Are California's food aficionados ready for another upscale
grocer?
The folks atThe Fresh Market (
TFM
) are counting on it. The high-end specialty grocer will soon
enter the Golden State as it steps up expansion beyond its main
stomping ground in the Southeast.
The Greensboro, N.C.-based company has signed leases and begun
construction on three stores in California, one in Santa Barbara,
one in Palo Alto and the other in Roseville. It expects to open
its first store in the state either late this year or early
2013.
Fresh Market has carved a niche in the high-end grocery arena
that has continued to strike a chord with consumers as it
branched out from its roots in the South and entered the Midwest
in 2005 and the Northeast in 2009.
It features high-quality products, with an emphasis on fresh,
premium perishable items, which account for two-thirds of its
sales. Its perishables include hand-trimmed steaks that are aged
for tenderness, fresh seafood delivered up to six times a week,
and hand-stacked produce that's colorfully displayed with
abundant variety.
Smaller Stores
Its stores, at roughly 21,000 square feet, are easy to
navigate, customer friendly and are much smaller than a typical
U.S. supermarket. The stores are designed to be aesthetically
pleasing, with ceramic tiled floors, darkened ceilings and
incandescent lighting.
In California, Fresh Market will be competing head to head
with the likes of giant natural and organic foods grocerWhole
Foods Market (
WFM
) and specialty grocer Trader Joe's, both of which have a large
presence in the state.
But that doesn't seem to worry Fresh Market's Chief Executive
Craig Carlock: "We compete with Whole Foods and Trader Joe's in
the East Coast in many markets," he said on the company's first
quarter conference call. "Probably 50 of our 116 stores compete
with them. We're going to compete on the quality of the products,
the price, the quality of the service (and) the convenience of
the shopping experience."
Piper Jaffray & Co. analyst Sean Naughton expects Fresh
Market will be well received in California, given the grocer's
differentiated merchandise and fresh local and organic food
offerings.
But BMO Capital Markets analyst Karen Short says in the
California market each locale is different.
"The California customer is not the East Coast customer," she
said. "They (Fresh Market) tend to have a similar approach to
merchandising and layout regardless of the market. That worked on
the East Coast."
But, she adds, it may have to "tweak" its model in
California.
California isn't the only spot Fresh Market is eying for
expansion. As of May 30, the company had 116 stores in 21 states
in the Southeast, Mid-Atlantic, and Northeast. Roughly 25% of its
stores are in Florida. According to an SEC filing, it believes
the U.S. market can support at least 500 stores operating under
its current format.
The company expects to have 14 to 16 new stores opened by the
end of this year. That would be up from the 13 stores it added in
2011.
Morgan Stanley analyst Mark Wiltamuth sees Fresh Market as "an
early-stage growth story," with only 116 stores and the potential
for 500 or more.
"This is a great buy and hold stock," said Wiltamuth. "What
attracts me is the high-store growth. They have the potential to
do 10 years to 12 years of 14% to 15% store growth on an annul
basis. Looking at that as a backdrop, we think they can do 10
years or more of 25% earnings per share growth on an annual
basis."
Naughton concurs, saying Fresh Market is "an early-inning
growth story."
"There's a big opportunity to take this concept into the upper
Midwest and West Coast and some additional areas in the south as
well," he said. "They're going to be constantly going into new
markets and testing. They've proven they have an ability to be
successful in different areas."
Double-Digit Growth
Fresh Market's successful foray into new markets has helped
propel the double-digit sales growth it's enjoyed for six
straight quarters.
In the most recent first quarter, sales rose 23% to $324.8
million. Earnings climbed 33% to 40 cents a share. Same-store
sales rose a hefty 8.2% vs. a year earlier. The same-store sales
gain was driven by a 5.7% rise in the number of transactions and
a 2.5% increase in the average transaction size.
Wiltamuth says Fresh Market and Whole Foods largely draw the
same customer. That customer is more upscale, has a college
degree and is more focused on eating in a healthy way.
"Fresh Market and Whole Foods are taking share from
conventional grocery stores," he said. "They're both relatively
small vs. larger grocery stores and they're both growing comps
and square footage at a much higher rate than conventional
grocery stores."
Analysts polled by Thomson Reuters expect full-year 2012
earnings to rise 27% to $1.36 a share. They see a 24% gain in
2013 and a 29% increase in 2014.