Goldman Sachs Downgrades The Fresh Market (TFM) to Sell; Analyst Catious on Competition and Inflation

July 8, 2014 7:16 AM EDT
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Price: $28.51 --0%

Rating Summary:
    4 Buy, 17 Hold, 3 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 18 | Down: 12 | New: 23
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Goldman Sachs downgraded The Fresh Market (NASDAQ: TFM) from Neutral to Sell with a price target of $27.00 (from $36.00). Analyst Stephen Grambling noted headwinds from competition and inflation were near and long-term headwinds.

"We downgrade shares of TFM to Sell from Neutral with 18% downside to our $27, 12-month price target vs. 4% average upside for our coverage. The bottom-line is TFM is operating in a more competitive environment for specialty grocers that we expect will cap the top line and pressure margins long term. In the near term, TFM is also facing incremental headwinds from the Affordable Care Act and protein inflation which we expect will drive earnings below guidance," said Grambling.

"We expect a combination of downward earnings revisions and valuation rerating to drive 18% downside to our price target. We forecast an 11% EPS CAGR over the next three years driven by 3.5% comp growth and 55bp of cumulative EBIT margin pressure from gross margin compression and SG&A deleverage. Our cautious view is predicated on the following factors," continued the analyst.

"Downward revisions – We expect margin pressure due to food inflation, competition and SG&A deleverage will offset re-accelerating comps near term. Our FY14 EPS of $1.54 is below management guidance of $1.56-$1.66.

"Competition caps margin – We believe TFM’s 7%+ EBIT margins are overearning due to a combination of elevated merchandise margins relative to peers and potentially unsustainably low direct store expenses per sq. ft.

"Re-rating – We expect a re-rating of the shares to 15x NTM EPS or 1.4X PEG, a slight discount to double-digit sq. ft. growth retail peers."

For an analyst ratings summary and ratings history on The Fresh Market click here. For more ratings news on The Fresh Market click here.

Shares of The Fresh Market closed at $32.67 yesterday.

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