Great Time to Jump into Whole Foods

There is a long-term trend in the Western world towards a green culture. This includes hybrid cars, energy-efficient homes, and organic foods. Once a niche sub-culture, organic food is now pervasive throughout our society. The industry has been growing without fail for a decade, both in total organic sales and as a percentage of total food sales. Organic food, of course, is noticeably more expensive than non-organic food, due to the higher cost of production. This was not a problem during the ‘good’ years, but with rising unemployment and the decline in consumer spending; consumers began to cut back on this green luxury.

The recession, as is the nature of recessions, is temporary. It is a cyclical downward movement in the economy. The organic foods trend, however, is a secular shift. Once we come out of the recession, the growth should continue to surge. The best play on this trend is Whole Foods (WFMI).

After peaking around $77 per share in late 2006, shares of Whole Foods began to steadily drop, reaching an astonishing low around $9 in late 2008. The company faced the common issue of expanding too much in the good years, only to be to bitten when the consumer became tighter with their wallets. This caused same-store sales to plummet for Whole Foods. The stock has recently recovered from its lows to about $19 a share. Whole Foods share price has the opportunity to continue to rise with an economic recovery.

I realize that the decline in the economy is not yet over. I expect comps at Whole Foods store to continue to fall, albeit at a lesser rate, with sales approximately flat for 2009 due to new store openings. Stocks are forward looking indicators as we all know, and the best way to profit is to take advantage of cyclical downturns and snap up best of breeds plays in great businesses.

Whole Foods is the number one organic and natural foods retailer, hands down. The only threatening competitor in my opinion is Wal-Mart Stores, which does sell organic products through its grocery segment. Wal-Mart’s selling point is its price, which works well in environments like this. Whole Foods, however, sells an atmosphere: an upscale environment, courteous staff, and high-quality food. You can play the organic trend through a number of grocery stocks, as well as Wal-Mart, but I am a firm believer in the value of a company like Whole Foods that specializes. Its focus on organic and natural foods is what gives it a competitive advantage, or its “moat” as Warren Buffet would say.

Whole Foods also has a dedicated CEO in John Mackey, who is the original founder of the company, and who still owns over $20 million in Whole Foods common stock. Mr. Mackey started the company with a $45,000 loan from friends and family when he was 25 years-old, and even lived in the store at first, to save money. Two years later he opened the original “Whole Foods Market,” only to have it wiped out by a devastating flood. Less than a year from originally opening, the flood destroyed $400,000 worth of inventory, and Mackey had no insurance on the location. Mackey worked tirelessly with customers and neighbors to rebuild and recoup, and nearly three decades later, he has a lot to show for his commitment. To have a CEO like Mr. Mackey, who was there in the beginning and has a truly personal stake in the company, adds a lot of value. When management’s and equity holders’ interests are aligned, good things tend to follow.

Trading at such a small percentage of its all-time high, this feels like a great time to jump into Whole Foods: a niche play with a strong competitive advantage, dedicated management, and on top of a great long-term trend. After the devastation in 2008, WFMI is a great way to start marking your portfolio ‘whole’ again.

The rest of this free research report “Stocks For An Economic Recovery” which includes commentary on all sectors is available for download at the following link.

- Harry Lacheen

Disclosure: None.

Comments

[Sasha B:]

If I take this 5th grade logic and apply to any stock I will get to conclusion that every stock out there a screaming buy (except maybe for inverse ETFs) and once we get over this recession nonsense I will be a rich.

May 19 05:16 PM

[2houndz:]

People lost equity in their homes, value in their portfolios and in some cases their jobs. This caused much introspection and they decided that just maybe, Safeway, Kroger and Wal Mart are not trying to poison their children.

While there has been a cultural shift toward this "upscale environment", I suspect that it was driven by what I call the "relentless pursuit of luxury" and a seemingly unlimited supply of money. The shift toward upscale will be weighed down heavily by the shift toward frugality.

May 19 06:54 PM

[Nathaniel C:]

I agree that more and more people are eating organic which is a plus for Whole Foods, but I think you underestimate competition from supermarkets. Vons, Ralphs, Walmart have all started to offer organic foods that are much cheaper than Whole Paycheck--err I mean Whole Foods. I stopped going to Whole Foods when I saw the price of an avocado was $3.89. The prices are egregiously high. Now that there is more competition I do not have to go to Whole Foods for organic products.

May 20 12:06 AM

[Alan Young:]

Agree with 2houndz. I like the cultural model of Whole Foods, but thank goodness we have a Trader Joe's across the street and a farmer's market up the road, selling essentially the same stuff for 30-40% less.

May 20 12:12 AM

[Bullish Ban...:]

Thanks for your comments.

The SA Editors changed the name of the article, but this was an excerpt from our newsletter Stocks For An Economic Recovery. The newsletter was based around the idea of if you could only pick one stock per sector to buy in order to participate in the eventual upturn of stocks. By this logic, Whole Foods makes a lot more sense as it will more than likely significantly outperform the marker on the upside and underperform it on the downside.

May 25 07:02 PM

[borisb:]

this company has 10 million square feet and might be near saturation. The innovated a few years ago with the hot foods to go, but what have they done for shareholders and customers lately?

May 30 06:09 PM