Be it economic slowdown or debt crisis in Europe, people will continue to eat as long as they are alive. This simple logic solves a number of problems for an investor; the food business can never go out of vogue, and an investor can be pretty sure of his or her investments made in the food industry. Moreover, with customers becoming highly health conscious and the importance of organic food growing, we've seen the emergence of organic food retailers.
A very noteworthy example here is Whole Foods (WFM, Financial), which offers natural and organic food through its chain of supermarkets. Whole Foods has been performing well, which was affirmed by its recent second quarter results. However, the outlook disheartened its investors.
Beyond the numbers
New store openings coupled with efficiently-managed costs drove revenue higher by 24%. However, its earnings were flat at $0.38 per share. Whole Foods opened 8 new stores and added 9 new leases, which contributed to its top line favorably. Also, it managed its costs well through better inventory management and other operating efficiencies. This has been a key to its success since customers have become highly calculative about their spending and retailers’ move of passing on the increase in input prices to customers have not been working well. Further, same store sales growth was 4.5%.
Additionally, Whole Foods has also been trying to lower its prices in order to attract more and more customers. However, the food retailer is not willing to compromise with its margins and has taken some initiatives to solve the problem. Along with efficiency in production it has resorted to a low-cost structure. It is planning to open stores that are smaller in size, but provide a wide variety with less inventory of each product. This will mean lower costs for Whole Foods.
Peer comparison
Whole Foods has been an excellent performer, especially when compared to its peers like Fresh Market (TFM, Financial). The 5-year stock performance of the two industry players shows that Whole Foods has been a better player.
With a 112% surge in stock price Whole Foods has proven to be a great performer. Its quality food and a network of loyal and affluent customers have played important roles. Also, it provides other services, such as cooking classes and dine in restaurants in its stores, which makes it different from Fresh Market and other similar players.
Fresh Market has also been a poor performer, with its stock price being flat for the period. This is because it is smaller in size than Whole Foods and is a relatively new player. It is gaining consumer confidence and has been performing well. It recently entered into a partnership with Novamex, to sell an aloe vera beverage that is made with aloe vera juice. The new innovative product is expected to lure new customers to its stores.
The future shines bright
Along with posting rocking results, Whole Foods is up for some great moves, which makes it an interesting investment. It plans to open 36 to 39 new stores during the year. And with its new small-store format, this will not only help decrease costs but also boost revenue.
The company also remains focused on pricing. Given the current economic environment, keeping a check on product prices has been a smart move. It continues to plan ways to reduce costs, as well as prices, through value meals.
The organic food retailer is eyeing expansion for quite some time now. With a 1,000 new stores in the queue the company has been trying to expand its footprint in Canada and United Kingdom. In fact, it has very few stores in Canada, which leaves the region highly untapped for Whole Foods. Exploring these opportunities makes the retailer attractive.
Concluding thoughts
Whole Foods’ strategy of increasing its top line through expansion, reducing costs, and offering lower prices to customers is expected to do wonders going forward. It has hit the button at the right time by providing value to customers when they are more sensitive to it. Moreover, consumers’ preferences towards healthy living and natural foods will benefit the natural food retailer. With large production efficiencies and expansion plans in its cards, this company is worth a long term bet.
