Is The Fresh Market Looking for a Fresh Start with a Merger?
What to Expect from The Fresh Market's Fiscal 4Q16 Earnings
Some background to Kroger’s bidding for The Fresh Market
According to a news from Reuters on February 11, 2016, Kroger and various private equity firms are showing interest in buying The Fresh Market (TFM) and are in the second round of discussions.
TFM has been unable to cope with increasing competition resulting from the entry of mainstream food retailers like Kroger (KR) and Walmart (WMT) in the organic and natural food market. In addition, Sprouts Farmers Market (SFM) has been targeting TFM’s territories and has made a successful entry in the Southeast.
TFM’s poor sales growth and low cash flow generation forced the company to conduct a strategic review of its operations in October 2015. The company hinted that the strategic review might result in a possible sale of the company or a change in its capital structure.
Deteriorating same-store sales
Rising competition has taken a toll on the company’s performance. Its same-store sales have fallen from 8% four years ago to -3.7% in the most recently reported quarter, fiscal 3Q16. TFM’s comparable store performance has been the worst in its peer group. While Kroger boasted sales comps of 5.4% in its most recent quarter (which ended November 7, 2015), Sprouts Farmers Market (SFM) registered same-store sales growth of 7.8% during its last reported quarter (which ended December 31, 2015). Whole Foods Market (WFM) seems to be sailing in the same boat as TFM. Its same-store sales fell 1.8% in its last reported quarter (which ended January 17, 2016).
Poor operating cash flow
TFM’s operating cash flow grew by 1.9% during fiscal 2015 as compared to fiscal 2014 despite the company adding 18 new stores. During the last three fiscal years, the company has increased its store count by 50%. However, its operating cash flow has grown at a compound annual growth rate of 10%.
The SPDR S&P Retail ETF (XRT) has ~1% exposure to TFM, while the Barron’s 400 ETF (BFOR) has 0.27% exposure to the company. Continue to the next part of this series for a discussion of TFM’s valuations compared to those of peers.
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