Wildbilly
10 years ago
Tech fuels farm-to-table 2.0
Online grocers are getting fresh food to customers faster.
BY MATTHEW FLAMM
JULY 7, 2014
Benzi Ronen has shifted Farmigo's focus to the suburbs, though the company is headquartered in Brooklyn.
$620B
Sales of groceries nationwide in 2013
-
$56.9B
Sales of organic and natural foods nationwide in 2013
$486M
Amount venture capitalists invested in grocery e-commerce companies in the year ended March 31
Technology has come to the farm-to-table movement, and the market for organic squash blossoms, pastured eggs, artisanal cheese and hormone-free ham may never be the same again.
The ease with which the grocery supply chain can now be managed through software and mobile devices has driven an explosion of investment in food and grocery e-commerce startups—close to $500 million in the past year. That's helped spawn growth in the farm-to-table niche—and in its East Coast epicenter, Brooklyn.
Competition has grown so intense among local-food delivery firms and entrenched players like FreshDirect that one Brooklyn startup, Farmigo, recently switched its focus from the boroughs to the suburbs.
Experts say a historic shift in the formerly sleepy sector is taking place as a result of new technology meeting pent-up demand.
"Distribution has always been the biggest problem for the local-food movement," said Carlotta Mast, senior director of content at New Hope Natural Media, which covers the natural foods industry. The startups bring an Amazon.com-like user experience to the traditional farmers market. "It's like you're virtually browsing the farm stand," she said.
All this startup activity in Brooklyn is one reason Adrienne Lytton, a 39-year-old mother of two in Scarsdale, N.Y., no longer goes to the supermarket for her family's food. In April, she became an "organizer" for Farmigo, rounding up friends and neighbors to order groceries from the online service, which drops them off at her home every Wednesday.
"The only things I buy at a regular supermarket anymore would be paper towels and some random items," she said. "The food [from Farmigo] is so fresh it's crazy."
Farmigo acknowledges it took the path of least resistance in shifting its business development resources to the suburbs. But founder Benzi Ronen believes the company's farm-to-neighborhood approach, in which drop-offs are made to schools, workplaces and organizers' homes—rather than to each customer's door—works best with people who are already in their cars.
Deliverance
Online grocers in the U.S. generated $65 billion in revenue last year. Here are top players.
Company Sales
Peapod $568 million
FreshDirect $374 million
Safeway Inc. $208 million
AmazonFresh $60 million
Source: IbisWorld
Getting out of the city
"Let everyone else fight the urban war," said the chief executive, who moved the company to Dumbo from San Francisco in March 2013 after raising $8 million in financing. "We have a model we think is very well suited to the suburbs."
Having spent the past year putting its infrastructure in place, Farmigo just moved into a 5,000-square-foot headquarters in Gowanus that Mr. Ronen plans to use for food-tech meetups. Based on outside requests for new "communities," he's forecasting rapid growth.
So is Good Eggs, a San Francisco-based "farm-to-fridge" startup that began making home deliveries in Brooklyn in November. The New York offshoot will leave Williamsburg for a 20,000-square-foot location in Bushwick this summer and expand its door-to-door service to Manhattan next year.
Meanwhile, Good Eggs' year-old Williamsburg neighbor, Quinciple, uses cargo tricycles to deliver a weekly, "curated" box of local products to its Manhattan and Brooklyn subscribers. It's in the midst of raising a seed round of financing.
All of these startups compete with Whole Foods and FreshDirect, which has extensive local food offerings and which may soon be joined by Amazon. The Seattle-based giant is rumored to be entering the New York market sometime this year with its AmazonFresh same-day deliveries. That could put pressure on FreshDirect, which already competes against online grocer Peapod and is battling community groups over its plan to build a facility in the South Bronx with nearly $130 million in government subsidies.
Executives at farm-to-table firms say they differ from the major retailers in both model and mission: The startups aim to connect consumers and producers in the most cost-effective ways. And they hold little to no inventory, relying on technology to track the availability of goods from a range of sources and offer them to consumers.
