Investors should take a look at Whole Foods (WFM). This company is an American foods supermarket that has locations in the United States, Canada and the United Kingdom. The chain specializes in natural and organic foods and has become quite popular in the communities where it is based. The first store was opened in Austin Texas, which serves as the corporate headquarters today. Beginning in 1980, four years later the company expanded to Houston and Dallas. In 1988 the company expanded to New Orleans with the purchase of the Whole Food Company, hence the name. The following year Whole Foods expanded to the west coast of the United States. Rapid growth was fueled throughout the 1990 ’s by the purchase of other natural food chains. By 1999 the 100th store was being opened. The company now has over 58,000 employees and total assets in excess of $5 billion USD.
The stock share of Whole Foods has been in a basic free fall since the high point which was reached in late October 2013. The price then exceeded $65.00 USD (United States Dollar) a share. By the end of April of this year the stock was still above $50.00 USD. Yesterday the stock dropped to a low of $37.75 USD and a high of $38.33. Dropping an additional 0.27 for the day (0.71%) Whole Foods closed at $37.92 USD on August 21. In after hours trading, it won back an additional 0.08 so the stock is now at $38.00 USD. Shares in the company are now where they were in the beginning of 2012. The stock had traded regularly below $20.00 a share as recently as 2010. It is important to note that the stock split 2 for 1 in May 2013.
Market capitalization stands at 13.72 billion USD and the P/E ratio (ttm) is 25.28. The Dividend yield is 1.27%. The 52 week range for the stock is from a low of $36.08 USD to a high of $65.59 USD. Volume was reported at 4,318,107 shares. The average volume for the last 3 months was 7,238,950.
The stock share price for Whole Foods has declined -34.43% since the beginning of the year. It has now reached a point where the stock has built an important base to push higher once again. There are signs that the stock may be ready for a rally. There is a positive divergence between price and momentum.
The recent quarterly business report released on July 30th , showed that although Whole Foods beat the expectations of industry analysts it missed making the high end revenue prospects. As a result the stock took another hit. However, it must be pointed out that revenues were still 10% higher then a year ago for the quarter. Total revenue for the company expected at $3.4 billion USD came in at $3.38 billion USD which although disappointing is no reason to panic. Same store sales were still up 3.9%.
Recognizing that the share price has been taking a beating the company decided to revamp the stock buy back program. The current one has been canceled to make way for a much larger scheme that will amount to $1 billion USD. The new plan will continue for the next two years.
This investor feels that the stock has declined more then what is practical given company earnings and the future prospects for the company. Although the stock had become overvalued in the fall of 2013 it has now become underestimated. It looks like the 50% retracement in the share price that has been achieved in the stock over the last 9 months, has become somewhat stable as a new base line of support. The run up of 5 years ending in October 2013 was due for a correction.
The Relative Strength Index (RSI) bottomed in May of this year with the major sell off of Whole Food shares in the market. Although the stock dipped even further over the summer it seems the big losses have already occurred.
There should be resistance for the stock to go much lower than $37.00 USD. It can be expected that the share price now at $38.00 USD can easily reach back into the low $40s USD later this year. An investor can expect to make between 10% and 20% returns if this is a short term move. Longer term, this writer expects the stock to move back into the high $40s USD in 2015. The $50s can be expected as early as 2016.
One can continue to be optimistic about Whole Foods if you consider that the EPS (Earnings Per Share) so far for the quarter are up 8% from a year ago. It is now at $0.41 USD in contrast to the anticipated return of $0.39 USD. The dividend yield is 1.27%.
The earnings growth for the company last year was up 16.67%. Growth for this year is only 4.26% so far. The projected earnings growth for the next five years is estimated at 11.19%. Revenue growth last year for Whole Foods saw an increase of 10.41%.
Whole Foods reported annual revenue at $12.9 billion USD in 2013. Annual profit for the year was $551 million USD. The net profit margin was 4.27% in 2013.
The next reporting date for Whole Foods is November 05, 2014.
The major concern for Whole Foods right now is the entry of new competitors in the supermarket business that are attempting to offer many of the same products as part of their inventory. These would include Sprouts Farmers Market, The Fresh Market, and Natural Grocers by Vitamin Cottage. In addition, Wal-Mart is teaming up with Wild Oats to offer more organic goods in its discount stores.
Although one can have concerns about a possible saturation point for organic foods, it does not seem that this fear is warranted at this juncture. Sales of all organic goods have increased at an astounding annual rate of 13.5% in the years between 2000 and 2012. However, as of 2012 organic sales still account for less than 5% of the total food purchases that were made in the United States. This allows one to believe that there is still plenty of room for future growth in the industry. Growth is also likely to expand internationally as more travelers become aware that these type of goods are now available.
Earnings have been particularly good for Whole Foods until just recently. The margins for profit though have been shrinking. Why? The entry into the market of competitors have forced the company to lower prices which has cut into the bottom line. The threat from Wal-Mart is somewhat muted because the two companies serve a different clientele for the most part. So it is true that margins will decline but this will be balanced but increased volume for Whole Foods in general.
Whole Foods also has an aggressive plan of expansion in the works. The stated goal of the company was to open up 1,000 stores in the United States alone. It is an impressive objective considering the company at present is limited to 388 locations state side (over 350 if one includes Canada and the United Kingdom). In seemingly acknowledgment of increased competition the company announced in December 2013 that the goal was now to establish 1,200 stores in the United States. There was also the stated effort to open more stores at a quicker pace.
Whole Foods has almost twice as many locations as it’s closest competitor. Sprouts has just over 200 locations. Fresh Market has less than 200 locations and Natural Grocers just above 100 sites. This gives Whole Foods more pricing power and up to this point a larger selection of merchandise. This is particularly the case for fresh fruits, fresh vegetables, dairy products and meats. The size factor will allow Whole Foods to grab a greater share of the organic market.
The corporate drive to lower prices will take some time to filter down so the stock will not move up too much in the immediate future, but longer term the company should be able to turn things around quite nicely.
On a final note there is always the possibility that the Whole Foods may be bought out by a larger established chain. This will permit the stock to be sold at a premium. A larger conglomerate may make the calculation that a major play into the organic market, can be achieved quicker by buying out the industry leader. The organic movement is a rapidly growing market that the majority of grocery chains will need to consider, as profits become progressively squeezed due to increasing competition.