Fresh Comes Out West

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

I noticed that United Natural Foods' (NASDAQ: UNFI) share price rose by 4 percent recently, and an article by the Fool's Rick Aristotle Munnariz mentioned a possible reason for the jump. Last Wednesday, The Fresh Market (NASDAQ: TFM) beat earnings estimates resoundingly, so investors may be expecting United Natural Foods to surpass the estimates as well. I had an outperform CAPS call on United Natural Foods already, so I decided to look into The Fresh Market.

The Fresh Market's earnings release mentioned that it added three new stores in 1Q 2012, and also mentioned the company's plan to add five new stores. The point that stood out to me here was that The Fresh Market was expanding into a new region, the West Coast. The Fresh Market is smaller than Whole Foods (NASDAQ: WFM) and most of its stores are located on the East Coast. Three of the new store locations are in Rogers, Arkansas, Pensacola, Florida, and Athens, Georgia, and the company also plans two new California stores in Santa Barbara and Palo Alto.


Organic and natural supermarkets already thrive in many California coastal cities because supermarket shoppers are willing to pay for healthy food. Of course, Whole Foods has already figured this out, and there are many other coops, natural food stores, and grocery stores with health food selections within the state. Whole Foods has a store in Santa Barbara and a store in Palo Alto, and many other stores in the Bay Area and the Greater Los Angeles region.


The health food market may not be saturated just yet. The Fresh Market also reported an 8.2 percent rise in comparable store sales, so it may be attracting new shoppers who weren't going to health food stores before. It does seem like more people have become interested in health food recently. Companies that sell natural, organic, and health food have been attracting investors in recent months as stories like Bloomberg's large soda ban hit the headlines. Although the New York City soft drink rule was very controversial, soft drink sales have been falling as health conscious shoppers reduce their soda consumption.


The Fresh Market's stock wasn't cheap before its earnings report came out, and the earnings report sent its shares up even higher. The Fresh Market's PEG is high at 1.84, although this PEG is lower right now than United Natural Foods at 1.88 and Whole Foods at 1.92. The Fresh Market's earnings report also announces its plan to establish 14 to 16 stores in fiscal 2012 (including the 3 in the first quarter), a major expansion for a chain with 116 total stores. With a forward P/E at 34, The Fresh Market needs to show very strong growth.


United Natural Foods' report could also be good news for Roundy's (NYSE: RNDY). Like The Fresh Market, Roundy's has established a regional base and its growth plans include expanding from its base into other parts of the country. Roundy's growth strategy depends on the success of Mariano's stores in Chicago that sell premium food, and Roundy's competes with Whole Foods and other premium supermarkets in Chicago. The Fresh Market's decision to add stores in several locations where Whole Foods already has stores suggests that these cities can now support several premium supermarkets, so there might be room for both Mariano's and Whole Foods in Chicago.


If I was only looking at The Fresh Market's P/E ratio, I'd probably pass on this stock. A 1.84 PEG still shows that investors in The Fresh Market are paying a big premium for growth. The company's earnings report and increased guidance, along with its plans to add new stores at a rapid pace and expansion into another part of the country, suggest that The Fresh Market could be worth the price.  

enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend The Fresh Market and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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