Whole Foods: A Secular Play On Healthy Eating

| About: Whole Foods (WFM)

With two-thirds of all Americans overweight, healthy eating is becoming more crucial to halt and reverse this frightening trend. There are many companies that cater to this emerging trend of healthy eating, such as Chipotle (NYSE:CMG) and Hain Celestial (NASDAQ:HAIN), but the company we are highlighting today is both a grocer and a luxury retailer.

Whole Foods Market (NASDAQ:WFM) sells organic, healthy groceries in over 300 locations around the U.S. and U.K. Whole Foods, which first opened in 1980, is proud to cater to an upscale "urban" demographic. Whole Foods' has a cache to it that its primary competitors Kroger (NYSE:KR), Supervalu (NYSE:SVU) and Safeway (NYSE:SWY) simply cannot match. This is just one of the many reasons that Whole Foods' stock has dramatically outperformed its rivals, rising over 280% over the last decade, as each of its three competitors lost at least 14%.

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What has been responsible for this dramatic outperformance? The same factors we feel will help Whole Foods outperform going forward.

  1. Whole Foods has beaten earnings estimates for 11 straight quarters, and its LIFO gross margin last quarter was 35.4%, a margin other retailers can only dream of matching.
  2. Whole Foods is far more resistant to economic shock. When customers at Vons or Ralphs face higher gas prices or economic worries, they usually trade down and buy less expensive groceries. Whole Foods' customers, however, are far less pressured by macro-economic conditions. For them $4 gas just isn't that big a deal.
  3. Whole Foods has an industry-leading balance sheet that it has worked diligently to clean up. The company is now debt free, and has reinstated a dividend. Management has stated that its accelerating free cash flow will be used to both invest in new stores and return capital to shareholders.

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Whole Foods, in its most recent earnings release, stated that "We attribute much of our success to our value efforts, which have improved our price image, and to continuing to raise the bar in areas that matter to our customers, particularly quality standards and health and wellness.” Whole Foods' in-house brand continues to grow, and management is disciplined about opening new stores.

We feel that Whole Foods is a sound addition to any portfolio. Goldman Sachs agrees, and in cutting its price targets on Kroger (from $23.50 to $20.50) and Safeway (from $20 to $17) suggested "leaning into secular stories with accelerating fundamentals like Whole Foods, and out of mature share donors that cannot create their own wake, like Safeway and Kroger." Whole Foods has raised its guidance for this fiscal year and has provided strong guidance for next year. Management is confident about the company's prospects going forward, and so are we. Whole Foods leads its industry in terms of margins, growth, balance sheet quality, and the quality of the food it sells. Whole Foods is leading its shoppers to healthier food, and should lead your portfolio to a healthier future.

Disclosure: I am long WFM, CMG.