seemed very realistic -- will now have to wait. After posting a 3% miss, relative to consensus revenue estimates, I believe management has to rethink not only about its aggressive growth strategy, but of ways to improve operational efficiency.

Factoring the pricing pressure that the company has begun to face from conventional retailers like Wal-Mart (WMT - Get Report) and Kroger (KR - Get Report), which have scaled their organic offerings, Fresh Market does not look like a great buy today -- even with the recent 20% decline that it has been suffering since November.

To be fair, the growing pains -- that Fresh Market is now suffering from -- are not new. Neither should this have come as a surprise to anyone who has been in this market for the last decade. Since the company's initial public offering (IPO) three years ago, Fresh Market has made a strong name for itself by operating a business that feeds the hunger of affluent consumers by providing high-quality produce shoppers can hardly find anywhere else.

Management not only executed the business to perfection, but timing helped Fresh Market to capitalize on what seemed like an overnight shift by many Americans who adopted new healthy-eating lifestyles.

The company, after having IPOed at price of $22 per share 2010, immediately became a Wall Street darling after posting close to a 40% increase (cumulative) in annual revenues between 2009 and 2012. All this, while management tripled earnings to more than $60 million in the same period.

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KR $37.17 0.13%
TFM $24.91 2.98%
WMT $60.24 0.53%
WFM $29.84 0.95%
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