Why I Finally Bought Whole Foods Stock

Over the past two decades, organic grocer Whole Foods Market (NASDAQ: WFM  )  has quietly proven itself to be one of the most incredible growth stories our stock market has to offer.

Take a look at what Whole Foods stock has done for investors since its IPO in 1992:

WFM Total Return Price Chart

Source: WFM Total Return Price data by YCharts.

And, no, that "K" isn't a typo. Including dividends, Whole Foods stock has indeed helped early investors return more than 30 times their money.

Lately, however, many are wondering whether the stock has already seen its best days, especially after the shares dropped like a sack of potatoes following the release of the company's less-than-stellar fiscal first-quarter results back in February.

So why buy now?
As a result, you might be wondering why I finally decided to add shares of Whole Foods Market to my personal portfolio earlier this week. After all, haven't we already missed the party?

In a word: Nope.

As I pointed out two months ago, the quarterly results weren't all that bad. In fact, the company remains solidly profitable, and still expects sales growth for 2013 to come in between 10% and 11%. Short-term oriented traders, however, weren't too keen on the fact that it was a decrease from the 13.7% growth achieved in 2012.

Curiously enough, the primary culprit for the miss lies in Whole Foods' insistence on focusing more energy on value-oriented items to broaden their consumer appeal. As fellow Fool Joe Tenebruso noted recently, "Whole Foods is a company that is doing well by doing good," and fast-becoming a "lifestyle brand" where people want to shop. Why? Because they trust its quality, enjoy the experience, and believe management when they say the company wants to make a positive difference in the world.

Whole Foods stock, produce

Source: Whole Foods. 

In short, Whole Foods is about as Foolish (with a capital "f") a company as they come, and any investor can feel great about owning its stock.

What's more, Whole Foods management plans to increase the total number of domestic stores to 1,000, or nearly triple the 345 total locations it currently maintains. If that sounds aggressive, consider that grocery giant Safeway (NYSE: SWY  ) currently has more than 1,600 locations, and the behemoth SUPERVALU  (NYSE: SVU  ) boasted more than 5,000 stores at the end of last year. Compared to both Safeway and SUPERVALU, at least, Whole Foods has plenty of room to grow -- and plenty of market share to grab along the way.

As it stands, Whole Foods is currently building around 10 new units per quarter, so it's safe to say that today's investors can still enjoy many years of steady, predictable growth going forward. And thanks to its strong free cash flow and cash and investments of $1.2 billion at the end of last quarter, the company should have no problems financing both its expansion and $0.20-per-share quarterly dividend.

As usual, this is a long-term play for me, so I fully intend to hold Whole Foods stock in my portfolio for at least the next decade. If you do the same, I'm convinced you'll be more than satisfied with the end result.

If you'd still like to learn more about Whole Foods, check out our brand-new premium report on the company, in which we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. Make sure to claim your copy today by clicking here.


Read/Post Comments (2) | Recommend This Article (4)

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  • Report this Comment On April 16, 2013, at 10:13 PM, Ernesto9999 wrote:

    1. Oops. The company's latest annual report states that it opened 25 stores in the prior year. That's not 10 per quarter, it's 6.25. At this nominal rate it will take 30 years to get to 1000 stores.

    2. Conventional grocers have not just entered WFM's business, they're aggressively grabbing customers with flexible store formats, prepared and specialty food offerings and a mix of natural and conventional products. Coconut water and quinoa are everywhere now and price competition is brutal.

    3. Competitors aren't standing still. Both conventional and natural/organic stores are growing FAST and they're not going to roll over. Foolish investors need to think very carefully how exactly WFM is going to continue to build pricey, labor-intensive stores and enjoy the same operating margins as in years past. Three words: Ain't gonna happen.

    4. WFM grew by acquiring other firms and still has yet to fully integrate and consolidate its regional operations into a cohesive company.

    5. Its reputation as some sort of nirvana for employees is slipping fast. Several years ago the company was in the top 10 of the "Best Places to Work" Survey published by Fortune magazine. In the latest survey it has slipped to #71. Note that this "survey" is actually a marketing gimmick with questionable methodology in the first place, and yet the firm continues to slip.

    The market has woken up to the fact that retail stores are a fashion choice and have about the lowest barriers to entry one can imagine. There is no reason why we won't see a day where shoppers can pick from "Costco Natural Marketplace" or "Safeway Organic Depot" along with triple the number of Trader Joe's, Sprouts, Natural Grocers, Wegman's, Meijer, etc. And speaking of competitors, where is WFM's online presence? I'll let my fellow Fools answer that one.

  • Report this Comment On April 17, 2013, at 10:43 AM, TMFSymington wrote:

    @Ernesto9999, I'll bite; thanks for your points! After all, it's great to consider both sides of the coin. :-)

    1. WFM is accelerating the pace of new location development; check out the transcript of WFM's Q1 2013 earnings call -- specifically Walter Robb's comments on opening new stores during the latest quarter and for the next two fiscal years.

    2 and 3. As for the competition, nobody expects it to be particularly easy for WFM, but there's still plenty of room for multiple companies to thrive in the space...and that's why WFM is placing more focus on value-oriented ideas going forward. What's more, management warned that will result in lower margins going forward (which is why the stock tanked after the report). In the end, I still think WFM is great at what they do, and truly great companies inevitably float to the top over time.

    4. Indeed it has (!), and those acquisitions have served investors quite well over the past few decades. That's why WFM also bought Foodmaster (six stores in Boston) late last year and is hungry for additional acquisitions. It takes time to integrate those operations -- something which simply comes with the territory.

    5. #71 still isn't a terrible feat, nor is being one of only 13 companies to make the list all 16 years since it started in 1998! That said, I smell a great article idea here, so thanks!

    Fool on!

    Steve (TMFSymington)

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