Whole Foods Market's (WFM, Financial) position has 200% growth potential from this price in the next decade, making it worth the risk. Let me start with the financials.
Revenue is up 138% since 2007 totaling over $111 billion. That’s north of $35 million per store with gross margins at 34%.
Net income is up 177% driven from $183 million to $507 million, totally $3.6 billion. And, while shares have grown 15% from 284 million to 326 million the company’s EPS has grown from 65 cents to $1.55, book value up $5.15 to over $10 per share, with current dividends of 54 cents per share (1.69% yield) and capital spending well under the company’s annual profit.
Current events at Whole Foods
Whole Foods has been relatively flat this year. Much of the weakness followed the release of its quarterly results. A decline in earnings based on continued erosion in same-store sales has rattled investors. Same-store comps have fallen in four consecutive quarters, and earnings are likely to remain under pressure during the next several quarters.
The company seems to be working on a variety of initiatives, including digital coupons and home delivery expansion. More importantly, lower prices are also part of the equation; expect that to contribute to lower margins but also to lead to higher sales long term. Whole Foods operates with better profit rates than most grocers (Kroger [KR] is 22%), allowing Whole Foods the ability to lower them and still earn significant returns.
My analysis on the future of Whole Foods
The tough part for Whole Foods is that stores like Kroger, Publix (PUSH, Financial), Safeway (SWY, Financial), etc., are simply stocking more natural and organic items in their stores to accompany the brands people already know. Whole Foods has bifurcated the market between big box buyers and natural/organic/farm to plate buyers, but the masses still favor the former.
A cost-cutting program looks to generate incremental savings and the company's new chain (three stores open currently) looks to help it stick to its roots while offering a more value-oriented format aiming to reach a wider audience. Right now, Whole Foods has 456 total stores with an average size of 39,000 square feet per store, offering 30,000 SKUs. The company sees room for three times more stores in the U.S. alone, and if it can roll out that many in the next decade, sales could reach $41 billion.
The Trump rally will come to a close eventually and if Whole Foods is unable to halt the slide in same-store sales, investors will likely remain on the sidelines, which makes it an opportunity for value investors. At 20 times earnings with potential growth in annual profit of $1 billion a year, the market value could easily rise to the $20 billion to $30 billion range. And, any share buybacks would only speed that up. Better still, you get paid 55 cents per share to wait.
Guru ownership
GuruFocus rates this 4.5 stars and the stock has Steven Cohen (Trades, Portfolio) (new buy), Frank Sands (Trades, Portfolio) (11.9 million shares), Joel Greenblatt (Trades, Portfolio), and Jim Simons (Trades, Portfolio) all have positions in the stock, each less than 1% of total assets managed.
Disclosure: I do not own any stocks mentioned in this article.
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