Whole Foods Market: Love it or Hate it?

Investors have pushed shares of Whole Foods Market lower so far this year. However, two key factors could act as catalysts for the stock going forward.

Mar 29, 2014 at 9:00AM

Whole Foods Market (NASDAQ:WFM) is off to a slow start in 2014, after a series of earnings misses shattered investor confidence in the health food retailer. Whole Foods lowered its fiscal 2014 outlook last month following weaker than expected first-quarter results. The company now expects full-year sales growth of 11%-12%, down from its previous guidance for sales growth of 11%-13%. Shares of Whole Foods are down more than 9% so far this year as a result.

Before you panic, it's important to note that Whole Foods' fundamentals are solid and the company's long-term growth strategy remains on track. It's in this spirit that I've outlined two key reasons for patient investors to be optimistic about the stock, despite the recent pullback.

Whole Foods Market

Source: The Motley Fool.

Responsibly growing its store base
Whole Foods operates in the lucrative niche space of organic health foods. The natural and organic food segment grew 10% to $81 billion in 2012, which trumped the mere 3% growth in the broader U.S. grocery market over the same period. Yet natural and organic products sold in the U.S. today still account for less than 15% of the roughly $700 billion that U.S. consumers spend on food consumed at home each year.

Whole Foods hopes to change this by aggressively expanding its store count in the years ahead, thus making it easier for more consumers to find its stores. Whole Foods is one of the fastest-growing grocery store chains around, operating 373 locations today but planning to nearly triple its store count in the years ahead. In fact, management says it ultimately sees the potential for as many as 1,200 Whole Foods locations within the United States.

"With a base of 373 stores today and a record 107 stores in our development pipeline, we expect to cross the 500-store mark in 2017," said Walter Robb, co-CEO of Whole Foods, said in an earnings press release. This is a reasonable growth trajectory for the company, and it should serve Whole Foods well by enabling the brand to reach additional potential customers in more regions across the country.

Expanding its private-label business
When it comes to beloved brands, Whole Foods is it at the top of its game. The health food chain ranked No. 11 out of 120 of the world's most trusted brands in a recent survey by Entrepreneur magazine. Additionally, the World Retail Congress named Whole Foods retailer of the year in 2013. Accolades such as these strengthen Whole Foods' brand image, which in turn enables the company to sell its products at premium prices. Additionally, shoppers are more likely to purchase items from Whole Foods' 365 private-label brand if they trust the Whole Foods name as a whole.

This is key because private-label products usually earn fatter margins for retailers. In fact, profit margins on private-label goods are typically 10% to 15% higher than those of name-brand items. Store brands also make sense from a consumer standpoint because they typically cost 15% to 30% less than name-brand alternatives, according to Consumer Reports.

Private-label foods have come a long way from the days when they were considered knockoff or imitation versions of national brands. Companies from Target to Whole Foods have learned how to use store brands to create value and build customer loyalty.

In fiscal 2013, Whole Foods' private-label products accounted for as much as 12% of the company's total sales, according to data from Morningstar. This is encouraging for Whole Foods going forward as it continues to expand its store-branded products. Most recently, it launched a line of premium products for pets called Whole Paws. "Premium pet food is the fastest growing segment in the pet food category," said Mitch Madoff, Whole Foods global exclusive brands coordinator, in a press release. Moreover, new private-label lines such as this should help Whole Foods grow its margins down the road.

Patience is key
Long-term investors should be rewarded down the road as Whole Foods Market continues to expand its footprint across the U.S. and makes its store more profitable by introducing new private-label products that carry higher margins than brand merchandise. With shares trading more than 21% below the stock's 52-week high, this could be a welcome entry point for patient investors .

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends 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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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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