The result, they say, is lower prices for premium products than customers would pay at Whole Foods or FreshDirect, and better prices for the farmers than they would get from wholesale distributors.
"Good Eggs makes it really simple to get our apples pretty much directly to customers with a single delivery, and as a result we're getting very close to a retail price point," said Josh Morgenthau, son of the former longtime district attorney, who manages his family's eco-certified apple farm in Fishkill, N.Y., when he's not running Good Eggs' Brooklyn operation. "We're really cutting out all the middlemen."
The setup is also proving attractive to investors. "We like that reinvention of the grocery store model, as opposed to tacking delivery on top of what is a 200-year-old business model," said Bryan Schreier, a partner at Sequoia Capital, which led an $8.5 million investment round in Good Eggs in September.
Venture capital funding in the grocery e-commerce and delivery sector in the U.S. totaled $486 million in the year ended in March, a 51% jump in spending over the prior year, according to CB Insights.
Though local and organic foods make up a mere morsel of the nation's $620 billion grocery business, it's the fastest-growing segment—and a vast new opportunity for the tech industry, Mr. Schreier said. In 2013, the entire organic- and natural-foods market came to $56.9 billion, up 12% from the prior year, reports Nutrition Business Journal.
'Hard to get right'
For all their innovations, the farm-to-table startups still face the challenge of food delivery.
"Home grocery delivery is just really hard to get right," said Forrester Research analyst Sucharita Mulpuru. She cited temperature-control issues, customers' reluctance to wait through lengthy time windows, and the costs incurred when people are not home at the appointed time.
"I like the economics of [Farmigo]," she added. "But they need to figure out how it scales over time."
Mr. Morgenthau conceded the difficulties of doing home deliveries five days a week—soon to be seven—but said Good Eggs controls costs using insulated, reusable packaging instead of refrigerated trucks and sending customers text and email reminders on delivery days.
Quinciple said it makes sure to get alternate locations in case customers aren't home. The company, making 2,500 deliveries a month, keeps missed connections to a tenth of 1%, said founder Markus Jacobi.
For Mr. Ronen, the challenge is finding organizers like Ms. Lytton as Farmigo extends its network into New Jersey this summer, following its recent expansions into Long Island and Westchester. He is planning to step up grassroots marketing using "a lot of ideas" from the 2012 Obama campaign, he said, and estimates the company will be adding 50 communities a month. Farmigo currently has 100 communities in the New York and San Francisco areas.
He also said there need to be many farm-to-table startups: "If you want to create a new food system that's able to leapfrog supermarkets, no one person or company is going to do it on their own."
http://www.crainsnewyork.com/article/20140707/TECHNOLOGY/307069993/tech-fuels-farm-to-table-2-0#
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Wildbilly
10 years ago
A Fresh Buy in a Heated Market
The Fresh Market: A Fresh Buy In A Heated Market
Jun. 2, 2014 3:19 PM ET | 4 comments | About: The Fresh Market (TFM)
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TFM over the next 72 hours. (More...)
Summary
Concerns over industry crowding have substance and company does not have strong competitive advantages, but market treatment seems overdone.
Strong industry prospects with natural/organic grocery expected to continue to grow low double digits to 2020.
Seasoned, talented, and invested management that has the right approach to growth.
Hardly off 52-week low, below all moving averages, and at 13.2x no-growth FCF, stock seems attractive both fundamentally and technically.
Intend to initiate concentrated position on day of publication.
In a prior article, I detailed why and how I would begin performing one hour of preliminary research on potential investments with an emphasis on reasons not to invest before delving any further into the idea. In this article, I will organize my findings on The Fresh Market (TFM).
The above paragraph is the generic spiel I've been using in all my articles lately, but this article is a bit different. Unlike, the other stocks I've checked out recently, I did not go into my TFM hour completely unfamiliar with the company. In February, I spent 3-4 hours researching and wrote on the stock, but never invested. My strategy has changed rather dramatically since then however, and so I will write this article independent of my old one rather than as a supplement.
Business Overview
The Fresh Market was founded in 1982 and operates 157 specialty/natural, small grocery stores in 26 states in the US.
