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Since Whole Foods Market (WFMI, news, msgs) announced a sales slowdown last fall, its once-hot stock has wilted like a bag of spinach in the back of the fridge.
Now investors won't go near the nation's leading natural- and organic-food supermarket chain because:
- Old-school competitors such as Kroger (KR, news, msgs) and Safeway (SWY, news, msgs) are having success playing by Whole Foods' rules, offering fresher produce, quality prepared foods and better service.
- Whole Foods needs to prove it can manage the takeover of Wild Oats (OATS, news, msgs), its first major acquisition.
- Despite their recent slide, Whole Foods' shares still trade at 31 times this year's earnings.
But who should buy Whole Foods stock? Anyone who doesn't mind owning a stock that will double in the next three years.
Here's why:
- Whole Foods is an emerging powerhouse brand on the verge of a Starbucks-style growth binge.
- Traditional supermarkets will never recreate the Whole Foods customer experience.
- Whole Foods has a minuscule 1% market share. So plans to increase its store base by 45% and double annual sales to $12 billion by 2010 are absolutely reasonable.
"They are still in the very early innings of their growth cycle," says Mike Trigg, an analyst with WCM Investment Management who believes Whole Foods stock will double in the next three or four years. "We see a lot of similarities to what Starbucks (SBUX, news, msgs) was five or six years ago."
Sure, there are risks to buying now. Andrew Wolf, an analyst with Branch Banking and Trust, or BB&T, rates the stock a "hold" because he's waiting for signs that Whole Foods can handle its challenges.
The problem with Wolf's approach is that often by the time you see tangible signs of success at a company, you've missed a lot of the action in the stock. Unlike Wolf, I don't think I'm smart enough to get the timing just right, so I'd rather just buy now and be a little early.
Here's a look at why the chief challenges facing Whole Foods are surmountable and, for smart investors, present a good time to buy the stock.
Half foods
Though Whole Foods shares have gone nowhere since November, your parents' supermarket chains, Kroger and Safeway, have been on a roll because of impressive sales growth at what were once considered stodgy, low-growth businesses. Sales at stores open more than a year were up 5.6% and 4.4%, respectively, in the fourth quarter for Kroger and Safeway.The old-school groceries are back in the game because store remodeling, improved customer service and better offerings of fresh produce are bringing in the shoppers. Supervalu (SVU, news, msgs) looks like the next chain to go "upscale." It plans a $1 billion upgrade.
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"Mainstream chains are getting in on its act," cautions HSBC Securities analyst Mark Husson, who is steering investors away from Whole Foods with a "neutral" rating on the stock.
But Morningstar (MORN, news, msgs) analyst Mitchell Corwin believes this view misses the big picture. "Whole Foods is an emerging lifestyle brand," says Corwin, who has a five-star rating on the stock, Morningstar's highest rating. "They offer a pleasurable shopping environment where food is the star." One key difference: Whole Foods stores have inviting dining areas which, like Starbucks, offer people another place to hang out.
BB&T's Wolf agrees that the natural-food chain's competitive strength isn't really threatened by the other supermarkets. "Whole Foods has a service culture that nobody else can match. These huge chains that are built for economies of scale have a limit to the amount of labor they can put into a store, otherwise the economics don't work," Wolf says. He thinks Whole Foods will be a winner over the long term despite his "hold" rating.
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