Consumers all over the world are paying more attention to the nutritional qualities of the foods and drinks they consume. Chipotle (NYSE:CMG), Whole Foods (NASDAQ:WFM) and Hain Celestial (NASDAQ:HAIN) are three high quality companies capitalizing on the trend and delivering healthy growth rates for shareholders.
Chipotle: burritos with integrity
Chipotle has differentiated itself from traditional fast food competitors from the start. The company is one of the biggest success stories in the fast casual space, and its "food with integrity" approach to Mexican cuisine resonates notoriously well among consumers: The company has delivered an annual growth rate of 20.3% per year over the last five years, and earnings per share have increased at 32.7% annually during the same period.
While most companies in the industry typically move into highly processed ingredients as they grow in size, Chipotle has done exactly the opposite, focusing every day more on fresh ingredients for its tacos and burritos. Instead of looking for low cost suppliers, Chipotle has developed its own network of high quality providers of natural and environmentally sustainable food.
The company´s food with integrity philosophy consists of "serving the very best sustainably-raised food possible with an eye to great taste, great nutrition and great value." This means using naturally raised meat, organic produce, and dairy without added hormones, with an emphasis on local sourcing.
When it comes to calories, it all depends on the choices the customer makes: you can choose a bowl or salad with plenty of vegetables if you want to keep calories under control, or go for gigantic burrito with all kinds of salsas and chips if you don´t care much about calories.
Some customers may give more attention to the health implications, ecological considerations and cultural footprint embedded in Chipotle´s food with integrity philosophy, while others are probably more attracted by the better taste that these high quality ingredients mean for the products.
In any case, customers are more than willing to pay a few extra dollars for a typical meal at Chipotle versus the lower quality offerings provided by other fast food chains.
Buying the dip in Whole Foods
Whole Foods is a major beneficiary of the natural and organic foods movement and a talented management team has translated growing demand into a 29.1% annual increase in earnings per share over the last five years.
But the company lost some flavor when it disappointed investors with lower than expected sales growth and reduced guidance during the last quarter. Sales for the third quarter increased by 10.8% on a comparative 12-week basis, comparable-store sales growth was 5.8%, a slowdown from previous quarters and below analysts' expectations.
The biggest reason for negativity was reduced sales guidance for 2014. Revenues are now expected to be up between 11% and 13% versus a previous range of 12% to 14%, and comparable-store sales are expected to be in the range of 5.5% to 7% versus previous guidance of 6.5% to 8%.
Whole Foods is offering higher discounts, lowering its prices to match those of the competition and adding lower-cost brands to its products assortment to expand into new markets and attract lower-income consumers. Also, accelerating store growth seems to be generating some cannibalization and taking its toll in comparable-store sales.
But the company still owns a leading brand in the organic foods business and a reputation for quality. Management is well known for its culture of innovation and efficiency, and Whole Foods has profit margins of 6.7% at the operating level, well above the industry average of 3% according to data from Morningstar.
Even if growth understandably slows down as the company becomes bigger and competition in the organics sector increases, Whole Foods is still a remarkably well-run company doing much better than other players in the industry. Long term investors may want to consider the recent dip in this high quality company a buying opportunity.
Hain Celestial tastes like heaven
Hain Celestial is a leading producer of natural and organic foods, drinks and personal care products. The company has expanded via both organic growth and acquisitions over the last years, capitalizing on the opportunity to profit from higher demand for healthy food choices and increased shelf space for the category from both specialized retailers like Whole Foods and retail giants like Wal-Mart and Costco.
Hain has increased sales at 10.6% annually over the last five years and earnings per share have grown at an even tastier 20.5% per year over that period. There is no deceleration in sight judging by the company's performance during the last quarter, as Hain reported a big increase of 33% in revenue during the quarter to $477.5 million and adjusted earnings per share expanded by 27% to a record $0.52 per share.
Founder and CEO Irwin David Simon said during the press conference that over 90% of Americans have purchased organic or natural products, but only 25% of those consumers are buyers of Hain products. This indicates that Hain has plenty of room for growth from both market share gains and growing industry demand over the coming years.
Changing consumer habits can be powerful secular trends to consider when searching for the best investment opportunities. Even if operating in different industries, companies like Chipotle, Whole Foods and Hain Celestial are generating yummy growth rates for shareholders by capitalizing on the trend towards healthy and natural nutrition.