Competitive Position
TFM competes with other specialty/natural grocers like Whole Foods Market (WFM), Sprouts Farmers Market (SFM), Trader Joes (private), and Natural Grocers by Vitamin Cottage (NGVC), as well as larger grocers expanding into the specialty market like Wal-Mart (WMT), Target (TGT), Safeway (SWY), and Kroger (KR). The specialty grocery industry is tough like almost all of retail, and getting tougher. It has gone from being seen as a niche market to now being in the crosshairs of giants like WMT and TGT. Target in particular seems to be making an aggressive push. I was in the store a few days ago and noticed lots of high quality, pre-seasoned, ready to cook meats, cheeses, nontraditional deserts like gelato, etc.
This niche-to-mainstream shift has really scared investors invested in the specialty grocers. The four publicly-traded firms have all declined a very similar amount since 10/25/13 (indicating the move in each stock is industry-related). The firms are down an average of about 43% in a little over 7 months.
The brunt of the decline came in early May when Whole Foods in its Q1 results missed on revenue, missed on EPS, missed on comps, lowered guidance, and attempted to reset longer-term market expectations lower. The other stocks were second-hand victims of the damage.
The market seems to believe there is little differentiating TFM but the company's management has a different take. From the company's Q1 conference call:
We have observed and recent extensive third-party customer research has confirmed that consumers come to us because of our unique combination of outstanding food quality, engaging customer service and an inviting store environment. We believe this combination provides us great flexibility and differentiates us from our competitors who compete on ingredients based product assortment, price or some combination.
So management believes that other companies compete on price and selling organic/natural products while TFM focuses on quality, customer service, and an inviting store format.
Overall, I have a mixed opinion on the company's competitive position. 'Quality, customer service, and an inviting store format' sounds like gushy PR. I feel like every retailer of any kind ever could and has probably used those terms to describe what sets it apart. In high school, I worked as a sales associate at Marshalls (TJX) and I couldn't even tell you how many times I was lectured on customer service at nightly meetings. You don't do retail without customer service.
On the other hand, I have heard very good things about the quality of the meats and cheeses in TFM's deli. Further, I do think a good deal of differentiation is derived from:
the company's store size (self-proclaimed to be small but actually right in the middle of the 5 specialty grocers I looked at)- 55% of WFM average square footage, 76% of Sprouts, 210% of NGVC, 210% of Trader Joes
smaller selection - 9-10k SKUs compared to 21k at Whole Foods
unique geographic base (US Southeast)
I certainly don't think TFM has a moat or even strong competitive advantages, but I don't think the company is as vulnerable as the market reaction seems to imply. The company is pretty small now. It does not need to put Whole Foods out of business to do well. Even at the target of 500 stores, the company would be small. This also presents a great deal of opportunity. 500 stores is over 3x the current store count.
I'd really like the chance to visit a store. The closest store is 50 miles away. I still plan on making the trip sometime this week.
This is the big negative about the long story, but I don't think it is as horrible a net negative as the market is pricing in.
Industry Prospects
From Intangible Valuation article and, in turn, SFM 10-K:
According to the Nutrition Business Journal, sales of natural and organic food have grown at a CAGR of 12.0% from 1997 to 2012, reaching a total market size of $54 billion in the United States and are expected to continue to grow to $113 billion in 2020, representing a CAGR of 11.3% from 2013 to 2020.
So the natural/organic industry in which TFM competes has grown at a double digit rate for close to 2 decades and is expected to continue to do so, at a slightly lower rate. The endpoint of $113B in 2020 represents 18% share (for the entire natural/organic industry, not just TFM) based on current US grocery sales of $620B and presumably less as the denominator should also be larger in 2020. That does not seem so unrealistic. Natural/organic seems like a pretty broad category. If these estimates materialize then TFM may be able to coexist profitably and grow with peers going forward. After all, TFM and peers have done just that in the past with the industry growing at a comparable rate.
I find this very comforting. If industry growth were not so promising/redeeming, I probably would rule out an investment in TFM based solely on the lack of material competitive advantages mentioned above.
