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Whole Foods Market (NASDAQ:WFM) has seen a good run in its share price post its last quarter results. The natural and organic food retailer reported better than expected results both on the top and bottom lines. The company's recent results have laid to rest some of the concerns about the potential decline in its gross margins and have reaffirmed the long term theory of a secular shift in consumer preference towards healthier organic foods. The company's performance can be attributed to its key strategies like investment in price or increasing discounts to broaden its consumer base; implementing steps to lower the cost; supply chain infrastructure improvement etc. The company has also taken some e-commerce initiatives along with new store openings. Here, I have analyzed some of the above mentioned strategies which make Whole Foods Market a good investment.

Gross Margin Growth

Whole Foods Market reported 10 basis points gross margin growth to 36.4%. Before the release of its quarterly results, investors were concerned about increasing pressure on its gross margin due to the company's focus on investment in price and promotions. This investment was offset by occupancy leverage, shrink reduction and economies of scale. The company has taken certain initiatives like rolling out some shrink control programs, leveraging the supply chain and distribution infrastructure; improving procurement etc. The company has also remodeled its distribution center which is now focusing more on cost efficiency. As a result of all these measures it can invest into price or increase discounts to attract more customers.

New Store openings and e-commerce efforts

The company has 85 stores under development including new openings, relocation and renovation. This is approximately 25% of the company's total operating base. It has opened 17 new stores tear to date as compared to 25 stores in FY12. It has leased 23 stores, relocated 3 stores and entered into 6 new markets. The company has invested $155 million in the expansion plans into new and existing markets. The company has also launched an e-commerce subsidiary to capture the online market. WholeFoods.com will offer 6000 non- perishable products initially and 10000 perishable as well as non-perishable products soon thereafter.

Same store sales growth likely to pick up

The company reported same store sales (SSS) of 6.6% which is a decline from last year's SSS of 7.2%. However, this decline can be attributed to the slow first three weeks of 2Q13 where the same store sales were 6.1%. Same store sales were affected by a blizzard in the northeast and a severe winter. Traffic and transactions are expected to improve in 3Q13 as the weather normalizes and the macro backdrop continues to improve. The company has seen SSS of ~9% in the first three weeks of 3Q13. Team Member Appreciation Double Day Discount has contributed 200bp to its same store sales in the initial few weeks of 3Q13.

Other initiatives

In addition to the above reasons, I am also bullish on the company as it continues to take a lot of steps in the right direction like launching new products and making opportunistic acquisitions.

  • The company has launched a new product line "Engine 2 Plant strong" of plant- based, minimally processed snacks, breakfast items and pantry staples in collaboration with Rip Esselstyn, author and founder of "Engine 2 Diet".
  • Whole Foods Market has agreed to buy Johnnie's Foodmaster food chain in the Boston area. The company has agreed to buy 6 stores and planning to reopen them as Whole Foods' stores during 2013.
  • The company is also emphasizing on maintaining quality and transparency. They have taken some initiatives like GMO labeling for seafood, welfare rating for meat, eco rating in cleaning products etc. which are hard to replicate for its competitors.

Peer analysis

The Fresh Market Inc. (NASDAQ:TFM) and Vitamin Shoppe Inc. (NYSE:VSI) are peers of Whole Foods Market in high growth retail space.

Company

Forward P/E

P/S

WFM

30.14

1.56

TFM

23.45

1.62

VSI

15.79

1.39

The Fresh Market Inc., one of the high growth format competitor, is trying to emphasize on good shopping experience to attract customers. The company is trying to provide great experience to its consumer right from the entry. It has accelerated its unit growth to around 15% to 18%. It has opened 16 stores in 2012 and is expected to open around 22 new stores and five renovations during FY2013. The company is also experiencing new market characteristics because it has entered four new states, California, Kansas, Oklahoma and New Hampshire. It is delivering the highest return on assets and capital deployed as compared to its peers. It has also introduced 130 new private labels and redesigned 100 other products.

On the other hand, Vitamin Shoppe Inc., another competitor of Whole Foods Market, has expanded its presence in the Pacific Northwest with the acquisition of Supper Supplement Inc. it has acquired Supper's 31 locations in Washington, Oregon, Idaho and one distribution centre in Seattle. This acquisition will help in unit growth as the company's 81 new stores include 31 stores of Supper Supplements. The company is also planning to grow with new product launches and its multi-pack Mytrition is already in stores. The company has also brought its $9.99 and K-free multi-packs in the market after positive feedback of its multi-pack Mytrition. K-free is targeting customers who are unable to take multivitamin with Vitamin K.

Although Whole Foods Market is trading at a premium over these two high growth format companies, I think it is a good buy given its consistent performance. Also retail is a numbers game and Whole Foods Market's size gives it numerous advantages in sourcing and supply chain optimization which makes it my preferred pick.

To sum up, Whole Foods Market's key strategies like investment in price to broaden its consumer base, shrink control, supply chain infrastructure improvement, leveraging economies of scale, new product launch and new store openings seems to be working in its favour. I believe the company will grow if it continues its focus on these strategies. Hence, I recommend a buy on the stock.

Source: Whole Foods Market: What Makes This Grocer A Good Buy