Natural Grocers by Vitamin Cottages and Two Competitors in the Natural Foods Marketplace

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

Natural Grocers by Vitamin Cottages (NYSE: NGVC) is a chain of grocery stores offering natural and organic foods and personal care products. The company, based in Colorado, is expanding but has not yet reached east of the Mississippi River. Therefore millions of us have never seen a Natural Grocers store or heard of the company. Currently there are about 60 stores reaching from Missouri west to Idaho, south to Arizona, New Mexico and Texas, and north to Montana.

Natural Grocers began as a man and wife team in 1955 when the Isely’s went door-to-door selling whole grain bread in Golden, Colorado. The couple soon opened a small retail outlet, adding stores over the decades. Family members continue to manage the company.

Natural Grocers made its appearance on Wall Street on July 25, 2012. The IPO price was $15; the stock closed its first trading day at $17.86. The stock reached a high of $24.75 on Oct. 3, 2012, a low of $17.69 on Jan. 10, 2013, then began rising, currently trading in the mid-$19 range. Natural Grocer’s current P/E is a lofty 64.40. 

Company sales grew 27.16%, from $264.54 million to $336.39M, from 2011 to 2012. Net income grew 89.76%, from $264.54 million in 2011 to $336.39 million in 2012.

Expansion plans involve adding additional stores in current states and expanding to contiguous states, controlling infrastructure costs and logistics.

Competitors in the Natural Foods Marketplace

Whole Foods (NASDAQ: WFM) is one of Natural Grocer’s aggressive competitors. Whole Foods is one of the few companies in the natural and organic industry offering a dividend, currently $0.20, a meager yield of .88%. The following chart illustrates the company's revenue, net income, and cash from operations over the past five years. Sales grew 15.74% in 2012 and net income increased 35.89%, an indication management is keeping a sharp eye on costs. Current P/E is 35.81.

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data by YCharts

Another Natural Grocers’ competitor is The Fresh Market (NASDAQ: TFM), a specialty food chain with over 115 stores throughout the east, mid-west, and California. The company specializes in non-perishable fresh foods, and stores have a farmers’ market atmosphere. The current P/E is 44.79. The Fresh Market struggled during the Great Recession and immediately following. The company rebounded, controlling costs and growing sales during a difficult period. Net income grew 124.29% from 2011 to 2012 and sales grew 13.74%, illustrated in the following chart.

<img src="" />

data by YCharts

A regional competitor in the natural foods grocery arena is Sprouts, a privately held chain with about 150 stores throughout the Southwest.

The Bottom Line

There are many reasons to buy Natural Grocers, and several reasons investors may pass.

Some investors shy away from companies run by founding family members.

The natural foods niche market is getting crowded. Competitors include the natural food chains mentioned above, local and independent health food, specialty and gourmet shops, retailers such as Wal-Mart, Target and Costco, and conventional supermarkets.

Some critics believe the health food market is a fad, with finite and almost-reached growth potential. When the field gets too crowded, as may quickly be occurring, some stores will falter and close, be acquired by stronger competitors, or merge with similar chains.

Consumers dedicated to healthy lifestyles and following certain dietary limitations such as vegetarian, organic, and/or gluten-free, are willing to pay extra for products meeting their needs. Natural Grocers offers a wide range of natural and organic products and dietary supplements and successfully nurtures a loyal customer base.

Whole Foods may be past its prime growth period. Natural Grocers, on the other hand, is just hitting its stride. Investors seeking growth opportunities may want to hitch a ride with the expanding chain.

Potential investors should not jump in at the current time, however, because of high valuations. Do not allow emotions to overtake solid investment principles. The best route to long-term investment success is waiting, watching, and buying only when the numbers are reasonable and realistic. 

mercyn has a position in Natural Grocers by Vitamin Cottages. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of 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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