How The Fresh Market Can Boost Shareholder Value

In a report issued Tuesday, Deutsche Bank analysts Karen Short, Ryan Gilligan and Shane Higgins shared three steps to boost shareholder value at The Fresh Market Inc TFM.

The company’s shares are down more than 22 percent year-to-date, widely underperforming the S&P 500, and the analysts believe “Investors are clearly discounting TFM’s +12-15%/yr unit growth targets given TFM's valuation.”

To improve shareholder value, they think the retailer should:

1) Invest in lower prices (since it looks like the company is over-earning), while making its more differentiated, higher-quality offering more visible. The resulting pressure on margins could be mitigated by slower unit growth, “renegotiating supply contracts, better shrink mgmt, improving promotional effectiveness, driving sales of higher-margin PL products; and driving sales of higher-margin, value-added products.”

2) Reduce unit growth targets. Instead, the analysts believe the company should concentrate on driving free cash flow and comps. A considerable cut in unit growth and capex would result in a surge in the free cash flow yield, from 3.2 percent to 8.6 percent.

3) “Accelerate Share Buybacks to Drive EPS Accretion.” Depending on the scenario, the analysts model an EPS accretion between 9 percent and 24 percent in 2016.

Deutsche Bank maintained a Hold rating and $35.00 price target on shares of The Fresh Market.