Whole Foods Market (WFM, Financial) has been called "whole paycheck" and a recent pricing study by Bloomberg Intelligence indicates Whole Foods Market is more expensive than Trader Joe’s but less expensive than smaller rival The Fresh Market (TFM, Financial). Thanksgiving Day menu items at Whole Foods were 22% higher than Trader Joe's but 15% less than The Fresh Market
Either way, customers are truly raving fans of Whole Foods Market. The company is the largest retailer of natural and organic foods in the U.S. and besides a five-star rating on GuruFocus and seven good signs, Joel Greenblatt (Trades, Portfolio) is the only guru with a sizeable position. He owns 1,664,348 shares. I can envision many others coming on early in 2016, especially at this value.
Whole Foods shares have been crushed in 2015 (down 41.4% year to date) on the back of slowing growth and the mislabel debacle in New York, yet sitting close to five-year lows presents a very good buying opportunity for fundamental value investors. The forward P/E ratio comes in around 18 times earnings, a far cry from the 30x at which it once traded, but with the company dominating this expanding niche, earnings should continue to increase at a steady rate.
Financial highlights (10 years)
- Revenue Growth – 175%.
- Income Growth – 162%.
- Dividend Growth – 79%.
- Book Value Growth – 126%.
Business highlights
- Stores – 421.
- Employees –Â 90,000.
- Customers per week –Â 8 million.
- Followers via social media – 10 million.
The company’s 421 stores is a far cry from the largest grocery chains Kroger (KR, Financial) –Â 2,640 stores –Â and Safeway (SWY, Financial) –Â 2,220 stores –Â but the company has ambitious plans to open 1,200 stores, making it the only nationwide chain –Â aside from Walmart (WMT, Financial) –Â most grocers operate regionally.
I tend to like stocks more when they trade near 52-week lows than at any other time. Of course, other aspects must be present –Â aspects like solid returns on equity, consistent upward trend in sales, earnings and book value. If I can throw in good brand and management at cheap prices, I usually hit big winners.
This is probably the case with Whole Foods. Co-founder and co-CEO John Mackey had this to say:Â “We have made measurable progress on many of our strategic initiatives over the past year, while producing industry-leading sales per gross square foot of $970, a record $1.1 billion in cash flow from operations and healthy returns on invested capital. Through our strong balance sheet and robust cash flow, we self-funded our new store development and strategic investments while returning close to $700 million to our shareholders through dividends and share repurchases.”
Being able to fund your own expansion is a massive advantage, and I am certain that generating close to $800 million in free cash flow a year will allow the company to keep the growth accelerating.
A couple of things are definitely true: (i) food prices will continue to rise and (ii) new Whole Food stores will continue to open. Add in the “millennial friendly” cheaper stores the company is opening to compete with stores like Trader Joe’s, and more of the market will be exposed to the brand.
It’s already done a great job getting to market first and building a $10 billion value. With 1,200 stores at an average net income of $1.25 million, WFM could be worth at least $30 billion, a 15% annual return by 2025. This is exactly the kind of steady growth a Warren Buffett (Trades, Portfolio) type would look for from an investment over the next decade.
