The Fresh Market Showed Sales Strength, but Kroger May Offer a Better Opportunity

The Fresh Market (TFM) closed out the week on a high note, as the stock was up 8.1% at the end of trading on Friday after earnings came out on Thursday afternoon. While the health food store posted strong top-line growth with a year-on-year improvement of 19.0%, a closer look shows that one important metric could have been better. Nevertheless, The Fresh Market's results did make the health food sector look better overall.

Like any retailer, The Fresh Market's overall sales performance depends on two factors â?? the change in store count and same-store sales.

The second metric shows how much sales changed at the health food chain's established stores. The chain posted substantial comps growth of 2.9%, and a breakdown of this metric looks good; most of the gain came from more customers visiting The Fresh Market's stores as traffic jumped 2.7%, so pricing did not drive this comps gain. However, investors have been attracted to health food stores because of their potential to grow much faster than traditional grocery stores, which makes a comparison with grocery giant Kroger (KR) worthwhile.

Kroger will release its next quarterly update in early September, but investors can still compare its most recent result with the news out from The Fresh Market. Kroger uses identical-store sales growth to measure the average performance of its established stores. Here, the grocery giant did much better with a 4.6% year-on-year gain for the first quarter, without including its fuel business. This compares with 2.5% comps growth in the same quarter for The Fresh Market. However, investing is about future results, so it's also worth considering the expectations of these two grocers for the rest of 2014.

Once again, Kroger pulls out in front here. When it released its first-quarter results, it projected identical-store sales growth of 3%-4%, once again not including its fuel business. This was a guidance hike. This is far above the comps guidance that The Fresh Market just gave at 1.5%-3.5%, and the smaller grocer left its previous forecast in place as well. Why does Kroger expect better comps than The Fresh Market for the remainder of the year? The reason could come down to competition. Craig Carlock, President and CEO of The Fresh Market, mentioned an increasingly competitive retail environment in the second-quarter release. Kroger has already been competing in health food with its Simple Truth brand, and now with Vitacost.com it has better positioning in the vitamin and supplement space as well. That recent acquisition bolstered Kroger's web presence as well.

Considering these facts, Kroger could be the better choice for investors in the grocery business. Much of this comes down to same-store sales, as Kroger leads on this metric even though it should be much easier for a smaller competitor to post big same-store sales numbers. While Kroger lacks the growth opportunity its smaller peer has with new stores, its forward P/E of 14 reflects this as The Fresh Market has a higher ratio at 18. The giant grocer has also shown that it can still expand through acquisitions as well. With health food store prospects looking up, Kroger looks worthy of further consideration.

By Eric Novinson

Copyrighted 2016. Content published with author's permission.

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