The Secret to Whole Foods' Success

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: Whole Foods Market (Nasdaq: WFMI). Is the executive team of this organic grocer doing all it can to earn you outsized returns?

Foolish facts

Data current as of February 28.

Fools have good reason to be skeptical of Whole Foods' management. It's hard to know what co-founder John Mackey will do next.

He's had ugly moments, to be sure. In 2007, he and his company suffered the indignity of an SEC inquiry tied to his misguided musings on the Yahoo! Finance discussion board for Whole Foods' stock. In 2009, he published an editorial in The Wall Street Journal that argued no one has an ethical right to health care. Whole Foods' left-leaning customers didn't much like that take.

And yet for as much controversy as he attracts, Mackey is also a thoughtful, passionate leader that I believe wants to do right by customers and shareholders. He wouldn't have stepped aside as chairman if he didn't care about corporate governance, and he wouldn't be the world's most outspoken advocate for "conscious capitalism" if he didn't care about customers and how his stores procure product.

Mackey can't simply be put in a box and labeled. Nor can his company's stores, which resemble a supermarket but feel like a boutique. We've come to appreciate them as the best place to shop for gluten-free and allergy-friendly products for our eldest son, who suffers from a wide variety of food-related ailments. We aren't alone.

"Whole Foods is truly at the forefront of an industry that has not received nearly enough credit or recognition. With over 65% of Americans overweight or obese, and companies like Taco Bell who advertise that 80% of their 'beef' is actually beef, people are finally realizing that natural, organic food is one of the most effective routes to health and wellness," wrote Foolish investor OutvestTheRest earlier this month.

Numbers confirm this thesis. According to the Organic Trade Association, U.S. sales of organic food and beverages have grown from $1 billion in 1990 to $24.8 billion in 2009. That's 18.4% growth annualized over 19 years.

Management overview

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 28.)
*Only includes direct holdings.

Growth like that is rare. When it comes, the industry's benefactors usually pack big golden parachutes to attract top-name management talent. Not at Whole Foods. Mackey earns just $1 dollar a year in salary plus relatively modest cash incentives. His primary source of wealth is tied to his ownership of Whole Foods stock.

And Mackey isn't the only owner. Each of the top members of Whole Foods' staff own sizeable chunks of stock, reflective of a long-standing policy that encourages all Whole Foods employees to become owners.

But history may be most telling when it comes to evaluating Whole Foods' management. Every key executive took huge cuts in salary and other cash compensation during the 2008 recession. All of them remain with the company today.

Management analysis versus competitors

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 28.)
*Return on capital. **Return on equity.

Color me impressed by how well The Fresh Market, a recent pick of our Motley Fool Rule Breakers service, stacks up against the competition in this table. High returns on equity and capital are reflective of a business that's outperforming, even if the stock isn't.

And yet Whole Foods stands atop the field in gross margins, while its double-digit returns on capital appear to be above the cost of debt. (ROC is up in each of the last three fiscal years.) By the numbers, this is a sustainable stock story.

Beyond the numbers, Mackey and his team may occasionally fumble their attempts at doing good, but I find it impossible to question their motives or commitment to the company and its employees and shareholders.

Do you agree? Disagree? Let us know what you think about Whole Foods Market's opportunity here and abroad using the comments box below. You can also rate Whole Foods Market in Motley Fool CAPS.

Interested in more info on the stocks mentioned in this story? Add Kroger, Safeway, The Fresh Market or Whole Foods Market to your watchlist.