Whole Foods Market: Strengths, Weaknesses, Opportunities, Threats

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. Fresh of a remarkable fourth quarter earnings report, which sent the stock shooting downward 4% the next day, I would like to pinpoint on a trailblazer in the healthy food industry, Whole Foods Market (NASDAQ: WFM)

Strengths:

  • Explosive Revenue Growth: In 2007 Whole Foods reported net revenue of $6.6 billion; in 2011 the company reported net revenue of $10.1 billion, representing 11.22% year over year annual growth, a tremendous feat that is highly anticipated to continue into the future as some analysts estimates put 2016 net revenues at nearly $20 billion.
  • Widespread Reach: Whole Foods has turned into much more than just the fruit stand at the end of the block, they operate 342 stores in the United States, Canada, and the United Kingdom, and are not going to be seriously affected by any occurrence exclusive to one region in any country.
  • Dividend: The company currently pays out quarterly dividends of $0.20, which annualized puts the dividend as yielding 0.87%, and while this may seem insignificant, this dividend nearly matches what you could get in any saving account.
  • Institutional Vote of Confidence: 85% of shares outstanding are held by institutional investors, such as pension plans, and these positions show the support long-term and big-money investors have in the company and its future.
  • Unique Destination: While there are thousands of supermarkets in the world, few offer what Whole Foods does, they put all of their potential products through a rigorous test, and go to great distances to provide the customer with products of incredible quality.

Weaknesses:

  • Colossal Valuation: The company carries a price to earnings ratio of 36.31, well above the S&P 500 average, and while some of the premium being paid on this stock can be credited to its astonishing growth, this valuation is still very steep.
  • Concentration in United States: The company operates roughly 7 stores in Canada and roughly 5 stores in the United Kingdom, out of a total of 342 stores, and because the large majority of their stores are located in the United States, any economic downfall exclusive to the United States could be crippling.
  • Recent Woes: Even though the company reported a quarter in which year over year earnings rose 42.86% and the company estimated that it would open 32-34 more stores in 2013, investors were not satisfied with the report, and punished the company for slower paced growth.   

Opportunities:

  • Expansion:  A year ago the company only operated 311 stores, now they operate 342 and have expressed plans of opening up 32-34 more in this coming year. They plan to open 33-38 stores in 2014, and further expansion after the foreseeable future is highly probable.
  • International: The company's currently operates in the United Kingdom and Canada on an international basis, and while at the moment these countries may be the only ones fit to host Whole Foods stores, the company still has the vast majority of the world open for expansion, including the fastest growing markets in the world, such as China and South America.
  • Dividend Growth: In this past earnings report, the company stated it would raise its quarterly payouts 42.86% to $0.20, and if the company is able to sustain its magnificent growth and financial strength more raises are undeniably in the pipelines.

Threats:

  • Competition: While Whole Foods may be unique in many ways, many other supermarkets are catching on to their success and are offering organic and healthy alternatives; and even the supermarket industry by itself is tremendously competitive.
  • Economic Downfall: Whole Foods has been criticized as “whole paychecks” as their products come at a massive premium to regular products, and if economic downfall occurred, especially in the United States, it would be detrimental to their business as people would simply not have the money to pay up for their products.
  • Food Prices: The historic drought of this year has already caused food prices to rise, and since Whole Foods’s products are already sold at a hefty premium, Whole Foods may have to swallow the additional costs and hurt their margins, or pass the costs onto their customers.
  • Gas Prices: When gas prices rise, the cost of shipping food rises, and when the cost of shipping the food rises, so does Whole Foods’s operating costs. 

Competitors:

Major publicly-traded competitors of Whole Foods include The Fresh Market (NASDAQ: TFM) and Kroger (NYSE: KR). The Fresh Market is significantly smaller than Whole Foods, and markets itself as offering healthier alternatives. The Fresh Market also carries a ridiculously high price to earnings ratio. The Kroger Company is larger than Whole Foods in terms of store count, however offers more of a regular supermarket experience. Kroger trades at a more reasonable price to earnings ratio and pays out a decently sized dividend.   

The Foolish Bottom Line:

Whole Foods possesses several strengths, weakness, opportunities, and threats; however in the end appears to be a financially solid company with a bright future. The world is shifting to healthier foods, and Whole Foods is at the forefront of this revolution. However, I caution potential investors to remember what happened to Green Mountain and Netflix when they failed to live up to their momentous multiples, such as the one Whole Foods carries now. 


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend The Fresh Market 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.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure