Here's Where Whole Foods Market Reigns Supreme

Whole Foods Market (NASDAQ: WFM  ) has been lambasted over the past month -- the stock has fallen more than 23% in the past 30 days after reporting quarterly results that didn't mesh with shorter-term market expectations. Co-founder and CEO John Mackey reiterated his confidence that Whole Foods "will continue gaining share as the demand for fresh, healthy foods outpaces rising competition, creating millions and millions of new customers for us."

While the optimism from Whole Foods' experienced and innovative leadership team is somewhat reassuring for investors, it is worth exploring the competitive landscape. Let's see how Whole Foods stacks up against larger and more mainstream conventional grocers such as Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) .

A background on the competition
Kroger was founded in 1883 and operated 2,640 supermarkets in the U.S. at the close of the 2013 fiscal year. Each Kroger store averages 61,000 square feet in size, and the company is the largest conventional grocer in the country. In 2002 Kroger launched its "Naturally Preferred" line of organic and natural foods -- one of the largest brand launches in the company's history -- and further expanded its organic food offerings in 2007. 

Safeway was founded in 1926 and operated 1,335 stores at the end of fiscal year 2013. Each Safeway store averages roughly 47,500 square feet in size. Safeway is behind Kroger as the second-largest conventional grocer in the U.S. The company launched its organic food product line in 2006 and joined other grocers (including Kroger) earlier this year in resisting the sale of genetically engineered salmon in its stores.

Whole Foods Market was founded in 1980 and had 362 stores at the end of fiscal 2013. Each Whole Foods store averages approximately 38,000 square feet in size. The average Whole Foods tends to be 20%-40% smaller than the typical Safeway or Kroger store. In addition to leading the way in the organic and natural foods retail market, Whole Foods has taken on related initiatives with animal welfare and genetically modified organisms (GMOs) transparency. 

A recent article from Fortune speculates that "what we might be seeing now is a realization that Whole Foods' best days are behind it." It is important to remember that competition is nothing new to Whole Foods. As noted above, the two largest conventional grocers in the U.S. both launched their own lines of organic and natural products last decade. Competition is bound to increase as organic foods become more mainstream and increasingly cost effective for grocers to carry. 

Here is where Whole Foods is king
I have noticed a curious amount of silence from financial analysts and writers when it comes to a certain metric that demonstrates the financial dominance of Whole Foods. Whole Foods is well known when it comes to more qualitative measures such as employee happiness, social engagement and responsibility, and company purpose. Going beyond the qualitative measures, Whole Foods' cash flow production offers a glance into the financial superiority of the company. 

In the 2013 fiscal year Kroger produced a total of approximately $3.4 billion in operating cash flow. This equates to about $1.3 million in cash flow produced by each of its stores over the course of the 2013 fiscal year. 

Safeway produced a total of approximately $1.2 billion in operating cash flow in fiscal 2013, or an average of $928,000 of cash flow produced per store. 

Whole Foods produced about $1 billion in total of operating cash flow in fiscal 2013. This means that each Whole Foods store produced an average of approximately $2.8 million in cash flow, more than twice as much produced by a typical Kroger store and three times that produced by each Safeway store. 

Free cash flow is even better
These numbers get even juicier when we look at free cash flow -- operating cash flow less capital expenditures; this metric measures the cash retained by these grocers after they have made the necessary capital investments to maintain and expand their respective store bases. In fiscal 2013, Kroger produced about $1 billion in free cash flow (or $398,000 per store). Safeway produced $477 million, or $357,000 per store. Whole Foods produced $472 million, which equates to $1.3 million in free cash flow produced per store. 

We can take this a step further and look at the free cash flow generated by each square foot of store space. Kroger produced an average of $6.52 in free cash flow per square foot of store space in the 2013 fiscal year. Safeway produced $7.52 per square foot. Whole Foods produced $34.31 per square foot, more than twice the free cash flow per square foot produced by Kroger and Safeway combined. This represents an astonishing ability to generate and retain cash that is unmatched in the world of grocers. 

Company Stores Op. Cash Flow Free Cash Flow FCF/Store Avg. Store Size FCF/SqFt
Whole Foods 362 $1.01B $472M $1.3M 38,000 SqFt $34.31
Kroger 2,640 $3.88B $1.05B $398K 61,000 SqFt $6.52
Safeway 1,335 $1.24B $477M $357K 47,500 SqFt $7.52

Foolish bottom line
Whole Foods has 114 stores in its development pipeline, which is music to the ears of investors who recognize just how powerful of a cash flow machine this business is. Considering Whole Foods' cash flow performance outperforms that of grocer behemoths such as Kroger and Safeway by such a significant margin, I am confident in the company's ability to compete, expand, and thrive over the long haul. 

Whole Foods' management believes the U.S. market can support 1,200 Whole Foods stores. I am inclined to agree because 1,200 represents fewer stores than what either Kroger or Safeway already has in the U.S.; and remember those grocers have stores that are considerably larger than your average Whole Foods store. Whole Foods has plenty of room to expand and already has a record number of stores in the development pipeline.

Whole Foods is redefining success both as a purpose-driven business and phenomenal cash flow machine. It's rare that you get these qualitative and quantitative traits in one business, but I think we have that with Whole Foods.

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