This Colorado-Based Natural Food Store Just Went Public
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Health food retailer Natural Grocers (NYSE: NGVC) went public on Thursday at $18 a share. This stock opened even higher than the $15 price that was originally given as the top of its opening range, and rose to $19.90 a share by the close of trading on Friday.
Annie's, Inc. (NYSE: BNNY) demonstrated how hot the health food sector is at the moment by rallying after its own IPO, as its stock has risen from $31 at the IPO date to $38.50 a share today.
With 55 stores, Natural Grocers has a lot of room to grow, so this stock could rally even further, although it does have to plan around Whole Foods (NASDAQ: WFM), a much larger health food retailer. Natural Grocers' managers realize that attracting shoppers away from Whole Foods could be challenging, so the health food chain put stores in smaller cities where Whole Foods' big box stores wouldn't fit. Howard Pankratz, at the Denver Post, reports that the majority of Natural Grocers' stores are located in Colorado, with a few other stores in several Midwest and Mountain West states. Natural Grocers seems like it made a good decision by avoiding the western coastal states for now and focusing on markets in inland states where there are fewer health food stores.
Smaller stores and smaller markets protected Natural Grocers from Whole Foods in the past, but Whole Foods has been testing out smaller stores of its own recently. Tom Ryan, at RetailWire, reported that Whole Foods' smaller concept stores substantially improved the grocer's sales per square foot figures. Natural Grocers might have an easier time maintaining its regional advantages. Even if Whole Foods shrinks its stores, the high-end grocer may still avoid some smaller towns that don't offer as much revenue as larger cities.
More shoppers want organic food these days. The Organic Trade Association reported that shoppers bought 9.4 percent more organic food in 2011, primarily fruits and vegetables. This is good news for Whole Foods and Natural Grocers, as both could attract some shoppers from traditional supermarkets.
Natural Grocers opened at a sizable premium and has now risen even further. According to Seeking Alpha, Natural Grocers currently has a market cap of $434 million. Yahoo! Finance states that Natural Grocers' trailing earnings were $6.6 million, which gives this stock a 66 trailing P/E right now. A 66 P/E is very expensive for a supermarket chain, although Whole Foods does have a trailing P/E of 39 itself, and Natural Grocers' recent income growth has been very rapid.
Annie's actually opened at an even higher P/E, so I didn't make a CAPS call on the stock initially, although its trailing P/E dropped to 85 after its latest earnings report. Even though the company's quarterly earnings improved over last year's results, which improved the earnings side of the ratio, investors wanted stronger growth with this much of a premium. Whole Foods' Thursday performance was much more impressive, as its stock rallied from around $84 a share up to around $94 a share after releasing earnings.
One reason behind Whole Foods' big jump was that some investors sold off Whole Foods after Chipotle (NYSE: CMG) had a weak earnings report, figuring that shoppers could no longer afford health food. It seems like Whole Foods and Annie's earnings reports provide some evidence against this theory, and there could be another explanation for Chipotle's miss. Taco Bell recently made a big splash with its Cantina Bowl, which uses higher quality ingredients. If Taco Bell was the reason that Chipotle's sales fell, then it seems like diners still want healthier food, but price sensitivity could be a bigger concern. Natural Grocers has a profit margin of 2 percent right now, which doesn't leave much room to cut prices, although the IPO proceeds should give it enough money to keep expanding.
Natural Grocers is very expensive right now, but there are several reasons for this price. Natural Grocers did earn 123 percent more money this quarter than it earned last year, and the company plans to keep adding stores at a rapid pace. Organic and natural food does seem to be in demand right now, as well. Natural Grocers' managers seem like they've designed a strategy that can protect this chain from its biggest competitive threat, Whole Foods. Natural Grocers seems like it could be one of the rare stocks that deserves a big premium.
Eric Novinson owns shares of Whole Foods Market. The Motley Fool owns shares of Chipotle Mexican Grill and Whole Foods Market. Motley Fool newsletter services recommend Chipotle Mexican Grill 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.If you have questions about this post or the Fool’s blog network, click here for information.