Is It Time to Buy Whole Foods Market?

Shares of Whole Foods Market are down more than 70% since its highs. Given the company's long-term outlook, shares are a bargain at its current price.

Jul 9, 2014 at 8:30AM

Whole Foods Market's (NASDAQ:WFM) second-quarter results, released on May 6, were quite poor as the company missed both revenue and earnings per share expectations. Shares of Whole Foods Market were hit hard the following day as investors fully digested the results.

Many investors have become accustomed to Whole Foods Market posting poor quarterly results, but this trend may end soon.

Short-term pain, long-term gain
When Whole Foods recently reported its second-quarter results, the company lowered its full-year fiscal 2014 guidance to $1.52 to $1.56 from a previous range of $1.58 to $1.75. The company guided its sales growth to be 10.5% to 11%, down from a previous 11% to 12% range.

It's no surprise that investors threw in the towel and sold shares given a revised guidance, which also included same-store sales growth of 5% to 5.5%, lower than the 5.5% to 6.2% the company previously projected.

While Whole Foods Market's short-term concerns are out in the open and now fully understood by investors, it is likely that the company's long-term prospects are being ignored.

What to expect beyond 2014
Whole Foods Market provided yearly guidance for fiscal 2015 until fiscal 2018. In 2015, the company is guiding its EPS to be $1.74 per share, a healthy gain over 2014's revised guidance of $1.52 to $1.56.

Whole Foods Market expects same-store sales to grow by 6% in 2015, likely because of new store openings, which grow faster giving an easier prior year comparison. Also, Whole Foods Market's price investments should gain traction and resonate with consumers, as this is a lengthy prospect.

Beginning in fiscal 2015 and extending through fiscal 2018, the company expects to grow earnings per share at a faster rate (or similar) to sales growth. As such, it is reasonable to think that Whole Foods Market should see a boost to its margins as the company gains further scale.

Organic advantage?
Whole Foods Market operates a greenhouse on top of its store in Brooklyn, which has been labelled as the first commercial-scale greenhouse farm. Obviously, by growing its own produce, Whole Foods Market can sell high-quality, pesticide-free produce all year round.

As consumers demand more information on where their food comes from, Whole Foods Market could be the only grocery store to say, "that tomato was picked fresh from our garden on the roof just this morning."

Whole Foods Market will also benefit from reduced costs as it will not have to pay for transporting food from sources far away. Additionally, Whole Foods Market will be able to market the fact that it is playing an all-important role in reducing carbon emissions.

According to Brian Sozzi of Belus Capital Advisors, Whole Foods plans to use its Brooklyn greenhouse to supply 10 surrounding Whole Food Market locations. This may serve as a sign that the project is scalable and could be duplicated in other cities.

Death of the traditional grocer?
In addition to a rooftop greenhouse, Whole Foods plans to include ramen shops, in-house brewery, plenty of eat-in and take-out options, and many other initiatives in its stores. Naturally, Whole Foods is attempting to lure in customers who may be tired with the same boring routine at their local supermarket or national chain.

However, there is one national chain that sticks out and offers a different shopping experience, and that is Kroger (NYSE:KR). Kroger's operations include traditional supermarkets, fuel centers, pharmacies, and convenience stores, giving the company tremendous scale and buying power.

Kroger has not shied away from M&A activity to fuel growth, including its acquisition of Harris Teeter, which is performing well. More recently, Kroger acquired for $8 per share, which will naturally give Kroger a new online growth channel.

Kroger is also competing head-on with Whole Foods Market; the company noted during its third-quarter conference call back in December 2013 that it expects its natural and organic food business to double over time. 

Investors who are banking on the continued trend of natural and organic should have confidence in the grocer's ability to meet these ambitious objectives. Kroger's Chief Financial Officer Mike Schlotman said during the company's first-quarter conference call on June 19: "We continue to see outstanding double-digit identical sales growth in our natural foods department."

Foolish take
As the demand for organic and healthier options continues to grow over the years, investors should initiate positions in their portfolios sooner, rather than later.

Kroger can certainly compete with a retailer liker Whole Foods Market; however, the company is unlikely to attract the "die-hard" organic eater. Nevertheless, Kroger's advantage stems from its size that allows it to better attract the mainstream customer.

Kroger offers investors a strong and consistent share buyback and dividend program backed by its massive $1 billion annual free cash flow.  

Kroger offers investors a certain layer of protection and a safer choice versus Whole Foods Market, whose shares are suffering from a lack of investor confidence given the fact that shares are down around 70% from its highs eight months ago.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jayson Derrick 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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