A grocer with a 14% ROA
Kroger has an ROA of 6.3%
Safeway has an ROA of 3.8%
Wal-Mart, which isn’t even a pure grocer, has an ROA of 9%.
And Whole Foods, the crème de le crème of grocers, has an ROA of 10%.
But none of these grocers can compare to the operating efficiency of the little-known grocer, The Fresh Market. Their ROA is 14.5%.
Over the past few years, The Fresh Market has been incredibly aggressive with their store expansion. Two years ago, the store invested $88M. Last year they invested $81M. And through 3 quarters this year, they’ve already invested $92M. In just 3 years, they’ve nearly doubled their assets. And they’ve done it all without issuing a drop of debt.
And their ROA is still 14.5%.
And while you might be thinking that their “asset-lite” model means a mountain of lease obligations comes with the package, their lease obligations stand at a manageable $26M – about 10% of their total liabilities as of the latest quarter.
And the stock is getting cheap. Thanks to a slip up in comps over the past few quarters, and a well-timed downgrade, the stock has fallen to about 22x earnings. But, what retail company hasn’t seen a slip in comps the past few quarters? Even Whole Foods just reported a quarter of “light” comps. I don’t think the current fundamental weakness in The Fresh Market is indicative of something that they are doing wrong. It’s been a widespread issue across the retail industry, at large.
I realize that many investors and analysts base the strength of a retail organization primarily on comps – if you can continue getting more dollars out of the assets you currently own, what’s not to like? But when you’re getting more “bang for your buck” out of your assets than any other player in the business, I’d also say you’re doing something right.
What am I looking for from TFM, going forward? Well, I’m guessing that once we see 4th quarter numbers from TFM, we’ll see an annual earnings increase of about 10-15% (from $64M to about $72M is my guess). This lags the year-over-year increase in asset growth, which will probably be about 25-30% growth as of Q4. If earnings growth doesn’t get “back in line” with asset growth over the next 2-4 quarters, then we could see some fundamental deterioration and slippage in ROA. But, assuming that the current environment is simply a temporary weak period in retail, we’re looking at a great buy-in price for a very well-run company.