Whole Food Market (WFM, Financial) recently reported disappointing last quarter results with its same store sales of 3.6% coming below analyst expectations. The stock reacted negatively falling over 10% post results. Whole Food Market, a leading organic and natural food grocer, is benefiting from the secular shift in consumer preferences towards healthy food products. However, off late there has been a significant increase in competition in this space. Traditional grocers are launching their own collection of natural and organic food offerings and it seems they are gaining significant traction at the cost of Whole Food Market.
In particular, analysts believes that Kroger (KR, Financial) is set to overtake Whole Food Market as the largest natural and organic food grocer in the US. Kroger's natural and organic food collection -Simple Truth – is seeing double digit growth and it has recently crossed $1 billion in sales mark. Kroger's mid single digit same store sales growth is also better than Whole Food Market. Despite of this, Kroger is trading at a PE of just 18.36 as compared to Whole Food Market's 24.83. I believe investors looking to bet on shift in consumer preferences towards organic food should buy Kroger's stock instead of Whole Food Market.
Analyst opinion is overwhelmingly bullish on Kroger's stock, with 14 of the 20 analysts covering the stock rating it as buy or strong buy. The company is firing on all cylinders. Back in October 2012, the company first outlined its growth plans that included four key performance indicators: positive identical store supermarket sales growth, slightly expanding non-fuel FIFO operating margin, growing return on invested capital and annual market share growth. In 2014, the company met or exceeded each of these metrics. At the end of the last year, the company achieved its 45th consecutive quarter of positive identical supermarket sales growth (ex. fuel). The company also expanded its FIFO operating margins (ex-fuel) and improved return on invested capital even as it increased its capital expenditure.
This strong performance also contributed to shareholder returns. The company exceeded its long-term guidance of net earnings per diluted share growth rate of 8% to 11% in fiscal 2014, and increased its dividend for the eighth consecutive year.
This improved performance is giving rise to a virtuous cycle for Kroger. Better performance implies more profitability which means the company has more resources to invest in its growth and provide better consumer experience. The company is currently investing $3.5 billion annually in lowering prices. The company is seeing a very positive response from the customers for its natural and organic food category. This category is seeing double digit sales growth. Last year, Simple Truth reached $1.2 annual billion sales mark. The company is using its merchandising expertise, manufacturing base and buying power to make its products more accessible.
These efforts are helping the company grow its market share and same store sales. The company's same store sales (ex-fuel) increased 6% in the fourth quarter. According to Nielsen's Point of Sales data, Kroger's overall market share grew 60 basis points during fiscal 2014. Nielsen's data also indicated that the company increased its market share in 18 markets of the 20 markets outlined by Nielsen report.
In addition to strong growth and market share gains, the company is also doing a good job in returning cash to the shareholders. Kroger's strong financial position allowed the company to return more than $1.6 billion to shareholders through buy backs and dividends. During the last year, Kroger repurchased 28.4 million common shares of the company. I expect these repurchases to continue going forward.
In 2015, the company is anticipating identical supermarket sales growth, excluding fuel, of approximately 3% to 4% for fiscal 2015. Full-year net earnings for fiscal 2015 are expected to range from $3.80 to $3.90 per diluted share. This is inline with Kroger's long-term net earnings per diluted share growth rate of 8% to 11%.
Kroger is trading at 18.36 times current year earnings and has a forward annual dividend yield of 1.00%. Given the company's strong earnings growth potential, market share gains, history of returning cash to shareholders and reasonable valuations, I believe the stock is a good buy at current levels.
