Whole Foods Is Expensive! It's Worth Every Penny

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After announcing another blowout quarter on May 7, shares of Whole Foods Market (NASDAQ: WFM) jumped more than 10% the following day, trading as high as $103 per share on the news:

  • Total sales were up 13%; Same-store sales were up an astounding 6.9%
  • Operating Margin was a record- 7.5%
  • Earnings per share (EPS) increased 19%

Simply put, the company is firing on all cylinders.  But by just about any measurement or metric, it's also insanely expensive to invest in.  Consider that as of May 11, its Price-to-Earnings multiple for the past 12 months, also known as TTM trailing PE, was an outrageous 33.5.  That means it would take over 33 years-worth of Whole Foods' profits to buy the company.  Here's how that compares to its industry contemporaries:

  • Kroger (NYSE: KR)- 12.4
  • Safeway (NYSE: SWY)- 9.0
  • SuperValu (NYSE: SVU)- negative value as the company is bleeding money

The point is that Whole Foods shares are trading 3-4 times that of its peers, and in the cut-throat grocery business, how long is that sustainable?

Apparently, for a very long time

And for some very key reasons.  Below is a series of charts that compare Whole Foods' financial performance to that of its peers over the past half-decade:

<img alt="" src="http://media.ycharts.com/charts/95fd2859c6819cb99df5327481fc63d8.png" />

WFM Net Income TTM data by YCharts

As you can see above, both Kroger and Safeway have consistently out-earned Whole Foods, generating solid net income figures.  But all income isn't created equally: These two behemoths require significantly more revenue in order to make more income than Whole Foods:

<img alt="" src="http://media.ycharts.com/charts/054e513052cd718acc6518a88b2f6c8b.png" />

WFM Revenue TTM data by YCharts

What can we take away from the two charts above?  Whole Foods has more than three times the income-generating power than both Kroger and Safeway. 

But that's not the whole story

It's only the tip of the iceberg. Whole Foods is still early in its growth. Today, there are somewhere around 350 stores open, and the company has said that the target is about 1,000 stores. That means investors today have the chance to own a company that will be three times larger in a decade or two.  Here's what the growth has looked like over the past five years:

<img alt="" src="http://media.ycharts.com/charts/b9397e3d6f5a881f38f96afc0ace964f.png" />

WFM Revenue TTM data by YCharts

Not all growth is created equally either. Whole Foods is one of the few growth companies out there that doesn't use lots of debt, issuance of new shares, or some combination of the two in order to grow: Whole Foods is so well run, it is able to not only sustain considerable growth, it's able to do it with cash from operations. But it gets even better- the company also pays a modest dividend, and actively buys back shares. 

And a company that tends to do nearly everything right should carry a premium valuation:

<img alt="" src="http://media.ycharts.com/charts/3f88293820bef59177399b0fb2d68e5e.png" />

WFM PE Ratio TTM data by YCharts

As you can see above, Whole Foods' valuation has consistently been much higher than its peers, but it has still been trending upwards over the past several years. One could correlate that to mean that the stock price could remain flat in the near term, as the market regresses to its historical average valuation of the company. But that would be a bad idea. 

What the chart above doesn't tell us is that between February 2004 and November 2006, the market valued Whole Foods anywhere from 40 times PE to 80 times PE.  And while I would be surprised to see Whole Foods shares increase that sharply again, it leads me to think that Whole Foods' shares are trading at a fair price today. 

Metrics are nice- what about the actual competition in the real world?

Okay, so we've seen some valuation and sales metrics, but we haven't discussed what's actually happening here in "reality land."  The simple fact is that more and more consumers are gravitating to "better for you"  foods.  It has been well documented that the majority of growth in the packaged foods industry is happening in this segment, and that grocers are clearing space on their shelves for these products even more quickly than they are making space in the produce section for organics. 

Companies like Hain Celestial (NASDAQ: HAIN) are increasingly taking market share from traditional packaged food behemoths like Kraft, General Mills, and others, sending many of these companies on spending sprees as they try to expand their brands into this growing segment, as Hain has consistently grown almost 20% per year for the past decade. 

And as traditional grocers add more of the products that Whole Foods has been the lone purveyor of in the past, traditional wisdom holds that eventually, it will be pressured to compete on price, and that it will become just another commodity grocer living on thin, barely-above 1% net margins.  But there are several problems with that assumption:

  • Whole Foods' customers are also raving fans, and choose to shop at the store not only because of what it does carry, but as much as anything, because of what it doesn't carry. 
  • Shoppers at Whole Foods can rest assured that the products they choose are going to meet very high standards, and that the maker and growers of those products will be a valuable part of the relationship, maintaining the whole ecosystem of sustainable, healthy eating as well as farming practices. 

And the company's performance in recent quarters shows these things to be true: Adding a handful of "better" products doesn't make any of Whole Foods competitors a viable threat.  Whole Foods' customers won't go to Wal-Mart or Kroger just because they are cheaper. 

Foolish bottom line

Whole Foods is one of the great investing stories of the past twenty years, but it's not too late to get on board.  Simply put, the things that have made Whole Foods successful have been proven to be sustainable competitive advantages.  There's an old adage in business: It's not just what you pay.  It's what you get. 

And I'm willing to bet that Whole Foods, and Hain, too, will continue to prove that adage to be true.  As a matter of fact, I've put my money where my mouth is on both of them.  What about you?  Share your thoughts in the comments below.  

It's hard to believe that a grocery store could book investors more than 30 times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. So make sure to claim your copy today by clicking here.

Jason Hall owns shares of Whole Foods Market and Hain Celestial. The Motley Fool recommends Hain Celestial and Whole Foods Market. The Motley Fool owns shares of Hain Celestial, Supervalu, and 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!

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