Whole Foods – This Is a Grocery Store, Right?

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

Call me a skeptic, but I'm not sold on Whole Foods Market (NASDAQ: WFM) the way the stock market is. The company operates about 300 grocery stores that specialize in organic and natural foods. My recurring question is, isn't this ultimately a grocery store? There are competitor grocery stores by the thousands, so what makes Whole Foods different? Does this difference mean enough to justify Whole Foods' current price? Taking a look at what is expected of the company, we find the following:

Current Price: $74.89
P/E based on '12 earnings: 32.99
Growth Expected: 18.29%
PEG: 1.80
Yield: 0.70% 

At first glance I would say the stock is expensive based on a 1.80 forward PEG ratio. However, we know that stock prices don't exist in a vacuum so maybe there has been a run-up in other grocers. Let's check two others, Kroger (NYSE: KR) and Safeway (NYSE: SWY), to find out:

Kroger:

Current Price: $24.30
P/E based on '12 earnings: 10.95
Growth expected: 10.71%
PEG: 1.02
Yield: 1.89% 

Safeway:

Current Price: $22.56
P/E based on '12 earnings: 12.33
Growth expected: 8.51%
PEG: 1.45
Yield: 2.57% 

So the average PEG of these two grocers is 1.24. Given that Whole Foods is at 1.80 it's definitely trading at a premium to its competition. Is this premium justified?

Name

Past Growth Rate

Beat Estimates By

Stores

Whole Foods

13.42%

7.1% on average

316

Kroger

0.13%

6% on average

2,460

Safeway

-6.39%

5.875% on average

1,881 

The growth rate of a grocer appears to slow significantly once the company reaches somewhere around 2,000 stores. This is good news for Whole Foods as clearly it will be a while before they reach this point. Whole Foods expects to open between 24 and 27 stores in 2012, which is 7.6 to 8.5% store growth. The company also expects same store sales growth around 8%. This gives us a combined growth rate of 15.6% to 16.5%.

The company gave us three things to be concerned about going forward in their last quarterly earnings report. The company expects a higher tax rate, more shares outstanding, and higher capital expenditures in 2012. In the company's own words, they expect full year '12 earnings of between $2.21 and $2.26. This is right about what analysts are expecting and translates to 15% to 17% growth in earnings.

Looking at all of these numbers I can't help but think unless Whole Foods is going to open more than the 24 to 27 stores they are targeting there is a possibility of an earnings disappointment in 2012. With top line growth of 15.6% to 16.5% and the stock valued as though earnings are going to grow at 30%+ there isn't much room for error.

I know Whole Foods is small, but their growth plans don't seem aggressive enough to match the expectation of the stock.


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

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