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Invest in This Grocery Giant

April 08, 2014 | About:
Value Investor

Value Investor

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It is always safe to invest in a market leader with good fundamentals and future growth prospects. Whole Foods Market (WFM) is one such company with a market capitalization of $19 billion. Whole Foods Market has witnessed a tough time in recent quarters. However, this fall in price could be considered as a good entry point for a company with huge industry potential and strong fundamentals. Let's discuss factors which make this world's largest organic food retailer an attractive investment.

Healthy Menu Ready to Penetrate

As the saying goes, if the customers are happy and willing to spend time and money in your business, investors will be happy too. Whole Foods Market is one such company, which offers natural and organic food. The company is known for maintaining healthy quality standards and believes in selling the highest-quality foods. This is evident from the fact that the company is the first certified organic food grocer in the U.S. Moreover, Whole Foods Market is also the first grocery chain which has set full GMO (Genetically Modified Organisms) standards. Every product has a label indicating whether it contains GMOs. The company is putting in constant effort to increase its number of non-GMO products from the current 4,800, as GMO-containing products have harmful health effects. With Americans becoming increasingly conscious of what they eat, the organic food industry has great opportunities. Whole Foods is a market leader with more than 360 stores, giving it a huge opportunity to increase its number of units and cater to this growing industry.

Industry facts also show that there are huge opportunities for organic food retail sales to expand. According to the research, it is expected that non-GMO food sales in the U.S. will increase at a compounded annual growth rate of 12.9% in the next five years. This will bring the market to $264 billion by 2017.

Expansion Plans

Eighty-one percent of American families buy organic food at some point in the year, according to the Organic Trade Association. The company sees a demand of 1,200 stores in the U.S. The company has expanded in 10 new markets in 2013, thus increasing the square footage by 8% to 14 million. It has also signed 50 new leases in the last 12 months and currently has 94 signed leases, giving it a nearly three-year supply of new stores to meet the increasing demand. Whole Foods expects per-square footage also to grow from 8% in 2013 to between 8% and 10% in 2014.

The company expects sales to grow by 11% to 13% in 2014. Estimates for comparable-store sales growth are 5.5% to 7%, while same-store sales growth is estimated at 5% to 6.5%. These figures are backed by the above-mentioned expansion plans of the company.

WFM vs. Peers

Kroger (KR) is another grocery giant. It is not a natural and organic grocery store like Whole Foods Market, however. Though the company has been performing well in the past, an increasing bent of customers toward a healthier diet definitely puts Kroger on a thinking note. What's good about the company is that it operates in a diversified market, including departmental stores and jewelery stores. Since Kroger has proved itself in a diversified market, it might look into providing organic foods on a larger scale to its competitors as well. If we compare the growth of the company in terms of identical sales growth, however, it is far behind with only 3.6% growth over the last year as compared Whole Foods' 7% in 2013. Kroger expects long-term earnings growth of just 8% to 11%, whereas Whole Foods expects growth of 11% to 13%. These assumptions are in line with Whole Foods' historical growth as well as future expansion plans.

The financial data below shows Safeway (SWY) to be the last pick of the three. There has only being 0% increase in revenue over the last year. Historical growth is also not consistent. Whole Foods Market tops the chart with a high growth rate of 16% in 2012, 10% growth in 2013 and an estimated growth of 18% in fiscal 2014. Operating margins for Whole Foods have also been consistently improving. Even the financials support the growth of Whole Foods Market.

Value in $million 2009 2010 2011 2012 2013
Safeway Revenue 40850 41050 43630 36068 36139
Revenue Growth -7% 0% 6% -17% 0%
Operating Income -629 1159 1134 709 635
Operating margin -2% 3% 3% 2% 2%
WFM Revenue 8032 9006 10108 11699 12917
Revenue Growth 1% 12% 12% 16% 10%
Operating Income 284 438 548 744 883
Operating margin 4% 5% 5% 6% 7%
Kroger Revenue 76733 82049 90374 96751 98375
Revenue Growth 1% 7% 10% 7% 2%
Operating Income 1091 2182 1278 2764 2725
Operating margin 1% 3% 1% 3%

3%

Source: Msn Money

Whole Foods has been outperforming over the last five years. A consistency can be seen in the movement of its stock prices, and Whole Foods by far is the best performer in this sector. The company has witnessed a stock price appreciation of 472% in the last five years, as compared to 114% for Kroger and 83% for Safeway. Whole Foods has thus proven itself to be a good long-term investment. Keeping in mind the above factors discussed, it is expected to deliver similar results in the future too.

WFM Chart

Conclusion

Whole Foods Market, with around 360 stores, has shown a better result than its peers Kroger and Safeway. While Kroger also looks attractive in my view, Whole Foods Market tops the chart with its uniqueness and significant room to expand.

About the author:

Value Investor
A value investor.

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