Whole Foods' International Plans

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Whole Foods (NASDAQ: WFM) got attention with its stock split, but this health food store's international expansion potential could be the most important part of its 2Q 2013 earnings release. The grocer mentioned that it might add stores in Britain and Canada. This strategy could help Whole Foods keep growing while keeping its long term strategy on track, and recent results from Hain Celestial (NASDAQ: HAIN) suggest that this strategy could work well.

Expansion Strategy

The Whole Foods bull case includes the grocer's long term goal of almost tripling the number of stores it owns. Whole Foods now has 346 stores, and it plans to eventually raise its store count to 1,000 stores. The grocer's upscale positioning adds some additional challenges here. Another health food store in a prime location could cannibalize sales from older stores, but a smaller or less affluent location might not be able to support a Whole Foods. Whole Foods hasn't run out of space in the United States yet, but as it gets closer to its goal its domestic opportunities could become more limited.

Expansion into Britain and Canada weakens the bear case for Whole Foods. Cities such as Vancouver and London might be able to support several more high end grocery stores. The secular health food trend isn't limited to the United States, either. The Organic Trade Association announced that Canada's organic food market had reached $3.7 billion in sales in 2012, with 23% of sales coming from British Columbia. Whole Foods and United Natural Foods (NASDAQ: UNFI) helped pay for this study, which makes a Canadian expansion push look even more likely. The British organic food market wasn't as strong last year, with total sales dropping 1.5% because of weak economic conditions, according to the Soil Association. Nevertheless, Whole Foods might still have an opportunity to capture market share from traditional grocers in Britain.

Hain's Results

Hain Celestial's fiscal 3Q 2013 results demonstrate what expansion into Britain and Canada can mean for a company that sells health food. While sales in the United States rose 8.3% for the quarter, Hain's rest of the world segment, which includes Europe and Canada, posted 11.3% sales growth. Boosted by recent acquisitions, Hain's British segment achieved 78.2% higher sales. These international expansion initiatives helped Hain achieve overall sales growth of 21.4% for the quarter.

The earnings announcement also weakened the bear case for this health food seller. As these results demonstrate, acquisitions have helped support Hain's strong sales growth. Hain just bought baby food maker Ella's Kitchen, and it expects this acquisition to be accretive in fiscal 2014, which shows that there are still decent acquisition targets available in the health food business.

United Natural Foods

United Natural Foods already distributes food in Canada, and this distributor could also benefit if Whole Foods makes a major expansion push into the country. The report on the Canadian organic market highlights the long term partnership between Whole Foods and UNFI once again. UNFI also knows where to sell organic food in Canada, and the distributor's map could provide some insight into potential Canadian store locations for Whole Foods. The UNFI Canada map shows UNFI locations in British Columbia, Quebec, and Ontario.

Valuation

Whole Foods' announcement provides additional support for all three health food companies' valuations. All three health food companies could benefit from a Whole Foods push into Britain and Canada, although none of these stocks are cheap. Whole Foods' forward P/E of 30.1 exceeds UNFI's forward P/E of 21.7 and Hain Celestial's forward P/E of 21.9. Whole Foods' announcement might change the forward earnings estimates, though. If Whole Foods enters international markets where Hain Celestial and UNFI are already present, Whole Foods could have the most to gain.

Takeaway

Whole Foods may have just addressed a major risk factor and opened up a new market. The grocer needed new, high end markets, and Vancouver and London look like great potential expansion opportunities. Other cities in Canada and Britain may also hold potential. Weak economic conditions in Europe could mean that Whole Foods will have to attract shoppers from other stores, but the chain has successfully drawn traffic from other grocers in the United States. The stock split looks bullish as well. Once again, Whole Foods has demonstrated why it has a four star CAPS rating, and this health food store still looks like a solid investment.

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Eric Novinson owns shares of Whole Foods Market. The Motley Fool recommends Hain Celestial and Whole Foods Market. The Motley Fool owns shares of Hain Celestial 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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