This Leading Organic Retailer is Still Expensive

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

The US is eating healthier and healthier. That is why organic food is turning to be a hot trend in the US. It is produced without using fertilizers and pesticides. According to the 2012 Organic Industry Survey, in 2011, sales of the organic industry in the US have grown by 9.5% to $31.5 billion. Organic food and beverage accounted for the majority of that, with $29.2 billion in sales. When we want to buy organic food, we would think of one place to buy right away. It is Whole Foods Market (NASDAQ: WFM). It is considered to be the leading retailer of organic and natural foods in the world. The retailer has around 311 stores in three main regions: the US, the UK and Canada, with the US accounting for 97% of the total sales.

Indeed, Whole Foods is the place to “surf” the increasing healthy eating habit of the American. It has served its shareholders well over the past 5 years. With the leading position as a natural and organic food retailer, Whole Foods has been outperforming other big grocery and food retailers such as Kroger (NYSE: KR) and Safeway (NYSE: SWY)

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Over the past 5 years, Whole Foods has delivered to shareholders more than a 115% gain, whereas Kroger and Safeway have created losses, of 0.12% and 40.38% respectively. Investors would've been much better off investing in the S&P 500 index with a loss of only 5.25%.

Why? The core value of Whole Foods is to offer the best quality organic and natural products to consumers. On average, it has around 21,000 SKUs categorized in three main segments: Non-perishables (33% of sales), prepared foods and bakery (18%-19% of sales) and Other perishables (47%-48% of sales). 

Whole Foods has kept rising continuously since the beginning of 2009. However, it experienced a decline when it announced its fourth quarter earnings results recently.  The fourth quarter results were strong, with $2.91 billion in revenue, a growth rate of 23.6%. Its revenue beat analysts estimate of $2.905 billion. For the full year ended September 2012, its revenue was $11.7 billion, 15.8% higher than fiscal 2011 of $10.1 billion. (Note that the fiscal 2012 has 53 weeks, and the fiscal 2011 has 52 weeks). The net income for the year grew nearly 36%, from $342.6 million to $465 million. Its 2012 EPS experienced significant growth of 36% to $2.52. The comparable store sales growth for the fourth quarter and the full year were as high as 8.5% and 8.7% respectively. In the fiscal year 2012, Whole Foods generated $918 million in operating cash flow and $463.5 million free cash flow.

However, the retailer forecasted earnings in the range of $2.83-$2.87 for fiscal 2013, below the $2.91 analyst estimate. In addition, it also said that the impact of Sandy would cause the retailer to take a one-time charge in its first quarter. Because of that, Whole Foods has lost 8.7% in 5 days, from $98.17 to $90.31. 

Historically, Whole Foods has managed to have the highest gross margin compared to Kroger and Safeway. Its gross margin has been in the 34%-35% range, whereas the gross margin of Kroger and Safeway have been fluctuating around 20% -24% and 26%-29% respectively.  In addition, Whole Foods is a debt-free operation, whereas the D/E of Safeway is currently the highest, of 2.3x, and Kroger’s is 1.8x. Indeed, because of the top-notch operations, Whole Foods is the most expensive among the three, with 38.8x P/E. Kroger is valued at 22.9x and Safeway is at 7.7x only.

My Foolish Take

Whole Foods is still a retailer of choice for both consumers and investors. However, with the earnings valuation of 38.8x, it does not sound sweet at all. I would rather wait for the one-time charge in 2013 first quarter earnings, which would hurt both the bottom line and maybe the stock price. If the price was cheaper and more reasonable then, I would consider investing into it.  

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend 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.

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