Insiders
Executives are paid extremely well at TFM:
(click to enlarge)
see link
(Source: Morningstar)
The total of $7.56M for 2013 represents a whopping 5.4% of 2013 operating cash flow. That's a lot compared to other companies I've looked at, however, a few comforting points:
Management is actually really talented and seasoned
Much of the pay is in stock and executives hold large direct stakes in the firm as a result that they have supplemented with voluntary purchases recently
I mentioned this in my last article, but I am genuinely impressed with TFM's management team. The company seems return-oriented and VBM seems to be ingrained in the corporate culture, unusual for a company of its size. Most small companies struggle to comply with US reporting standards, but TFM seems to go above and beyond. This time around, I really took notice of how careful management is being in expanding. In his article, Intangible Valuation correctly referenced Peter Lynch. In my mind, Lynch is the guru of investing in small restaurants and retail companies. I read his books and one of the major lessons in the retail analysis section is that promising companies get into trouble most frequently when they try to grow too quickly. Too many new stores too quickly can mean subpar lease terms, site selection, neglect of existing stores, and so on. It's just not smart. I am impressed by how much effort and patience management at TFM is putting into expansion. Most of the prepared remarks in the Q1 conference call detailed site selection and deal structuring. The company recently retained a real estate analytics firm to perform a white space analysis and management is now pursuing built-to-suit lease terms in order to decrease risk and transfer part of the initial capital burden to the lessor.
The company's CEO, Craig Carlock, has been CEO for over 5 years and been with the company for 15 years. Chairman Ray Berry founded the company in 1981 and served as CEO from 1981-2007.
Carlock and a few others have made direct investments recently and Carlock has direct holdings worth $6.7M, or 2.35 years of total compensation based on his 2013 take. That seems very significant.
(click to enlarge)
see link
(Source: SECForm4.com)
Timeliness
This is becoming an increasingly critical factor in my investment decisions. I care a great deal about entering stocks at relative lows in order to secure myself in case the rest of my thesis does not play out. Deep below all moving averages, and attractively positioned in its 52-week range, TFM seems quite timely:
(Source: FinViz.com)
see link
Performance & Valuation
Operating cash flow has grown 14.5% annually since December 2009 and 26.2% in the last year. Revenue has grown 15.3% annually since December 2009 and 15% in the last year. Most recently, in the company's Q1 results, comps increased 2.5% Y/Y. The company also reaffirmed its full year 2014 guidance:
(click to enlarge)
see link
(Source: TFM Investor Relations)
Particularly impressive is the continued stability in comps growth. It looks like the company is performing well.
EPS is greatly understated because depreciation exceeds maintenance capex by a good margin. Trailing operating cash flow is $150.64M. Intangible Valuation came up with no growth FCF of $112M. At a quote of $36.05 with 48.4M diluted shares outstanding, TFM has a market cap of $1.48B. P/FCF is 13.2x. Carlock mentioned 12-15% unit growth going forward. If the company can increase FCF by the midpoint of 13.5%, the stock seems slightly undervalued, but that is probably too conservative. Comps have been improving and are guided to continue to improve and the resulting operating leverage, along with some fat the company has identified for trimming, should enable FCF growth of 15-18%. In that case, the stock looks very cheap. Indeed, the analyst consensus is for 16.9% over the next 5 years and Value Line estimates earnings growth of 16%. I was also surprised to see this in the VL report:
(Source: Value Line)
see link
You don't see estimated gains like that in a Value Line report very often and these estimates are:
Calculated with the stock at $34.93. From the current quote of $30.65 to the midpoint of $92.5 in 2018 represents 32% annualized returns. I'd be happy with even half of that.
Calculated on April 25, before the company reported its excellent Q1 results, which may result in VL making more bullish assumptions in the next update.
Even if headwinds materialize and the company is only able to do 10-11% FCF growth (lower than estimated industry growth and company's guided unit growth), the stock is probably fairly valued at this price.
