About Whole Foods
As mentioned, Whole Foods Market, Inc. (NASDAQ:WFM) is the largest organic and natural food retailer in the U.S., with over 340 stores in 37 states. The company tries to create an atmosphere that specifically caters to health-conscious consumers. The company has grown tremendously over the past few decades, as shown in the last 10 years’ revenues:
The average Whole Foods store is 38,000 square feet and sells about $36 million annually. The stores contain a wide variety of products including natural and organic foods, dietary supplements, personal care products, and household items.
Will there be Growth?
One of the ways that Whole Foods Market, Inc. (NASDAQ:WFM) tries to differentiate itself from other supermarket chains is by its emphasis on perishable food items, which account for almost 70% of the company’s sales. This causes customers to shop more often, increasing inventory turnover and reducing waste, allowing the stores to run more efficiently.
Lately, Whole Foods Market, Inc. (NASDAQ:WFM) has begun offering more lower-priced products, in direct contrast to most organic food stores, which should lead to above-average growth. The company has also placed a renewed emphasis on expansion, and plans to open about 85 new stores in the near future.
Too Expensive?
At over 32 times last year’s earnings, Whole Foods does appear to be a bit on the expensive side. The consensus calls for a forward growth rate of about 15% annually, which doesn’t really justify such a high multiple. The company does have a very attractive balance sheet with over $1.2 billion in cash and virtually no debt; however this is quite frankly not enough to justify such a lofty valuation, despite the stable nature of the company and the upward trend in organic and natural groceries.
The Alternatives
For comparison’s sake, let’s see how more traditional grocery retailers are valued. The Kroger Co. (NYSE:KR) is one of the largest grocery chains in the market, and Wal-Mart Stores, Inc. (NYSE:WMT) does more grocery business than anyone else in the United States.
With over 2,400 stores, The Kroger Co. (NYSE:KR) is one of the largest U.S. supermarket chains, and trades at a seemingly very cheap valuation of just 12.4 times TTM earnings. Appearances can be deceiving however, as Kroger isn’t growing nearly as fast as Whole Foods Market, Inc. (NASDAQ:WFM) and the company’s balance sheet is not nearly as attractive with almost $6 billion in debt and just over $200 million in cash.
The largest retailer of any kind in the world, Wal-Mart Stores, Inc. (NYSE:WMT) is actually the largest supermarket operator in the United States with about $180 billion in annual sales (for comparison, The Kroger Co. (NYSE:KR)’s annual sales are about $97 billion). They are also quite possibly the most attractive as an investment, trading at just 15.8 times earnings with a 9% forward growth rate expected. Additionally, Wal-Mart pays a 2.4% dividend which has been raised very consistently. They also have a great track record of being a recession-proof company, actually gaining revenues each and every year during the recent financial crisis. Wal-Mart Stores, Inc. (NYSE:WMT) is one of only a handful of companies in the entire market that actually grew its sales every year between 2008 and 2011.
Conclusion
If you want a stable, predictable investment that will provide you with good returns on a consistent basis, buy Wal-Mart. If, on the other hand, you have a bit more appetite for risk and are willing to deal with a little more volatility, Whole Foods Market, Inc. (NASDAQ:WFM) may be the way to go. However, at the current levels it may be just a bit too expensive. I would wait for a significant pullback before jumping in, but this is definitely one growth story to keep an eye on.
The article Healthier Lifestyle Trends Will Boost This Grocer originally appeared on Fool.com and is written by Matthew Frankel.
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