A Few Reasons Why Whole Foods Is A Buy On The Dip Opportunity

Aug.20.14 | About: Whole Foods (WFM)


Whole Foods is undertaking smart moves such as opening more stores to tap the fast-growing organic food market.

Whole Foods is countering competition by investing in technology, and by also delivering value to customers, apart from spreading awareness about itself.

Whole Foods looks reasonably-valued, and its earnings are expected to grow going forward.

Whole Foods Market (NASDAQ:WFM) was supposed to be riding the growing adoption of organic and natural food in the U.S. In fact, the U.S. was the world's biggest organic food market last year, and looking ahead, the trend should continue. According to a report, the organic food market in the U.S. is expected to grow at an annual rate of 14% till 2018. Thus, there is no doubt that Whole Foods has got a lot of opportunity ahead of it to tap this fast-growing market.

The problem, however, is the rising competition. Whole Foods' performance has taken a beating as grocers are entering the organic foods market. As such, Whole Foods has lost 33% of its value this year. In addition, Whole Foods recently slashed its annual sales forecast yet again. However, it is trying hard to execute a turnaround.

Turnaround initiatives

The company has been investing in value, technology, and, growth, and also cutting expenses. For instance, in the previous quarter, Whole Foods reduced its expenses that allowed it to deliver 7.5% operating margin. It generated 16.4% return on invested capital and solid operating cash flow of $240 million.

Looking ahead, Whole Foods Market is adopting a few key strategic initiatives to improve its performance in an extremely competitive environment.

For example, Whole Foods Market is investing in new and existing stores, which is expected to drive comps. The opening of every new store is seen as an opportunity for innovation, and Whole Foods is developing and differentiating its shopping experience at a rapid pace with the opening of 33 new stores in the previous four quarters.

Whole Foods Market is also focusing on retail innovation to improve market share. As a result, its new stores in Albany, New York, Colleyville, and Texas are performing robustly. The new stores of the retailer have demonstrated average weekly sales per store of $503,000 for the last eight quarters, delivering productivity levels of 84% on a weighted basis.

Going forward, Whole Foods has 116 stores in its development pipeline, which will allow it to capture more market. In addition, Whole Foods is expected to launch 38 new stores this year, delivering a 10% rise in square footage. A similar increase in square footage is forecast for next year. Hence, with a smart store strategy, Whole Foods is trying to regain its momentum.

In fact, the company believes that its new stores and relocated stores will add approximately $1 billion to sales next year. Looking ahead, the company expects to hit the 500-store mark in 2017, and cites robust demand for about 1,200 Whole Foods Market stores in the U.S. over the long-term. Clearly, the company is doing well to increase its footprint all over the U.S. in a bid to make the most of the biggest organic foods market in the world.

Apart from a new store strategy, Whole Foods plans to remodel around 70% of its stores which are more than 10 years old. These upgrades are expected to range from decor updates, to addition and remodeling of venues, to complete store remodels. These upgraded stores should deliver an improvement in comps going forward.

Increasing awareness

Moving on from the store strategy, the successful value for price efforts of Whole Foods Market will also drive sales growth in the long run. The company has executed a competitive price match for several grocery items nationally. Going forward, Whole Foods will focus on perishables to reduce the price gaps on selective known value items, widen the selection of products at basic price points, and enhance promotions.

Moreover, Whole Foods Market plans to introduce a national marketing and brand campaign, which should spread awareness and improve the company's performance as more customers visit its stores.

In addition, Whole Foods is planning to launch its Responsibly Grown rating system for produce and flowers. These standards are expected to assist customers in making well-informed buying choices for key sustainable farming practices such as farm worker welfare, pest management, and pollinator protection.

Also, Whole Foods Market is widening its reach through strategic partnerships, and offering functionalities such as home delivery and customer pickup in some 12 to 15 key markets. It will also introduce its first online subscription club by the year-end, and launch direct shipping in most of its major categories next year.

Impressive valuation

So, Whole Foods is making a number of smart moves in order to get its business back on track. At the same time, the company has a solid valuation. It has a trailing P/E ratio of 26 and a forward P/E ratio of 22. This indicates earnings growth in the future. In addition, Whole Foods' bottom line is expected to grow at a CAGR of 12.65% over the next five years. The company has low debt of just $62 million, and its cash position is strong at $796 million.

As such, Whole Foods is fundamentally sound, and investors can consider using the stock's weak performance as an opportunity to buy. The company is making smart investments and has sound strategies, and this could lead to better times ahead.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.