Organic Does Taste Better

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

The organic food craze has been great for investors over the years. Whole Foods Market (NASDAQ: WFM) is one of the biggest benefactors. The stock has been a four bagger over the past five years, having returned an annualized 38% over this time. 

Whole Foods owns and operates the largest U.S. chain of natural- and organic- foods supermarkets. The news of late has been great, with the company posting June-ending quarter EPS of $0.38 compared to $0.31 in the same period last year.

Since being founded in 1980, Whole Foods has grown to become the largest U.S. retailer of organic foods, with over 340 stores. Part of Whole Foods' strategy of late has been acquisitions -- around 30% of its store base is from acquisitions. 

Expansion should be another key part of Whole Foods' growth going forward. After opening 25 stores in 2012, the company plans to increase the number of stores opened to 32 in 2013 and 33 to 38 in 2014. Although it currently has 340 stores, the longer-term goal is for 1,000 stores, with expansion opportunities in Canada and the United Kingdom. 

There's no denying the rapid rise to fame of organic and natural foods, but the beauty of this industry is that the trend should continue higher -- driven by a global rise of wealth (namely emerging market urbanization) and the spread of the awareness of healthy eating. And although year-over-year growth is slowing, the annual sales of organic foods are still very robust, with room to grow...

...in 2012, organic food sales only accounted for 3.5% of total U.S. food sales. 

Top organic comp

The Fresh Market (NASDAQ: TFM) is one of Whole Foods' chief competitors, having 130 small-format stores in 25 states. Revenue is expected to be up an impressive 14% in fiscal 2014, with 3.4% growth in same-store sales as the company continues growing square footage. The grocer plans to add upwards of 20 stores in 2014, and is expected to grow total square footage by 15%. The long-term target is to grow stores from 130 to 500. 

The opportunity for growth is more than just pure store-number growth, but also geographical expansion. As of now, about 45% of its stores are located in Florida. I think the rising tide will lift this boat over the long term, in that The Fresh Market will definitely benefit from a rise in organic- and natural-food demand. 

More consolidation?

Ingles Markets (NASDAQ: IMKTA) operates a major supermarket chain across six Southeastern states, operating just over 200 stores. The stock tumbled some 10% last week on less-than-stellar quarterly results. Although sales were up 1.5% year-over-year for the 2Q, EPS came in at a $0.62 loss for the quarter from the $0.56 loss for the same period last year.

The small-time grocer got a big boost in its stock price earlier this year thanks to the Kroger-Harris Teeter buyout announcement. This gave investors hope that industry consolidation will continue. Ingles is up still up nearly 50% year-to-date, but is trading at over 50 times earnings compared to Harris Teeter's 25 times.

However, Ingles does own a significant portion of its properties and it also operates a number of fuel stations. Around 35% of its grocery stores have fueling stations, and these fuel stations help increase traffic.

Bottom line

The high demand for organic foods isn't going away anytime soon, and so the question becomes, what's the best way to play the market? Whole Foods has the broadest reach and appears to be investors' best bet. The company is trading inline with The Fresh Market at 38 times earnings, but analysts expects Whole Foods to grow EPS at an annualized 19% over the next five years. I like entire organic-foods retail industry for the long term. 

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


Marshall Hargrave has no position in any stocks mentioned. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure