Whole Foods: Healthy Stock in a Sickly Sector

This article is part of our Real-Money Stock Picks series.

Whole Foods Market's (Nasdaq: WFM  ) shares wilted in recent days as some investors speculated that it could fall short of lofty expectations like Chipotle did last week. Such speculation simply didn't pan out. Even though many companies have recently revealed struggles in their latest quarterly reports, Whole Foods has set itself apart as one of the winners in a tough environment.

Fiscal third-quarter net income increased 32% to $116.8 million, or $0.63 per share. Whole Foods' total revenue increased 14% to $2.7 billion, and same-store sales surged 8.2%. Meanwhile, quarter-to-date sales figures for the fiscal fourth quarter look like the grocer is still on fire.

Last quarter, analysts freaked out because of Whole Foods' admission that high gross margin rates weren't sustainable. So far, though, the grocer continues to trend high; fiscal third-quarter gross margin was 36%, still at the top end of the company's historical range, not to mention the kind of figure that's shocking (in a good way) in an industry renowned for extremely thin margins.

More recently, Chipotle's quarter -- good but not good enough for growth-hungry investors and analysts -- helped spook some investors on stocks like Whole Foods.

Too bad, nervous speculators. Whole Foods has not only defied the naysayers, but it's managing some very interesting achievements in the current environment. Co-CEO Walter Robb told CNBC that new customer traffic's up 7%, and that center-of-the-store wares are doing well at a grocer that has traditionally lured considerable sales from the perishables in the outer ring. The successful sales data seems to have registered from all across the store.

For more reason to remember how much Whole Foods manages to differentiate itself in a tough retail segment, take the plights of conventional grocers like SUPERVALU (NYSE: SVU  ) and Safeway (NYSE: SWY  ) for a comparison.

SUPERVALU's financial stability and performance has been hit by competitive concerns, it's burdened with a huge debt load, and it's shopping itself around, hoping a buyer will be willing to take on its troubles. It's suspended its dividend and has nearly $2 billion in unfunded pension liabilities too. You could even call it a "super value trap" at the moment.

Safeway isn't in quite the same danger as SUPERVALU, but that grocer's position isn't exactly a portrait of health either. Its declining profit has led investors to believe it may not be able to meet its own hefty debt obligations.

Granted, Whole Foods still sports premium valuation. However, suffice it to say that seriously struggling companies like SUPERVALU and Safeway aren't "cheap" if they may not even survive over the long haul. Whole Foods trades at 33 times forward earnings, which is about the same as another grocery upstart, The Fresh Market (NYSE: TFM  ) , and much higher than Harris Teeter (Nasdaq: HTSI  ) , which trades at 15 times forward earnings.

Whole Foods possesses factors that expose true value despite premium stock pricing. One of the many reasons I bought some Whole Foods Market shares for the real-money portfolio I'm managing for Fool.com is that I consider it a gold-standard business and an incredible innovator in a tired industry. This successful quarter underlined Whole Foods' strengths once again, making it one of my favorite portfolio holdings.

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Alyce Lomax owns shares of Whole Foods Market in her personal portfolio. The Motley Fool owns shares of SUPERVALU, Chipotle Mexican Grill, and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Whole Foods Market, Chipotle Mexican Grill, and The Fresh Market. Motley Fool newsletter services have recommended buying calls on SUPERVALU. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On July 27, 2012, at 1:33 PM, StopPrintinMoney wrote:

    Whole Foods sells overpriced food to people with high disposable income. This is the stock you DON'T want to own during tough times.

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