In an earlier article, trends in consumer preferences, the growth of millennial's income, the importance of shopping experience, and a first-mover advantage were cited as the reasons why Whole Foods (WFM) is a better investment than Wal-Mart (WMT 1.99%). The article does not take into account the financial position and performance of both companies and how this impacts your investment decision. Here we will go over important metrics and what they mean for Foolish investors.
Sales, size, and margin impact oh my!
| Market cap | Number of locations | |
|---|---|---|
| Whole Foods | $15 billion | 362 |
| Wal-Mart | $241 billion | 10,942 |
Wal-Mart is in 26 countries, while Whole Foods is mainly in the US with minimal operations in the UK and Canada. Sales for the most recent fiscal year came in at $476 billion and $13 billion for Wal-Mart and Whole Foods, respectively. That's quite the dispersion, and it can be explained by Wal-Mart's scale. This poses an opportunity for Whole Foods when expansion occurs more rapidly, not just domestically, but globally.
| Gross margin for: | 2011 | 2012 | 2013 |
|---|---|---|---|
| Whole Foods | 34.99% | 35.5% | 35.8% |
| Gross margin for: | 2012 | 2013 | 2014 |
| Wal-mart | 24.98% | 24.8% | 24.8% |
Gross margin represents the percentage cost of revenue. Whole Foods sells higher priced goods, which explains the higher margins. Wal-Mart is known for its everyday low prices, but is not as well-known for quality as Whole Foods is. Whole Foods customers accept the higher prices because they know they are receiving a higher quality of goods which can not be bought elsewhere. Wal-Mart has not turned a blind eye to Whole Foods' leading role in this category of food. Wal-Mart now has aisles dedicated to natural and organic foods, though not whole stores like Whole Foods.
Also, smaller companies like Whole Foods have an easier time increasing financial metrics than big companies like Wal-Mart. Just think how much more a one billion dollar increase in sales would impact Whole Foods over Wal-Mart. For Wal-Mart, it would barely move the needle, whereas Whole Foods it would be about an 8% increase in sales.
Cash is king
Investors love cash flow, and Free Cash Flow (FCF) is a metric that measures the cash leftover for use by suppliers of capital after all expenses have been paid to run or upgrade the business.
| FCF for: | 2011 | 2012 | 2013 |
|---|---|---|---|
| Whole Foods | $593 million | $726 million | $811 million |
| FCF for: | 2012 | 2013 | 2014 |
|---|---|---|---|
| Wal-Mart | $10.75 billion | $12.7 billion | $10.14 billion |
Whole Foods has not only managed to increase FCF over the period, but has done so while increasing capital expenditures. This means Whole Foods' operating cash flows are increasing at a greater rate than capital expenditures. Whole Foods is in a stage of expansion and is increasing it's store count at a clip of around 8% per year. This presents an opportunity to get in on this growth company while it is still in relative infancy compared to the competition.
Wal-Mart has a history of using FCF to increase its dividend and to repurchase shares. Even though Whole Foods is a relatively young company, it still manages to pay a dividend with a yield of 1.1%, and has a history of share repurchases. Whole Foods management has authorized an increase in its repurchase program as well.
Foolish takeaway
Investors wanting a piece of the natural and organic foods industry should look to Whole Foods. This company is still in it's early growth stages when looking at total locations and store reach. They have the first-mover advantage, great margins, FCF growth, and still pay a dividend along with stock buybacks. The article referenced above along with a solid financial position outline how Whole Foods could become a great long-term play for anyone looking to invest in this high-growth industry.
