Novice Investing - Finding A Whole Food in The Market

Date: Friday 05th 2008f September 2008 05:39:40 PM

Finding A Whole Food in The Market - 02/10/2007

By: Hari Wibowo

Whole Foods Market Inc. (WFMI) engages in the distribution of natural and organic food through supermarkets. We are interested in looking at Whole Food Market due to the recent drop in share price coupled with the tremendous sales growth the company has demonstrated during the past decade. As of September 2006, the company operates 186 stores with distributions as follows: 177 stores in 31 US States, 3 stores in Canada, 6 stores in the United Kingdom. For fiscal year 2006, revenue came in at $ 5.6 Billion, a compounded annual growth of 31% since 1991. In 1991, revenue was $ 92 million. Whole Food strives to be the best food retailer in every locations by putting the heavy emphasis on perishable products. About 67% of its sales come from perishable products.

Whole Food 2006 annual report pictures that the company's growth is still in its early stage. Sales of natural products grew 9% to $ 51 Billion in 2005. The natural products mentioned here include food and beverages, dietary supplements, personal care products, household goods, organic cotton clothing. The company expects this industry to continue to grow due to several reasons; 1) Increased awareness of the role of food and nutrition to our health, 2) An increasing number of individual reaching retirement age, 3) Environmental concern due to degradation of water and soil quality, 4) Concerns about increased usage of pesticide, growth hormones and artificial ingredients. Partly due to these reasons, management is confident about their goals of making $ 12 Billion in sales by 2010 from $ 5.6 Billion currently.

Whole Food management is also disciplined in the way it pays company's executive. It put a cap of 19 times average pay for the maximum an executive can earn with the company. The average annual pay is $ 32,000 which means the maximum pay at Whole Food Market is $ 608,000. Now, how many times have you heard many executives getting paid tens of millions of dollars? I doubt that the average company's pay is twice or thrice as much as Whole Food Market.

Further to emphasize on its commitment on the agricultural community, the company is committed to buying from local farmers, as long as they meet with Whole Food quality standards. There is of course several pro and cons including Whole Food decision to sell lobster in Maine. This may come to haunt Whole Food for years to come, depending on how they handle the situation. Overall though, you can find more ethically challenged companies than Whole Food.

Regarding valuation, Whole Food share price has dropped from its all time high of $ 74.00 to $ 45.61 currently. With current Earning per Share (EPS) of $ 1.41, Whole Food spots a Price Earning (P/E) ratio of 32. This is an expensive valuation for a company of no growth that we normally come across. However, since 1991, Whole Food has been growing sales at an annual rate of 31% and net profit at 21% annually. Thus, if history is any guide, within 5 years, Whole Food profit would grow to $ 3.65. Still, that is a P/E of 12 five years from now, which is uncertain.

While Whole Food can be considered a retailer, it differentiates itself by selling organic and healthier food. As a result, it can charge a premium and they have higher than average gross margin than other prominent retailers. This shows that at least currently, the market that the company serves is different from other national big retailers.

Company	2005	2004	2003
Whole Food	34.9%	35.1%	34.7%
Wal-Mart	23.8%	23.7%	23.2%
Kroger	24.8%	25.3%	26.3%
Safeway	28.9%	29.6%	29.6%

Compared with many other growth stocks, Whole Food is growing conservatively. Despite all the capital expenditure, the company still keep $ 245 Million (or $ 1.71 per share) of positive net cash in the balance sheet. Thus, the risk of the company defaulting is less, should there be bumps on the road.

History shows that for company in its growth stage, the company seldom trade at a price earning ratio of below 30. Microsoft never did that. (Until recently when sales growth slows to 5-10%). Amazon and Yahoo always had a P/E of above 30. eBay shares appreciated 4000% in which it never trade with a P/E of below 30 due to its tremendous growth. Recently, it spots a P/E of 26 due to slowing growth. How about Starbucks? It is traded at a P/E of 37.0 The question you have to ask is whether the growth story at Whole Food is already over or not. Also, is it possible for Whole Food management to reach its target of $ 12 Billion sales by 2010, which is four years from now?

From general crowd point of view, the market that Whole Food serves will continue to growth for the foreseeable future. As stated earlier, the market for natural products is $ 51 Billion in 2005 and Whole Market has slightly more than 10% market share. Starbucks alone can book a revenue of $ 7.8 Billion simply by selling coffee and its derivatives. Thus, there is a wide open chance for Whole Food to bring phenomenal growth for years to come.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Whole Food Market Inc. (WFMI) or any other securities.

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