A Trip to the Specialty Grocer Could Be Beneficial to a Stock Portfolio

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

Shopping for grocery industry stocks is just like a typical trip to your local supermarket for the week's groceries. You choose a particular grocer for your shopping needs based on their substantial product choice, product and customer service quality, and value for your money spent and a Return on Investment (ROI) in terms of what the products provide you. In essence, you're looking for the same thing when it comes to choosing the actual grocery company for your stock portfolio.

Choosing a specialty supermarket stock means selecting a company that's innovative in terms of their product mix - with the requisite substantial choice for their customers. However, the industry's changed significantly in recent years. Product choice isn't the run-of-the-mill choices generally seen in the past. A broad choice of instant coffee for example, spread out in a mesmerizing row from the major brands doesn't exactly cut it anymore. Today's consumers want unique brand offerings, and they don't always have to be from the big players.

My local independent supermarket offers a very small local coffee company's unique blends, in their unique packaging, right beside Taster's Choice, Maxwell House, Folgers, Nescafe, and such. Like those small craft breweries that are popular, grocery products of the niche type are attractive to consumers. Of course, concern about price will always be a part of any shopping expedition; it doesn't mean, though, that someone won't indulge in products that speak to their individual tastes in the right way, even if they may be more expensive.

While consumers still engage in traditional grocery shopping outings – get in, get what you need, and get out – an increasing number of shoppers are looking for a retail food 'experience.' This experience involves the aforementioned specialty grocery products and the marketing that surrounds them. This marketing involves product sampling beyond the ordinary along with added-value promotions. Ever wonder why stores are having cooking classes and qualified chefs traipsing up and down their aisles these days. Customers are demanding this focus as applies to the products they buy. They want to know what's cooking, why it's cooking that way, and where in the store they can buy the same stuff to do the same thing.

The Fresh Market (NASDAQ: TFM) is one of those specialty grocery retailers. This company concentrates on providing premier products in an inviting shopping atmosphere. They understand consumers' need for that grocery shopping 'experience.' The Fresh Market is adding to their chain of specialty grocery stores with new locations recently announced for Naples, and Brandon, Florida, as well as a new location in Laguna Hills, California. The Fresh Market offers daily sampling and a hot cup of coffee for shoppers. One can hand-select their meat and seafood and have it cut to their specification by their in-store butchers. All of this, with those creative specialty products, takes place in a European Old-World market atmosphere.

For the third quarter of fiscal 2012, The Fresh Market's net sales increased 22.1 percent to $321.5 million and comparable store sales increased 5.6 percent, compared to the corresponding thirteen week period the year prior. Net income in the third quarter of fiscal 2012 increased 19.0 percent to $10.9 million, from $9.2 million in the corresponding thirteen week period in fiscal 2011. Diluted earnings per share in the third quarter of fiscal 2012 was $0.23. This represents an increase of 18.5 percent over diluted earnings per share of $0.19 for the corresponding period in fiscal 2011.

Of note, from an investment perspective, is the significant growth in net sales and net income. Here's an enterprise that's aggressively building sales through a continued commitment to premier specialty grocery items aggressively marketed. In tandem with these products is the company's strong focus on customer service. Investing in retail entities demands researching that an enterprise has this two-pronged strategy of quality products in association with exemplary customer service. The retail landscape is too often littered with sub-standard customer service and indifferent employee attitudes towards customers who are responsible for paying their wages.

For fiscal 2012, The Fresh Market opened 16 new stores. Their aggressiveness in marketing top-notch specialty products is matched by the Company's aggressiveness in building their retail network. This should be inviting to potential investors as this should manifest itself in increased total revenues, total profits, and increased market share. For the year to date fiscal 2012 period, total net sales increased 21.8 percent to $959.3 million and comparable store sales increased 7.3 percent to $821.2 million, compared to the corresponding thirty-nine week period in fiscal 2011. These are healthy numbers - stagnant sales often mean a lack of creative product sourcing and marketing, coupled with poor pricing strategies when it comes to sales & promotions. Investors should look seriously at a retail chain's growth in same-store sales and total net sales before making a stock buying decision.

Whole Foods Market (NASDAQ: WFM) operates in much the same way. The atmosphere may be different, but the specialty products with a focus on not being just a typical grocer has earned them their place in a supermarket sector that's as crowded as those aisles one tries to push a cart down on a Saturday morning. I've shopped their Toronto, Ontario, Canada store in the Yorkville district of the city. They offer a wide selection of organic offerings. Their overall produce and specialty cheese selection is impressive as are their prepared foods. 

For the 13-week fourth quarter ended September 30, 2012, the Company's sales increased 24 percent to $2.9 billion. Comparable store sales increased 8.5 percent, and identical store sales (excluding three relocations and two expansions) increased 8.3 percent. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased 36 percent from the year ago period to $252.2 million, net income increased 49 percent to $112.7 million, and diluted earnings per share increased 44 percent to $0.60.

Like The Fresh Market, Whole Foods Market is concentrating on growth. The healthy increase in sales should alert investors to the fact that the company has read the pulse of their customer base and knows, and is offering, the products customers want. The robust net income of both companies is a sign that they're controlling costs while building their sales. Especially important with retail enterprises is controlling labor costs and store overhead such as utilities and repair and maintenance expenses each year.

When researching a retail company, consider their inventory carrying costs and their inventory turn for signs of operational efficiency as well. Furthermore, consider their capital expenditures; is the company directing a good portion of this money to opening new stores. On top of all of this, an investor must consider a retail enterprise's cash flow from operations. For example, Whole Foods Market, for the aforementioned fourth quarter generated $188.8 million in cash flow. These are important dollars that gives the Company some operational flexibility in implementing initiatives they deem necessary for further growth.

Choosing a supermarket stock means selecting a company that's perceived as high quality in the marketplace by consumers, and by stakeholders. High quality in the eyes of shoppers' encompasses pricing commensurate with product quality and uniqueness; it doesn't mean it has to be the lowest price. High quality also means consistently new products sourced from equally high quality suppliers.

High quality in the eyes of stakeholders' in a supermarket chain means a strong record of accomplishment in building their retail network. Look for a company that's had consistent expansion in terms of new stores or at the very least is holding on to what they have, not closing stores. In addition, look for same-store sales growth more often than not.

MichaelONTARIO 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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