My neighborhood is getting a Whole Foods Market (NASDAQ:WFM) next year, and people (including me) are losing their minds. The hype surrounding the grocery chain has carried over from the consumer world to the investing world, as well, with the stock rising and falling like a ship on the high seas. Meanwhile, Kroger (NYSE:KR) continues to plow through the high waves, cutting a smooth course toward success.
With revenue rising, earnings up, and cash coming in the door, Kroger's stock has risen 41% over the last twelve months, while Whole Foods's share price has dropped by 17.5%. Kroger is doing almost everything right, but we're still not talking about it enough. Here are the details on why you should ditch Whole Foods and sail on the SS Kroger.
Kroger's brand has customers rolling in
For the first six months of the fiscal year, sales were up 10.6%, driving a 10.4% increase in earnings per share. All of that was supported by a 4.7% rise in comparable-store sales over the first half of 2014.
That's not to say that Whole Foods hasn't done well. The high-end grocer boosted comparable-store sales by 3.1% in its last quarter. The company finished fiscal 2014 in September with a 4.3% comparable sales increase, which is even better than Kroger. The problem is that Whole Foods' expectations drastically decreased earlier in the year. That 4.3% growth for the budget year is nowhere near the 6.3% the company managed in the previous year. In addition, the company was forecasting a comparable sales increase between 5.5% and 7% at the beginning of the year.
In addition to the slowdown, Whole Foods is also seeing weakness in its older stores. Locations open more than 11 years are now averaging annual comparable-sales increases of just 2.4%. Four years ago, the older stores were increasing comparable sales by 6.2%.
Kroger, on the other hand, has kept its comparable sales growth relatively steady. Four years ago, the business increased annual comparable sales by 2.1%, and that was up to 3.6% in its last fiscal year.
The danger of being the new hot thing
The drop in growth at Whole Foods tells me two things. First, competition is moving in and giving the company less inherent advantage. It used to be that if you wanted a huge selection of organic or sustainable products, Whole Foods was the only game in town. Now, customers are able to shop around, giving Whole Foods a fight on price and selection.
Second, it says Whole Foods is moving into a new phase of its life -- it's getting old. Kroger is an established brand that has been around the block and back. Its steady sales growth is indicative of an ability to manage a mature business. Whole Foods hasn't had to develop that skill yet, but the challenge is on the horizon.
One clear danger for Whole Foods' investors is that they are holding a hot stock. The company currently trades at 29 times its earnings, while Kroger has settled down to 19 times its earnings. That means each move that Whole Foods makes could have a bigger impact on the stock, as hopes for growth are high. Kroger investors are in a position that comes with maturity, and large jumps and falls are less likely.
The strong growth of Kroger's sales, its stability, and its steady increase in earnings means it can outperform even a much-hyped competitor. Whole Foods might have a bright future, but the ups and down make it a riskier business. Kroger is the better bet for investors looking to get into the grocery game.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Andrew Marder 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.