Consumers in the United States are demanding increasingly niche and high value added food products. The food revolution in the United States stretches from the explosive growth of portable food trucks that cover the urban landscape, the tilt of menus across the spectrum of restaurants toward gourmet or niche items, and the growth of gourmet food and kitchen supplies at retail establishments.
This impact has been seen to varying extents all the way from the QSR (Quick Service Restaurant) space to the fine dining and gourmet space in major metropolitan regions. In the QSR space, firms such as Chipotle (CMG) and Panera (PNRA) have seen explosive growth with higher-quality fare than their competitors. Even decidedly down-market firms like Burger King (BKW) have expanded their menu with slightly more upscale offerings. The food revolution has touched American kitchens, with growth in gourmet ingredients. According to trade industry publication Packaging Digest, sales of gourmet food products were $67 billion in 2010 and growing. Below are two ways for investors to take advantage of this long term trend toward gourmet foods by consumers.
Williams-Sonoma (WSM) is a luxury kitchen supply store that provides a broad range of kitchen and home décor products. The flagship stores under the Williams-Sonoma brand are focused upon kitchen goods while the Pottery Barn brand sells general home décor products. Williams-Sonoma has rapidly grown revenue during a challenging economy, with revenue increasing from $3.1 billion in the fiscal year (FY) ended January 2010 to $3.7 billion in FY 2012.
From a fundamental perspective the balance sheet of WSM is most impressive, with $2 billion in assets to just over $800 thousand in liabilities, including virtually no long term debt. The assets include over $500 million in cash and inventories that have grown slower than sales, considered a positive indicator for a retailer. WSM has a $3.4 billion market capitalization at the current share price of $34.52. In terms of key financial ratios, WSM is attractively priced on a price-sales ratio of less than 1, and a trailing price-earnings ratio of 15. Considering analysts anticipate continued top line and bottom line growth, the price-earnings ratio on a forward basis is just 12, which is quite low for a luxury retailer in a fast growth segment in the United States. For dividend investors, WSM also provides a relatively high dividend yield of 2.5%. WSM offers tremendous opportunity for investors both from an consumer trend perspective and financial metric perspective.
Whole Foods Market (WFM) is a high-end grocery store chain with over 300 locations in the United States, Canada, and the United Kingdom. Whole Foods is popular among epicurean consumers for their selection of unique ingredients, including a wide variety of gourmet and organic offerings. Whole Foods has grown through organic growth and through acquisitions, including their controversial acquisition of Wild Oats market in 2007. Although Whole Foods suffered some challenges related to public relations due to an over-active CEO in terms of internet message boards, the company has continued to ride the positive wave of demand for high quality, organic, and sustainable foods that have allowed it to rapidly growth through its 34 year existence as a company. WFM is a significant success story in a very competitive and mature grocer industry in the United States in which participants like Safeway and Kroger have struggled to grow revenues. Many have pointed to a "hollowing out" that has led to the success of premium grocers such as Whole Foods, and discount grocers such as Wal-Mart (WMT) at the expense of moderate grocers such as Safeway and Kroger.
The success of WFM relative to their moderate price-point competitors is apparent in the market capitalizations for companies in the industry: WFM has a market cap of $17 billion, which is more than SWY and KR combined. This market cap is reflective of the confidence investors have in continued growth at WFM, which has a trailing P/E ratio of 39 and a forward P/E of 31. The company is also richly valued in terms of price to sales ratio, which is 1.52 for WFM in an industry that averages well below 1. Bullish indicators include a lack of saturation for WFM even in their home market of the United States, which still lacks stores in more than a dozen states.
WFM has also continued to sustain impressive growth, which has exceeded 10 percent revenue growth annually even as the company has reached $10 billion in revenue. WFM pays a modest dividend yield of 0.60%, which is likely to remain low due to the expansion plans for the company. Although as described above WFM appears richly valued on a variety of financial metrics, it is the most well positioned company in the United States in the tremendous epicurean trend taking place among consumers. As such, investors should seek out any pullbacks in shares as buying opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.