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Summary

  • WFM is at valuations that reflect a growing company with some near-term challenges.
  • Debt levels in WFM are astonishingly low.
  • Growth opportunities for WFM are plentiful, given the brand recognition and customer loyalty.

The sign of a well-run organization from a shareholder perspective is a consistently good RoE. If a company shows consistently better RoE compared to competitors, it is a sign of a management responsive to the shareholders. A number of things play into an improved RoE including high profitability, growing retained earnings, a shrinking float, low debt and many other factors. So it is not every day that you look towards retail, or even worse, towards a grocery store for these characteristics.

Hello, WFM!

Whole Foods Market (NASDAQ:WFM) has been synonymous with organic food and the brand is held in high regard when it comes to a great "natural" shopping experience. It is a "Trader Joe's" sort of experience but at a larger scale. I have to admit that I have not shopped too many times at WFM, but when I have, I am almost amazed at the "farmers' market" style of shopping in there. Everything seems more like a real market, the closest you can get to a real market, in the world of big box retailing I suppose. The quality of the products is also very impressive, except for their relatively higher prices. But I guess you pay up for Apple (NASDAQ:AAPL), don't you?

Let's set aside the experience and look at the numbers:

1. Forward P/E of 22 - At expected 10% revenue growth it is high but not off the charts
2. RoE of 15%+ - For a grocery store this is pretty impressive. Costco (NASDAQ:COST) is one comparison I can draw
3. Debt - 60 million - This is off the charts for a grocery chain. You got to love this as a shareholder
4. Growing retained earnings - Even in the last quarter where net income shrunk
5. Relatively small - Still only 300 odd stores in terms of overall size is very small
6. 1 time sales - You are not paying too much at current levels - though not that cheap compared to other low margin grocers
7. Enterprise value - less than 1. Not that far out for a grocery store but on the cheaper side though
8. A dividend - Small one, but something nevertheless for a growing company

Now with all this said, the market is not at these levels for no reason. WFM has been showing signs of struggling with competition, both from companies like Safeway (NYSE:SWY) that has made a push into organic in a big way and Sprouts (NASDAQ:SFM) that is making a direct go at WFM. Sprouts, especially, is going the rout of slashing prices to catch up with WFM. This is very costly for WFM that is trying to be a premium service in a cut-throat market. Much like AAPL in the desktop/laptop market. A couple of quarters with a bumpy net income showing have also made the market nervous about the prospects of WFM.

With all that in mind, the thing I like most about WFM are the same things I like about AAPL.

1. A strong brand recognition for a market segment
2. A resistance towards "slash and burn" approach to pricing and marketing
3. The incredibly low levels of debt for a grocery chain
4. A very low number of stores and the opportunity to expand - given the low debt load
5. A management that seems shareholder friendly
6. A market that is disillusioned with the name
7. Apparently, a founder that is a non-conformist
8. Close to 8% short interest - Compared to an industry average of about 2-3%

Source: Whole Food Markets: Going Organic