Why I'm Not Worried About Whole Foods

Yesterday, Whole Foods (NASDAQ: WFM  ) came out with earnings and its forecast for the rest of the year. The market wasn't pleased, as the company is down by as much as 10% today.

Below, I'm going to show you why long-term investors shouldn't be worried about today's dip, and at the end I'll offer up access to a special premium report on the company.

First, the good news
Earnings per share, that oh-so-important figure Wall Street likes to focus on, came in $0.01 ahead of expectations at $0.78 per share. On the whole, Whole Foods was able to grow earnings by 20% over the same time frame last year, and sales came in 14% higher, as well.

The company also opened a record number of stores during the quarter -- 11 -- and the build-out of stores looks to be ramping up, with over 100 stores expected to open over the next five years. That's a big number, as it would increase Whole Foods' presence by as much as 30% from its base of 345 stores today.

Now, the stuff that worried Wall Street
Comparable-store sales -- which is a great metric to examine to see if people are buying more from existing stores -- were up 7.5%. That's a great number for any grocer, but some might be frustrated by the fact that the growth is slowing down over time. I'm not worried, though, as that's bound to happen when comparisons from the previous year get tougher and tougher.

Another concern was the fact that the company doesn't expect gross margins to be as good as they were last year. It's fair for investors to be a little disappointed with that, but on the whole, management was very clear last year that the margins at the time were not sustainable.

Take a step back, though, and you'll see that Whole Foods is head-and-shoulders above the competition in these categories.

Company

Comparable Store Sales Growth

Gross Margin

Net Margin

Whole Foods

7.5% 

35%

3.79% 

Safeway (NYSE: SWY  )

0.5% 

26%

1.56% 

Kroger (NYSE: KR  )

3.2% 

20%

1.45% 

Harris Teeter (UNKNOWN: HTSI.DL  )

2.5% 

29%

1.98% 

SUPERVALU  (NYSE: SVU  )

(4.5%) 

21%

0.02% 

Source: SEC filings. All numbers reflect the most recent reportable quarter.

Of course, this isn't exactly an apples-to-apples comparison, as SUPERVALU and its chain of stores are hardly competing for the same customers as Whole Foods. But Harris Teeter has gone a long way to make its in-store experience similar to that of Whole Foods, and Safeway has its "O" organics line to compete in the same arena.

Another big difference is what these stocks trade for. While Whole Foods trades for more than 30 times earnings, the next highest among the group is Harris Teeter, which comes in at a little over 22 times earnings.

But I've said time and again that what Whole Foods represents is much more than just a grocery store. It represents a movement toward reawakening the relationship we have with the stuff that we put in our body. I don't think this movement is a fad; it will be a sustained force for years to come.

Given that, I don't think it's too much to pay a high multiple to own a piece of the company. Take a look at where the company is today, compared to yesterday, and it seems like an even better deal.

 

Feb. 13, 2013

Feb. 14, 2013

Price

$96.91

$87.50

P/E

38

33

Sources: SEC filings; Google Finance.

If you're a long-term investor -- someone who can buy and hold a company for decades as long as a fundamental thesis remains true -- then today could be a great entry point for ownership in Whole Foods.

In this brand-new premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. We're also providing a full year of regular analyst updates to go with it, so make sure to claim your copy today by clicking here.


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