Whole Foods Market: Is This Your Opportunity to Buy?

In a market that sits near all-time highs, it's not always easy to find new investments. However, if you dig deep enough, you can find industry leaders that have lagged the market -- and Whole Foods Market (NASDAQ: WFM  )  is one of those companies. The grocery industry titan has pulled back nearly 20% from its 52-week high, so let's find out why it has declined so drastically during this bull market and if this is our chance to buy.

The health food giant
Whole Foods is the leading retailer of natural and organic foods in the United States. It was the first national "Certified Organic" grocer, and it has become the face of America's transition to healthier eating. The company currently operates 367 locations in the United States, Canada, and the United Kingdom.

Source: Whole Foods Market.

The start of the weakness
2013 was lining up to be a great year for Whole Foods, as its stock had risen 41.44% through Nov. 6, but then came the fourth-quarter earnings report after the market closed that day; this is where the trouble began. Here is an overview of the results:

Metric Reported Expected
Earnings per share $0.32 $0.31
Revenue $2.98 billion $3.04 billion

Earnings per share increased 6.7% and revenue rose 2.2% from the fourth quarter of 2012, driven by comparable-store sales growth of 5.9%. However, this is a clouded comparison, as Q4 2012 contained an extra week; on a 12-week comparative basis, earnings per share rose 16% and revenue rose 11% year over year. These results, paired with the previous three quarters, made for the best year in Whole Foods' 35-year history. 

Had this been all that was reported, the stock likely would have headed higher, even while the company posted mixed results in comparison with analyst estimates; however, the company then cut its fiscal 2014 outlook. Here is the updated guidance versus the previous guidance:

Metric Updated Guidance Previous Guidance
Earnings per share $1.65-$1.69 $1.69-$1.72
Revenue growth 11%-13% 12%-14%
Comparable-store sales growth 5%-6.5% 6%-7.5%

The change is not that drastic and it would result in another record year for the company, but negativity set in anyway. With good key metrics and a minimal reduction in outlook, I believe the stock should have remained unchanged or possibly fallen a point or two in the next day's trading; however, this was not the cas,e as the stock was hit hard.

The decline that ensued
After the release of the report, Whole Foods' stock declined about 8% after-hours and it proceeded to fall 11.18% in the trading day that followed. It now sits more than 18.4% below the level it was at before the report, which is about 19.8% below its 52-week high of $65.59. 

Performance from Nov. 5, 2013 through Jan. 10, 2014. Source: Yahoo! Finance.

Industrywide weakness
Whole Foods is not the only natural grocer on the decline. The Fresh Market (NASDAQ: TFM  ) and Sprouts Farmers Market (NASDAQ: SFM  ) have both pulled back significantly as well. The Fresh Market currently operates 149 stores and Sprouts operates 165, and both are expanding quickly right alongside Whole Foods. Take a look at how each company performed over several recent time frames:

Metric Whole Foods Fresh Market Sprouts
2013 performance 26.88% (15.78%) 113%*
Performance Nov. 6, 2013-Jan. 10, 2014 (18.47%) (24.46%) (20.19%)
Performance Dec. 31, 2013-Jan. 10, 2014 (9.11%) (4.15%) (0.23%)
% below 52-week high 19.87% 32.09% 22.47%

*Sprouts went public at $18 per share on Aug. 1, 2013.

The Fresh Market has had a very rough time after missing on several earnings reports, including a miss on both the top and bottom lines last time out; earnings per share came in at $0.23 on revenue of $364.50 million versus analyst estimates of $0.26 per share on revenue of $378.57 million. The company then cut its outlook, causing the stock to drop 14% in its next trading day. I do not believe The Fresh Market should be touched in today's market, because there is too much negativity surrounding the stock and there are much better options in this industry.

Source: Sprouts.com.

Sprouts Farmers Market went public on Aug. 1 and it turned out to be one of the hottest IPOs of the year; it priced its shares at $18, but they surged more than 122% to $40.11 in their first day of trading. In its first earnings report, Sprouts blew away earnings estimates; it reported earnings per share of $0.13 on revenue of $633.60 million versus analyst estimates for earnings of $0.10 per share on revenue of $620.16 million. However, its shares fell more than 1% in the trading day and the decline continued after company insiders announced the sale of more than 17 million shares. Sprouts now sits more than 17.5% below the level it was at before the earnings report, but I believe the negativity is priced in and that it is the second-best investment option in the industry behind Whole Foods.

Should we buy?
Yes, I believe the sell-off in Whole Foods' stock is a buying opportunity. The mixed earnings report and outlook reduction should have caused little to no decline, so the 18.4% sell-off is far from warranted. I believe Whole Foods will continue its expansion efforts and deliver on earnings in 2014, driving its shares back toward their 52-week high. If this happens, investors would accumulate a solid return of roughly 25%, which I believe will far outperform the overall market in 2014.

The Foolish bottom line
I believe Whole Foods is one of the best investment options in the market today. It is the "best of breed" company in its industry and I believe it will continue to be the leader in the natural and organic grocery space for decades. It is nearly 20% below its 52-week high, so investors should strongly consider adding it to their portfolio before it starts its march higher.

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Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2014, at 2:26 PM, ScottAtlanta wrote:

    Wow what a ridiculous article.

    Though I only skimmed this article...it appears that the singular justification for buying WFM now is that is is down 18% from his 52 week high.

    Perhaps, it's down b/c it's a grocery store with a current P/E around 36 and a growth rate of 11-13%.

    Perhaps today's price is still too high and the market will correct it to about 21 times earnings....which would still be expensive for a grocery store....about $31 per share, lol.

    Pumping a board members stock seems lame especially with such weak rationale, despite the disclosure at the end of the article.

  • Report this Comment On January 15, 2014, at 4:14 PM, JoeySolitro1 wrote:

    Scott, you're looking at WFM as a grocery store and not a natural/organic grocer... these are two completely different models, with different consumer bases, and the stock will ultimately command a much different multiple. Apples and oranges, my friend.

  • Report this Comment On January 15, 2014, at 10:02 PM, Borisbmx wrote:

    So TFM is "untouchable" even though it has identical eps numbers as WFM, greater % square footage growth, and a refined and nimble 20,000 square foot format, and sells for $13 a share less? What planet are you on?

  • Report this Comment On January 15, 2014, at 10:07 PM, Borisbmx wrote:

    why does Yahoo even allow this garbage to be listed? Time is running out for Fool.com and its empty lies.

  • Report this Comment On January 16, 2014, at 4:29 PM, ScottAtlanta wrote:

    @ Joey....

    Wow again. Your defense is that it's not a grocery store it's "an organic grocer"....no comment about the very high P/E and reduced growth rates...those things that matter to the MARKET and why the price is being driven DOWN.

    That's not apples and oranges Joey....It's Kool Aid. Enjoy.

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