1 High-End Grocer Thriving Amid Tough Competition

Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, two high-end grocery chains, Whole Foods Market (NASDAQ: WFM), and The Fresh Market (NASDAQ: TFM) have struggled with an uncertain macroeconomic environment. Customers seem to prefer value chains like Kroger or big box superstores like Target and Wal-Mart more. But though both have been beaten down, at this point Whole Foods is a considerably better buy than Fresh Market. 

For the first quarter of 2013, Austin-based Whole Foods managed to beat earnings and revenue forecasts, but disappointed on future revenue guidance. Additionally, it reported that comparable-store sales growth dipped from 8.5% to 7.2%. Investors weren't happy, and shares tumbled almost 10%.

The scenario was worse for Fresh Market. It missed on both earnings and revenue estimates, and guided lower for the remainder of 2013 as well. Comparable-store sales growth has dropped all the way to 1.9%, way below analysts' estimates of 4.2%. In response, Fresh Market shares fell 20% from the recent high of around $50 they reached in the middle of February.

Stock price performance

At the end of November 2012, Fresh Market delivered its third-quarter earnings report, and the stock price dropped around 13%. Whole Foods followed that up with its fourth-quarter report, which knocked around 10% off the stock price in the middle of February 2013 (and took Fresh Market's price down with it). Fresh Market's fourth-quarter disappointment was the big one, though taking around 20% in total off the stock price in the matter of a few days.

Company fundamentals

Despite the recent pullback in the stock prices, neither of these companies is priced cheaply. Currently, Whole Foods' forward P/E ratio stands at around 26, whereas Fresh Market is a little cheaper at 21. Due to expectations for growth and expansion, both of these stocks earned relatively rich multiples. However, the recent earnings reports and the severe reaction to those reports from the marketplace suggest that those multiples may not have been warranted in either case.

Still, Whole Foods is quite simply better positioned, because of the following reasons.

First, Whole Foods' balance sheet is in excellent shape. The company has nearly $1 billion in cash, and its long term debt load is just $25 million, leaving its debt-to-equity ratio at a scant 0.07.

Second, consider the difference between the two companies' expansion plans. In 2013, Fresh Market expects to open around 20 new stores. This will expand the company’s total number of locations by about one-sixth. While these stores may eventually add to the bottom line, they'll also incur significant start-up costs, including rents and materials, that won't immediately see a return. In contrast, Whole Foods also expects to add locations, but its nationwide geographic diversification should help mute any impact to its bottom line.

Finally, recent quarters aside, Whole Foods has a better track record of growing revenue and earnings year over year. While the recent economic environment has clearly affected both companies, Whole Foods' management team has managed to deliver consistently solid growth. Despite their present dip, comparable-store sales growth numbers are still very good. When the economy returns to a healthy state, Whole Foods should be positioned to take advantage of it.

On a concluding note

Based on company's revenue growth history, solid balance sheet, low debt levels, and better overall performance on recent earnings reports, Whole Foods is better than Fresh Market in the high-end grocery space.

Whole Foods is a better cash flow generator, and currently, it has more cash in hand. This will help with its 2013 growth and expansion plans. Fresh Market faces some short-term obstacles with its store growth and expansion plans.

In the long run, once the economy recovers, both companies should be reasonably expected to do well. But, Whole Foods seems better equipped and positioned for both the short and long term. This is certainly a stock that would make sense for a variety of investors’ portfolios.

Abir Karmakar has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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