'Challenges Remain' For The Fresh Market, Deutsche Bank Says

In a report published Monday, Deutsche Bank analysts maintained their Hold rating on

. The price target was lowered from $40 to $35. The company posted its Q1 adjusted EPS marginally above the estimates and the consensus, driven by strength in GPM. However, the comp posted for the quarter was well below expectations, raising concerns regarding the sustainability of the company's margins and EPS. "Some of the comp miss was weather-related (~50 bps) and some was self-inflicted (a shift in pricing/promotional activity). TFM continues to focus on growing units at +12-15 percent per year beyond FY15," the analysts said. However, given that the stock is now trading more in-line with its slower growing conventional grocer peers, it appears that investors are unwilling to give too much credit to the company for unit growth. According to the Deutsche Bank report, "If TFM were to cut capex to maintenance levels, the FCF yield could be as high as 10 percent, and in our view this would warrant a much higher multiple given the share repurchase potential and stability of the cash flow." Given that competition is expected to intensify, the analysts do not believe that unit growth is the right strategy to create shareholder value. They put more faith in lowering new unit capex and consolidating the core as an optimal strategy for The First Market. The company lowered its sales and comp guidance for FY15, while reiterating its EPS guidance for the year. The analysts have accordingly lowered their FY15 and FY16 EPS estimates from $1.90 to $1.85 and from $2.10 to $1.90, respectively.