Why Whole Foods Doubters Have Gotten Crushed -- Chart by Chart
Whole Foods Market (WFM) has been one of those rare, extraordinary investments that kept on giving long after its share price looked way too expensive. Year after year after year, investors have paid gargantuan prices for the nutty granola grocer and reaped huge returns anyway, leaving behind anyone who waited for a more standard valuation on the shares. It never came. Perhaps it’s time to admit that Whole Foods is worth a luxury price.
Since 2008, Whole Foods has given value investors few openings. Its PE ratio hasn’t dipped below about 28 since early 2009, and even then it traded for double the valuation of competitors. The share price has marched up more than 340% in the past three years, and the few bobbles on the way rarely lasted for more than a month. Its P/E now approaches 40, while earnings are expected to grow maybe 11% this year. YCharts Pro gives Whole Foods near-perfect marks for fundamentals but only an average rating for share price value.
For today’s investors, the question is whether the numbers that made Whole Foods’ shareholders so rich in recent years can be sustained into the future, now that the grocer is a $15.8 billion market cap company with some $10 billion annual sales. Because generally, those numbers have been wonderful. Revenues have posted modest gains every year since the recession – it closed some stores during it -- while profits have boomed.
Most impressively, the profit gains come mainly from pulling more people into every store rather than adding expensive real estate. Same store sales have been up for 12 straight quarters; up 8.5% in the past fiscal year and 9.5% year-over-year in the past quarter alone. It runs about 320 stores now; expects to open some 25 or so stores this year and a few more than that in 2013, with an eventual goal of about 1,000. The average size of the stores is going down, but the small format stores -- there are at least six so far – are producing far higher sales per square foot than the more familiar mega versions. The company uses free cash flow to fund expansion, and it appears to have plenty of money to continue doing so.
The company is coming off “an exceptional quarter,” according to co-chief executive Walter Robb, one that led to a the full-year profit forecast increase of about 6.5%. He says things are going so swimmingly now that Whole Foods can, all at the same time, add stores, increase its dividend, fund stock buybacks and pile up cash.
Robb wasn’t specific about those dividend and buyback plans, but its dividend yield now is well under 1% and still below pre-recession levels. That leads to high hopes for a grand increase, particularly with earnings so vastly higher than the dividend payout.
One potential setback for the share price lies in its profit margins, which have grown steadily and are much higher than competitors. Robb warns that they may ease down a bit in order to make the prices for its largely more expensive organic products more competitive. The company really wants to shed its “whole paycheck” nickname, and Robb indicates he’s willing to sacrifice some margin to gain some cred with value shoppers.
Rationally, a couple of factors may make Whole Foods’ current share price unsustainable. Those great same-store sales gains surely have to slow down at some point. Further economic recession could pull away its customers just like it did in 2008, when the shares lost some 75% of their value. And it will get harder and harder to find places to put 50,000-square-foot stores.
It’s also quite possible that even these issues wouldn’t hurt the share price for very long. Long-term, the fundamentals are there for Whole Foods shareholders to more than prosper: plenty of cash, a growing dividend, a moderate expansion plan and management that understands how to create profit while strengthening the brand. In other words, there’s not much reason for Whole Foods to go on sale.