Conclusion
After scanning through several companies, it looks like I've found another rare stock suitable for a concentrated entry right now. The Fresh Market is an excellent company with strong growth prospects and seasoned, talented, and invested management that has been pulled down on concerns that the specialty grocer industry is getting too crowded. As a result, shares are extremely timely now near a 52-week low and the stock also looks attractively-valued fundamentally at 13.2x no-growth FCF. The only major negative I am seeing is that the company is not as differentiated and its business not as protected as I would like to see. I am skeptical of retailers in general and there does seem to be some substance to the market competition concerns, however I think the market reaction is overdone and the long thesis redeemed by every other element. I am comfortable entering into a large long position and will do so this morning (Monday 6/2).
http://seekingalpha.com/article/2249223-the-fresh-market-a-fresh-buy-in-a-heated-market?uprof=44
Wildbilly
10 years ago
The Best Investment In Organics
About: The Fresh Market (TFM), Includes: SFM, WFM, WMT
The market for organic and natural foods continues to gain strength, and this trend will only get stronger as the economy continues to rebound. As more people find jobs, they'll have more money to spend. Part of that increased income is likely going to go toward eating fresh and natural products.
Adding validation to the movement, Wal-Mart (WMT) has announced plans to enter the organic foods market. Many investors missed the tremendous move in Whole Foods Market (NASDAQ: WFM) shares over the last five years. But there could be another organic food retailer poised for a similar run. That company is The Fresh Market (NASDAQ: TFM).
The Fresh Market growth story
The Fresh Market is still early in its expansion opportunities. Whole Foods has 375 stores compared to The Fresh Market's 150 store base. It plans to add a record number of stores this year, with the long-term goal of hitting 500 stores. Its other top competitor, Sprouts Farmers Market (NASDAQ: SFM), also has around 150 stores. The key for The Fresh Market is to expand beyond its core market. Nearly half of its stores are located in three states: Florida, North Carolina, and Georgia.
The Fresh Market is opening its stores earlier to try and take traffic away from Whole Foods and others. Most of its locations will now be open nine additional hours per week. This move could boost The Fresh Market's comparable-store sales. Both Family Dollar (FDO) and Dollar General (DG) extended their hours back in 2009--as a result, they saw 100 to 150 basis point growth in their comparable-store sales.
The organic foods market
The beauty of the organic foods industry is that its higher cost and quality products help insulate companies from weak economic conditions. The higher cost products attract a higher-income customer who is less likely to trade down when the economy weakens.
Whole Foods shares have been in free fall this year. The organic foods retailer posted comparable-store sales that were weaker than expected last quarter. It blamed intensifying competition, where its stores are seeing overlapping from the likes of The Fresh Market and Sprouts Farmers Market.
Then there's Sprouts, which recently had a strong quarter. This was despite the competitive pressures that Whole Foods felt. Its most recent quarter showed that earnings per share beat consensus by 15%. Comparable-store sales were up 12.8%, which was well above what Whole Foods posted. And while Whole Foods lowered its guidance, Sprouts increased its outlook.
How shares stack up
The Fresh Market trades at a P/E ratio of 18 based on next year's earnings estimates. That's lower than either Whole Foods or Sprouts Farmers, which trade at 23 and 33, respectively. When you factor in Wall Street's growth estimates, The Fresh Market has a P/E to growth ratio of 1.2. That's well below Whole Foods' 1.8 and Sprouts Farmers' 1.6.
On the plus side for investors of Whole Foods, the company offers a 1.2% dividend yield, while The Fresh Market does not. Whole Foods also has virtually no debt compared to The Fresh Market's debt-to-equity ratio of 20% and Sprouts Farmers' at 76%.
Bottom line
The organic foods market is still a young growth story. One of the companies at the forefront of the growth story is The Fresh Market. It still has plenty of store expansion opportunities and the potential to improve comparable-store sales. For investors looking to gain exposure to the organic and natural foods market, The Fresh Market is worth a closer look.
Disclosure: The author owns no shares in any stock listed.
http://seekingalpha.com/article/2236583-the-best-investment-in-organics?ifp=0
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