Organic & Natural Food Retailers: How Do The Players Stack Up?
BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consumers have increasingly been gobbling up organic foods, driving U.S. sales from $11 billion in 2004 to $27 billion in 2012. Organic food sales grew at an annual rate of 7.4% in 2012, more than double the growth rate for all food sales. Given organics account for less than 5% of overall grocery sales, there's still plenty of growth potential left.
Since going public in 1992, first-mover Whole Foods Market (NASDAQ: WFM), the largest retailer of natural and organic foods, has been a huge beneficiary of this ongoing trend. Not surprisingly, an increasing number of retailers have been entering this space or going public in order to get a (bigger) piece of the growing organic pie.
It can be hard to keep track of who's on first. So, here's an overview of the main organic and natural food retailers.
Whole Foods has 355 stores in the U.S., Canada, and the U.K. It's still in a considerable growth mode. It opened 25 new stores in fiscal 2012, and has already opened 24 new stores in its first three quarters of fiscal 2013. The company sees demand for 1,000 stores in the U.S. alone. It also sees growth opportunity in Canada and the U.K.
It's often overlooked that Whole Foods is also steadily becoming more of a food producer, as it offers a multitude of products under its "365" brand. A strong-selling private-label brand helps increase margins.
The Fresh Market (NASDAQ: TFM)
The Fresh Market, based in North Carolina, is a specialty retailer providing fresh, high-quality foods focused on perishables. It went public in late 2010.
It had 131 stores in 25 states, as of April 28. The bulk (about 100) of its stores are located in the South, with a heavy concentration in Florida. It has a smaller presence in the Midwest and Northeast, and 2 stores in California.
For fiscal 2013, the company expects to open 19 to 22 stores, with 13 to 15 new stores opening in the second half of the year.
Natural Grocers by Vitamin Cottage (NYSE: NGVC)
Natural Grocers, based in Colorado, is a family-operated specialty retailer of natural and organic foods and dietary supplements. It went public in July 2012.
The company has 70 stores in 13 states. Stores are concentrated in the Midwest, Mountain States, and West. It opened 13 stores in fiscal 2013 and already has plans to open at least 11 in fiscal 2014.
Sprouts Farmers Market (NASDAQ: SFM)
Sprouts, based in Phoenix, AZ, is a retailer of natural and organic foods. It just went public on August 1, with its stock price quickly doubling, likely suggesting both organic food is an attractive space and the market's over-heated.
It had 160 stores in eight states, as of July 6. Stores are concentrated in the Mountain States, Southwest, OK, and TX. It will open 19 stores this year and plans to open 20 stores in 2014.
How do the players stack up by the numbers?
Sources: Yahoo! Finance & Morningstar; annual numbers are for last full fiscal year; data to Aug. 15.
Whole Foods and The Fresh Market are the standouts. The Fresh Market has outstanding ROE, while Whole Foods' and the Natural Grocers' are solid. The Fresh Market and Whole Foods are the runaway winners on profit margin.
Sprouts needs to sprout better margins before I'd consider it. We'd expect better margins for companies involved in the natural and organic niche. Additionally, its triple-digit PE suggest it's over-priced.
Whole Foods reported fiscal third quarter results on July 31. It had a solid quarter with revenue and EPS up 12.1% and 20.2%, respectively. Comparable store sales were up 7.5%, which is tops in this industry, yet down from 8.2% in the prior-year quarter.
It upped EPS guidance for 2103 and now expects EPS growth of 17% to 18% on sales growth of about 13%. Analysts' estimates are for 18.9% average EPS growth over the next five years.
Some analysts think margins could be hurt in the future due to the company's competitive pricing strategy implemented to gain market share. While that's a legitimate concern, it will prove a good decision if the increased sales add more to the bottom line than contracted margins subtract from it.
The Fresh Market's revenue and EPS rose 12.9% and 14.8%, respectively, and comparable store sales rose 3% in its first quarter ending April 29. It reports second quarter results on Aug. 28. Analysts expect EPS growth of 21% next year and an average of 20.4% over the next five years.
The Natural Grocers revenue and net income rose 30.5% and 31.1%, respectively, in its fiscal third quarter ending June 30. This isn't an apples-to-apples comparison with the prior year's quarter, as the company purchased the 45% non-controlling interest in Boulder Vitamin Cottage (which owns five stores in Colorado) in July 2012. On a pro forma basis (as if the company owned the remaining interest since the start of 2012), net income increased 19.5%. Comparable store sales rose 10.4%. Analysts expect EPS growth of 87% this year, 28% next year, and an average of 26.5% over the next five years.
The Natural Grocers is a mixed bag -- great comparables and strong growth expected, but margins and valuation are drawbacks. Additionally, it had negative FCF over the trailing twelve months. Granted, it's using the cash for expansion, but it's still a drawback when compared to Whole Foods and The Fresh Market, which fully funded their expansions with cash from operations. I'd wait a quarter or two to see in which direction things move.
Organic food sales are projected to grow at about an 8% annual clip for at least the next five years. That growth rate increases if the more ambiguous "natural" and "healthy" foods are included.
Investors wanting to add a retailer specializing in this niche to their check-out cart should consider Whole Foods. It has great margins and comparable store sales, and, while growth rates have slowed, they're still strong. The Fresh Market and Natural Grocers, in that order, also bear watching.
BA McKenna has no position in any stocks mentioned. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!