The Fresh Market Is Sprouting

 | Jul 19, 2012 | 11:30 AM EDT
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Hungry minds want to know: Is there any limit to the number of specialty-food retailers that can tempt consumers with a scintillating presentation of locally sourced meats and vegetables? It seems like a crowded market, but never underestimate the power of good grub to spark the imagination of both households and investors.

The latest case in point is Fresh Market (TFM), which operates a chain of small specialty-food retail stores focused on high-quality food products, premium perishables and a superior customer-service environment in the stores themselves. Locations are mostly in the Southeast, Midwest, Mid-Atlantic and Northeast, with management planning for continued expansion throughout the U.S.

When customers step inside a Fresh Market, the goal -- according to the firm -- is to create an extraordinary food-shopping experience with a neighborhood-grocer atmosphere. The company was started three decades ago in Greensboro, N.C., by Ray and Beverly Berry, who were looking to start an open European-style market. The idea was to create stores that were smaller than their American counterparts, and which largely focused on perishable goods.

The initial 14,000-square-foot store focused on loose produce, vitamins, bulk foods and bins of freshly roasted coffee, and it became the blueprint for other locations to follow. Low-level lighting and classical music was a staple, with the stores dedicated to differentiating themselves from larger conventional supermarkets.

Most stores, of which there are now 115 in more than 21 states, have an old-style butcher shop and fish market, bakery, floral stand and delicatessen. The key demographic for The Fresh Market constitutes customers that place a greater emphasis on food quality and customer service than they do on price.

According to investment research firm Deutsche Bank, the target demographic profile is very similar to that of Whole Foods (WFM), Starbucks (SBUX) or Nordstrom (JWN). Within the $1 trillion food retail industry, there's been a growing emphasis on healthy eating choices and fresh-quality offerings, and that's the niche on which the company is focused.

Another differentiator for Fresh Market vs. most traditional supermarkets is its emphasis on stocking higher-margin perishable offerings. These make up more than two-thirds of its inventory. In order to further improve margins and reduce costs, the company utilizes a sourcing model that includes more than 1,000 vendors and suppliers, many of which are local to the geographic region of each store.

While founder Ray Berry remains chairman, the job of CEO has fallen to Craig Carlock. He's been in charge since 2009, but has served in various executive capacities since 1999.

The past few years, the firm has been able to grow its store count by 12% annually, with sales and operating income respectively growing at 13% and 31%. In fact, the store count has tripled since 2000, and the firm estimates it has capacity for more than 500 stores in the U.S.

The Fresh Market (TFM)

The Fresh Market went public November 2010 at $22 per share, and the stock now trades north of $55. Shares have climbed nearly 40% already this year, but the niche market has tons of growth ahead of it: The company estimates it can raise the number of stores by 5x. The most recent quarter saw net income of $19.3 million, a rise of 43% from a year earlier. Additionally, revenue growth came in at 23%, marking the fifth consecutive quarter of double-digit year-over-year growth.

The company is clearly still in a high-growth stage, and as a result it doesn't come cheap. The shares are currently trading at 33x next year's earnings, though that's directly in line with that of many of its peers, including Whole Foods. Factor in the potential that still lies ahead, and it's easy to see why The Fresh Market is an appealing choice in this sector for emerging growth investors who are comfortable with the risk.

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