Some folks say it's hard to find anything cheap at a Whole Foods Market (NASDAQ:WFM), but could the grocer itself present a relative bargain today? After a sell-off following a modest earnings report, perhaps now is a good time to add the natural foods store to your shopping cart.

Buy Local Produce

Source: Whole Foods.

The market has an upset stomach
Over the past five years, Whole Foods has become a stock market darling. Despite offering a premium product in a tough economic environment, the grocer weathered the storm and returned more than 900% to shareholders in the process. The management team, led by co-CEOs John Mackey and Walter Robb, runs a fine-tuned operation that generates healthy 4% profit margins compared to a meager industry average of 0.7%.

As a result, the market expects bountiful revenue and earnings growth from the green grocer and nothing less. So when management remarked on a challenging environment during the first period of 2014, investors' appetites for shares of Whole Foods diminished. The stock sank 7%, and words like "rotten" and even "dreadful" were used to describe the company's results.

Just how dreadful were they? Whole Foods missed earnings expectations by two pennies per share and left something to be desired for this shareholder, but nevertheless failed to arouse feelings of despair. Instead, the latest quarter simply awakened investors to the idea that heady growth can only last so long. At some point, the low-hanging organic fruit gets picked, and even a rule-breaking company like Whole Foods will mature into a seasoned veteran. Co-CEO John Mackey noted that Whole Foods, in some respects, was finally confronted with "the law of big numbers" resulting in "a bigger cruise ship to try to steer."

As shown in the chart below, the signs of this maturation process are already showing. Whole Foods' same-store sales, a key retail metric, have tapered off in recent quarters. In other words, the Austin-based grocer is finding it difficult to hurdle a high bar at stores open more than a year. For the latest quarter, Whole Foods reported a same-store sales increase of 5.4% versus 7.2% in 2013.

Still, the gap between Whole Foods' performance and that of the rest of the retail or grocery industry is quite impressive. A quick calculation reveals that Whole Foods averaged 8% same-store sales growth during the 10 quarters shown versus a grocery industry average of 2.8%. The broader retail sector, meanwhile, turned in ho-hum growth of 2.4%.

A head above the herd
If Whole Foods' growth is slowing, it's still sprinting when compared to the industry at large. And its latest results did little to diminish its status as the natural foods category leader.

From an operational perspective, gross margins held steady at 35% of sales, and return on invested capital ticked up to 13.3% from 13.1%. The latter points to the company's ability to further leverage a highly trafficked existing store base.

Competition, meanwhile, is increasing from the likes of Sprouts Farmers Market and The Fresh Market, but demand for high-quality foods appears to be outpacing supply. Whole Foods remarked on its ability to open stores in previously unforeseen markets, from Alabama and Kentucky to the heart of Manhattan. The New York Times pointed out Whole Foods' success in smaller cities recently, and co-CEO Walter Robb described increasing opportunity even in tightly packed large cities: "[A]nother thing we're excited about is that ... we're able to cluster our stores closer together [in] these major metro markets ... we can put so many more stores than we ever dreamed we'd be able to put in 10 years ago."

As a result, Whole Foods once again upped its projected store count, this time from 1,000 stores to 1,200 nationwide. This would more than triple the size of its footprint, which stands at 373 today. By the end of 2014, Whole Foods aims to add 33 to 38 stores, increasing total square footage by 8% to 10%.

What will it cost to whet your appetite?
The long-term catalyst, then, appears to be growing demand and interest in a category it has dominated for decades: natural and organic foods. After all, Whole Foods is America's first national Certified Organic grocer and the biggest player in what has historically been a niche market. Now, that niche market is evolving.

Over time, Whole Foods is working to bridge the gap between what is considered specialty and mainstream in groceries. Management spoke to this point when describing "pricing investments" made to bring prices more in line with everyday competitors like a Kroger or Wegman's, for example. These efforts will depress same-store sales in the near term due to a smaller ticket price for the same shopping cart. In the long term, however, the company can gradually shed the moniker "Whole Paycheck" as shoppers see more reasonably priced fare.

To make this happen, Whole Foods might sell more conventionally grown produce, for example, but by no means does this imply fading demand for organic products. If anything, consumers are growing more concerned about the origins of the food on their plate. As a result, they're more willing to pay up for, say, pasture-fed beef or organic olive oil.

From my perspective, then, Whole Foods is sitting at the center of a burgeoning market that could soon go mainstream. For higher-quality foods and transparent supply chains, Americans seem more willing to pay a premium. That premium, however, is not too abnormal, historically speaking. Consider the fact that the average American spends about 11% on food and drink today, down from 18% in 1967. Collectively, we're starting to make the connection between a downward trend in food prices and health care costs that have ballooned from 8% to 18% of our budgets over the same time frame. It seems that more and more people are debating whether the savings at the register are worth the consequences of increasing levels of nutrition-related illnesses like diabetes.

As we become more attuned to preventative measures like evaluating the health and nutrition of the food we consume, companies are catching on to the trend. According to a recent study by Deloitte, 79% of the top brass at leading food and beverage companies cited "health and nutrition" as one of the most important issues facing the industry today.

Key Food and Beverage Industry Issue

 Percent of Executives
Citing Its Importance 





Price/growth pressure






Source: Deloitte Food and Beverage Study, 2012.

While other companies are waking up to this trend, however, Whole Foods will keep humming along, improving on the work it's been doing for more than three decades.

Foolish takeaway
Looking ahead, it's hard to imagine Whole Foods losing momentum as it disrupts the estimated $522 billion supermarket industry. Double-digit growth might be harder to come by, but every year the addressable market expands. After Thursday's decline, Whole Foods trades at a forward price-to-earnings ratio of 26 versus a market average of 15. For a company at the forefront of the fast-evolving grocery industry, that's a premium I'm willing to pay.

Is Whole Foods a top stock?
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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Isaac Pino, CPA, owns shares of Whole Foods Market. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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