Can Anything Stop Whole Foods?

Shares of Whole Foods Market (NYS: WFM) hit a 52-week high on Monday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
The drive to create a healthier America likely gained some steam after a published report in late April from the Centers for Disease Control and Prevention found that a whopping 35.7% of the U.S. population was considered obese. With advertising campaigns targeting healthier lifestyles and restaurants and grocery chains changing the foods they carry, organic and healthier-choice retailers like Whole Foods are reaping the benefits.

In Whole Foods' latest quarter, the company outlined another stretch of high-single-digit comparable-store sales growth and boosted its full-year outlook on the back of strong organic sales growth. Here's a quick rundown of just how strong comparable-store sales growth has been in the past five quarters:

Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
7.8% 8.4% 8.7% 8.7% 9.5%

Source: Whole Foods Market 10-Q.

The keys to Whole Foods' success since the recession have been its reduction of debt, its focus on ramping up lower-priced options to remain competitive with other grocery chains, keeping its emphasis on organic and healthier foods, and just a general trend toward a healthier lifestyle by many Americans.

But, as you would expect, Whole Foods isn't the only fish in the sea. There are countless other organic players looking to feed off consumers' insatiable appetite for healthier foods. The freshly debuted Annie's (NAS: BNNY) reported a 17.5% increase in sales last week while Hain Celestial (NAS: HAIN) reported a 31.5% jump in sales as net income spiked 53.6%.

How it stacks up
Let's see how Whole Foods stacks up next to its peers:

WFM Chart

WFM data by YCharts

The chart confirms that grocers that have been slow to adapt to healthier eating styles, such as Safeway (NYS: SWY) and Kroger (NYS: KR) , have fared poorly. Fortunately, Whole Foods and Hain have a more symbiotic relationship than anything else.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Revenue CAGR

Whole Foods Market 4.8 18.7 31.7 12.5%
Hain Celestial 2.5 25.3 25.8 8.9%
Safeway 1.6 3.7 8.4 1.7%
Kroger 3.0 4.8 8.6 6.5%

Source: Morningstar; author's calculations; CAGR = compound annual growth rate.

As you can see from these metrics, there's a big growth difference between traditional low-margin supermarkets and faster-growth, high-margin organic and health-focused grocery chains.

Hain Celestial is a company I more closely examined last month. In short, the growth of its name-brand products compounded with its green initiatives should propel it higher over the long term.

Whole Foods, as we've discovered, is pricier than its peers, but it has also grown more consistently. Another factor working in its favor is low employee turnover. The company's policy of keeping executive compensation in check and allowing its employees avenues to advance within the company has had a positive impact on loyalty and bottom-line profits.

Safeway and Kroger, on the other hand, are cheap on paper but have been beaten down by rising commodity and fuel costs. Safeway has countered this by attempting to add fuel stations outside its grocery stores to make the shopping trip more convenient, while Kroger has taken to cutting costs in order to buoy its margins. Don't let those sales-growth figures fool you; growth has practically slowed to a crawl for both companies.

What's next
Now for the $64,000 question: What's next for Whole Foods Market? That's going to depend on whether it can continue to grow its market share in the organic food sector and whether it can keep prices low enough to remain competitive against traditional grocers while still maintaining healthy margins.

Our very own CAPS community gives the company a four-star rating (out of five), with 88.2% of members expecting it to outperform. Consider me among the majority, as I made a CAPScall of outperform on Whole Foods, which has yielded a positive return of 27 points up until now -- and don't think I have any intention of closing this pick.

Whole Foods has far too many things going right to sell the stock here, despite its pricey valuation. Consumers have been very forthright in demanding healthier food choices, at places from grocery stores to fast-food chains, and we've seen that those willing to adapt without raising prices into the stratosphere are going to do quite well. With a happy employee base and strong earnings growth, the next stop for Whole Foods should be a triple-digit price tag.

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Craving more input on Whole Foods Market? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Hain Celestial and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Hain Celestial and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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msherer260

Taking on WHOLE FOODS may not be a big factor for major chains Kroger or Safeway. But in areas where Whole Foods is taking some market share these giants have the power to move price on them. Kroger and Safeway always have the ability to re-merchindise stores to go up against someone like whole foods (NOT WALMART OR WINCO THATS JUST PRICE)., as they are working with some margin on these items making a whole foods type area or ailes in their stores with much better prices and advertising same can cut into whole foods and keep a number of customers from drifting away. The customers that like the IdEA of whole foods but still want everyday popular foods will be easy to keep if they find many of the same items at a better price. The Whole Foods customer with money to burn is always going to go where they can pay more and feel like they are getting something special.

June 12 2012 at 12:20 PM Report abuse rate up rate down Reply