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), whose name has always been associated with health and wellness and The Fresh Market ( TFM), 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) and Kroger (KR), 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.

Not surprisingly, the Street rewarded Fresh Market with stock gains of more than 170%, peaking at around $60 in Fall 2012. Unfortunately, this also came with even higher growth estimates, which has led to where we are today. Management just hasn't been able to produce growth in sufficient quantities. And it looks as if there won't be much improvement in that category anytime soon.

This doesn't mean Fresh Market has suddenly turned into a bad business. In fact, it has been the company's success as well as that of Whole Foods that have caused the influx of new competition from "non-organic" retailers. As I've said, one of the main advantages of Fresh Market was -- not only did the company cater to the affluent shopper, but Fresh Market also offered products that were scarce. Today, that is no longer the case.

That said, given recent reports suggesting the organic/natural food market should grow to $80 billion in the next two years, I believe Fresh Market can still thrive as the pie grows bigger.

However, the question is -- what are investors willing to pay for a stock that is no longer posting gaudy growth numbers? Street expectations will have to come down. And with the P/E at close to 30, which is twice that of Kroger and Wal-Mart, I think expectations are still too high. I remain curious to see how management responds to the company's challenges. Until then, I don't believe the growth story is as compelling, which makes the stock very unattractive.


At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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