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TFM’s Return on Equity Falls: How Are Its Peers Doing?

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A look at The Fresh Market’s return on equity

In this section, we’ll look at the returns earned by The Fresh Market’s (TFM) equity shareholders. We will also compare TFM’s ROE (return on equity) to its competitors Whole Foods Market (WFM), Sprouts Farmers Market (SFM), and Kroger (KR). ROE measures the net profits earned by equity shareholders as a percentage of equity capital invested.

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TFM’s ROE has fallen significantly over the past few years

Like ROA, the company’s ROE has seen a significant decline over the years. TFM had an ROE as high as 90% in fiscal 2009 and had an average of 30% during the last four fiscals. However, this fell to 19.5% in 3Q16.

TFM initially enjoyed higher margins due to the high demand for specialty and organic grocery stores in the United States. It followed a high price strategy, like its competitor Whole Foods Market (WFM), and easily coexisted with the former in many of its markets. However, with an increase in competition, not only from specialty and organic retailers such as Sprouts Farmers Market (SFM), but also from larger grocery chains such as Kroger (KR), TFM started losing grip on its margins.

The above comparison is for the last reported quarter. The quarter-end dates for the above retailers are as follows:

  • The Fresh Market: October 25, 2015
  • Kroger: November 7, 2015
  • Whole Foods Market: September 27, 2015
  • Sprouts Farmers Market: September 27, 2015

ROE falls but remains competitive in peer group

Though TFM’s ROE has fallen to less than 20% in the last reported quarter, it continues to hold the best ROE among its close competitors. SFM’s ROE stood at 16.2% in the most recent quarter, while WFM’s ROE stood at 14.1%. Kroger had a higher ROE, with 34.5% in its most recently reported quarter. The reason for Kroger’s high ROE is its relatively higher debt-to-equity ratio of 2.1x, which results in a lower equity base. TFM and WFM have low debt-to- equity ratios, of 0.1x and 0.02x, respectively.

ETF exposure

Investors looking for exposure to food retail stocks could invest in the Vanguard Consumer Staples ETF (VDC). The Fresh Market (TFM), Kroger (KR), Whole Foods Market (WFM), and Sprouts Farmers Market (SFM) have a combined weight of 3.1% in the ETF. Continue to the next part of this series for a look at TFM’s stock performance.

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