The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash-flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul.
Whole Foods Market (WFM) has not been on the market's good side lately, but I believe this provides an opportunity for patient investors to take advantage of a shortsighted market. For the two reasons below -- as well as the three reasons listed in my previous article -- I added Whole Foods to my Pencils IRA Project with the expectation of market-beating returns over the long haul.
4. Consistently increasing cash-flow production
Whole Foods has increased operating cash flow at an average annual rate of 14.59% between fiscal 2010 and fiscal 2013, producing $472 million in free cash flow in 2013. Over the past four years, Whole Foods has managed to increase free cash flow production at an average pace of 9.5% annually. This consistent free cash flow growth has helped Whole Foods build up $1.08 billion in cash with only $60 million in debt.
| Company | Sales (FY 2013) | Operating Cash Flow (FY 2013) | Store Count | Sales/Store | Cash (MRQ) | Debt (MRQ) |
|---|---|---|---|---|---|---|
| Whole Foods Market | $12.92 billion | $1.09 billion | 379 | $34.09 million | $1.08 billion | $60 million |
| Sprouts Farmers Market (SFM 0.21%) | $2.44 billion | $160.59 million | 172 | $14.19 million |
$149.05 million |
$433.06 million |
| Natural Grocers by Vitamin Cottage (NGVC -0.92%) | $430.65 million | $25.72 million | 83 | $5.19 million | $7.91 million | $19.75 million |
| The Fresh Market (TFM) | $1.51 billion | $140.37 million | 156 | $9.68 million |
$11.74 million |
$50.77 million |
Source: Google Finance, most recent quarterly reports, and authors calculations. MRQ = most recent quarter.
There's certainly room for more than one competitor in this field, but Whole Foods has the leader's edge in terms of store count, revenue, and cash flow production. I am confident that the company's healthy balance sheet, along with the ongoing innovation of the business, will help Whole Foods command the leadership position in the organic and natural food retail market going forward.
5. Strong company culture
Whole Foods enjoys a rating of 3.6 out of 5 on employee review website Glassdoor, while Mackey and Robb have a solid 83% employee approval rating. Compare this to Whole Foods' smaller competitors:
- Sprouts Farmers Market has an employee rating of 2.7/5 on Glassdoor, and CEO Doug Sanders has an employee approval rating of 51%.
- The Fresh Market has an employee rating of 2.5/5, while CEO Craig Carlock has an employee approval rating of 31%.
- Natural Grocers by Vitamin Cottage has an employee rating of 2.8/5, and CEO Kemper Isely has a dismal 21% employee approval rating.
These numbers speak for themselves. Considering the importance of happiness and engagement when it comes to employee retention and productivity, these numbers bode well for Whole Foods (especially when compared to the mediocre ratings of these smaller competitors).
Whole Foods -- which has been ranked for 17 consecutive years as one of Fortune's 100 best companies to work for -- has several attributes that set the company's culture apart from both its peers and many other businesses across all industries. Whole Foods employees enjoy numerous benefits such as store discounts, dental and health care plans, paid time off, the opportunity to vote on new hires, and the ability to view the salaries of all employees (including executives).
Foolish bottom line
"I'd say competition is more intense right now than possibly we've ever experienced before," said Walter Robb in the company's most recent conference call. These competitive challenges may cause short-term bumps in the road for Whole Foods, but the company is a market leader in a growing field. Not only that, but Whole Foods has an innovative leadership team, top-notch company culture, and unparalleled cash-flow production in its field.
Given Whole Foods' focus on long-term results and arsenal of cash to support continued innovation, I'm happy to take advantage of the recent sell-off to add the company to the Pencils IRA Project.
