It's rare these days to find a company that prides itself on quality and that can grow its business in such a way that it keeps investors happy. Companies across all industries seem to be in some sort of race to the bottom, to provide the cheapest, quickest products, with the least amount of underlying cost. That's a shame, and it ends up building a world where consumers buy as cheaply and as often as they can, just to throw out the old and dive into the new. But there are those rare companies still out there, and here are three that you should think about investing in now.
In a week of horrific earnings reports, Whole Foods Market (Nasdaq: WFM ) was a bright spark. The grocery chain increased sales by 11% and earnings per share by 28%. It beat Wall Street's expectations, and the stock was rewarded with a 12% increase, jumping up to $94 by the end of the day. That sales growth came from a focus on bringing quality products to consumers and then charging them a premium for the quality.
The wonderful surprise is that customers continue to be happy to pay up for quality. Same-store sales rose 8% last quarter and are on track to exceed even that growth in the next quarter. Gross margins were 36%, which is a slight shade better than competitors have been able to manage. Rival grocery SUPERVALU (NYSE: SVU ) is fishing in the other end of the pond and pulling out old boots. Its last quarter saw a 5% drop in sales and a gross margin of 22%.
The company's focus on "value" -- which means being cheap, not providing meaningful value -- means that it's dependent on being the cheapest offering. Whole Foods sells quality, so it doesn't need to compete on price in such a self-destructive manner. This is a common theme among the companies we're looking at here -- sell quality, and you can name your price.
If Whole Foods is setting the bar for grocery chains, Michael Kors (NYSE: KORS ) is doing the same for fashion. The company locked down a 53% gross margin in its most recent quarter. As we saw with Whole Foods, strong margins didn't lead to lower sales, and the company increased revenue by 58% on the previous year. Also as we saw with Whole Foods, Michael Kors has been able to name its price, because of strong name-brand recognition.
That branding is catching on, and customers keep wanting more from Michael Kors. The company's same-store sales increased a phenomenal 36% last quarter. Management has said it expects this pace of growth to continue, and that forecast is reflected in the stock's price. Kors is currently trading at a forward P/E of 30, which is slightly cheaper than Whole Foods, trading at 32.
While in retail brand strength makes a huge difference, in the world of finance it all comes down to size. Payment processor Visa (NYSE: V ) has brand strength to spare, but it also has a huge customer base. Last quarter, Visa more than rewarded investors with a 15% growth in revenue and a 25% increase in earnings per share, excluding money set aside for litigation.
Since Visa doesn't have stores, a good measure to track is payment volume growth. Compared with last year, the company grew volume 6% overall in the last quarter. It also increased cross-border volume by 14%, which highlights the value the company is generating from global payments. All this growth comes at a slightly lower forward P/E of 18. This discount is largely due to the unknown future of processor litigation, which has already affected both Visa and MasterCard.
The bottom line
These three companies drive home the value that investors can get when they invest in quality. By building strong brands that customers go out of their way to purchase, businesses can charge a premium for good and services. Those premiums come right back to investors in the form of earnings per share. The downside is that investors pay extra for quality, too. High P/Es can seem daunting to investors and can put unnecessary pressure on companies.
These three have stepped up to that pressure and provided solid returns to investors. Of the three, I prefer Kors right now. The company has constructed an excellent base over the past year, and the next few years should have it really building off that base. But Kors isn't the only company with a strong head start. The Fool's special report "3 American Companies Set to Dominate the World" details how these three household names are set to take off around the globe. Get all the details, and get your free copy today.