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 Vitacost.com 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.

Leaked: This coming device has every company salivating
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we buy goods, but potentially how we interact with the companies we love on a daily basis. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns, you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers