People have become health conscious and look for healthier options such as organic and natural food. Thus, specialty retail has gained a lot of importance. Also, these products provide a higher margin since people are willing to pay more for fresh and organic products.
Specialty grocer The Fresh Market (TFM, Financial) reported its second quarter results quite recently. The numbers were ahead of Street’s estimates, making investors happy and leading to a sharp rise in its share price.
Analyzing the numbers
Driven by higher demand for its products, revenue surged 19% over last year, clocking in at $422.2 million. The top line for the quarter was higher than the analysts’ estimate of $416 million. The company managed to attract more customers through promotions and new merchandising programs. This resulted in an increase of 2.7% in the number of transactions and 0.2% uptick in the transaction size. Hence, same store sales growth came in at 2.9%. Further, Fresh Market has been expanding its store base, which is boosting sales. It opened 4 new stores during the quarter.
However, margins shrank 20 basis points to 34%, because of significant rise in input costs. Also, occupancy costs rose during the quarter, hampering the margins further. But the specialty retailer’s focus on prepared food segment should help in expanding its margins, since prepared foods have higher margins.
Adjusted earnings for the quarter stood at $0.36 per share, 12.5% higher than last year and a penny higher than analysts’ estimates.
Key strengths
One of the key strengths of the company is its ability to provide freshly produced meat, a number organic and natural food products, which is in vogue. Also, it provides upscale groceries as well as prepared foods, which lures customers to its stores.
The popularity of these products has enabled other companies such as Kroger (KR, Financial) to provide similar products. Kroger too has started offering food which is made of natural and organic ingredients. The organic food range is called “Simple Truth”. This has brought a lot of customer attention. In fact, Kroger also plans to add a range of new items to the Simple Truth line, mainly because of increased competitive pressures from other players such as Whole Foods Market (WFM, Financial) and Fresh Market.
Whole Foods Market is the leading player in this industry, which offers premium organic products to customers. In fact, its stock price has appreciated by 72%, in the last 5 years, whereas Fresh Market’s share price has advanced by 3.9% only.
The road ahead
However, Fresh Market is taking initiatives to expand its reach. It plans to open a total of 22 new stores during the year, out of which 6 will be opened in the third quarter. Further, it plans to expand its footprint in the southeastern U.S. Hence, it plans to double the number of stores it has in the region.
Moreover, it has reaffirmed its guidance for the year. It continues to expect a comp sales growth of 1.5% to 3.5%. Also, it expects earnings to be in between $1.56 and $1.66 per share.
To end up with
Fresh Market is expected to do well, given its expansionary plans and efforts to attract customers. However, it faces stiff competition from other industry players, which might be a problem. Nonetheless, the attractiveness of the industry and the retailer’s initiatives, makes it an interesting company.
