Not sure how many of you guys have a Whole Foods near you, but it definately is a great place. I have one a couple hundred feet from my office that I goto a few times a week for lunch. Not your typical supermarket experience. You definately pay a premium, but that is what you get in return as well. Anyways preparing to buy this as soon as I free up some other funds.
Whole Foods Market WFMI
by Mitchell P. Corwin, CFA, CPA
Thesis 04-05-2006
Whole Foods sets the standard for differentiation in the supermarket industry, in our opinion. The firm doesn't look at itself simply as a delivery vehicle for everyday foods, like so many of the traditional supermarkets. Rather, it has created a brand image that connects with high-end food shoppers.
Sales of natural and organic products increased nearly 7% in 2004, and we think that growth rate can average mid- to high-single digits in the coming years, thanks to more demand from mainstream consumers.
Whole Foods benefits from that trend. However, the true success story for the firm has been its evolution from a simple purveyor of alternative foods to a unique, upscale supermarket. The company recognized early that there was a growing movement of food enthusiasts clamoring for stores that shared their love of food. With a pleasurable setting and well-paid workers who care about customer service, Whole Foods today delivers some of the best stores for those embracing healthier lifestyles, in our view. It helped make organic foods hip among baby boomers and young urban professionals, carving out a new niche in food retailing.
While supermarkets continue to expand natural-food offerings, none can match the selection in Whole Foods' newer 50,000-80,000 square-foot stores, in our view. Plus, while supermarkets are forced to lower prices on many products to compete with the likes of Wal-Mart WMT, Whole Foods competes in an entirely different market; its customers will pay up for its exotic fruits and hearth-baked breads. With the increasing buzz factor and the ability to charge premium prices, the firm posted nearly 13% same-store sales growth in fiscal 2005 and should continue to post low-double-digit same-store sales in 2006. Also, operating margins are 5%-6%, compared with the 3%-4% earned by the large supermarkets. With robust free cash flows, Whole Foods can afford to pay quarterly dividends and still fund its ambitious growth using internally generated funds.
We don't foresee anything stopping this dominant firm's continued double-digit growth. That said, switching costs aren't high in this type of business, and Whole Foods appeals to a finicky customer base. Therefore, we continue to assign the firm a narrow economic moat rating and would seek a decent discount to our fair value estimate to invest.
Valuation
We think Whole Foods is planning to bump up its annual square footage growth in 2007 and 2008 beyond the 14% increase the company expects in the current year. As a result, we have increased our assumptions for new-store growth in those years, and our fair value estimate is now $85 per share compared with $74. We expect square footage growth of nearly 20% in 2007 and 2008, slowing down to 15% thereafter. We expect annual sales to increase 21.4% in 2006 and average 23%-24% over the next five years. In our previous model, we assumed sales increased 21%, on average. Operating margins should remain relatively flat because the company intends to use cost efficiencies gained from operating a larger store base to lower prices. We assume capital expenditures rise at a slower rate than sales, declining from 6.1% of sales in 2006 to about 4.4% in 2010.
Risk
Whole Foods relies heavily on its brand; any concern about the company's image would probably damage sales heavily. Our model incorporates low-double-digit same-store sales increases. This implies that Whole Foods continues to appeal to more mainstream consumers. Should the company's customer base fail to continue to grow at a robust rate, the firm's intrinsic value would be significantly impaired.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Whole Foods Market 5,000 9,000
* Kroger 56,434 14,918
* Wild Oats Markets 1,124 523
* Albertson's 41,273 9,463
* Safeway 38,416 11,364
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 01-31-2005
Strategy
The company's growth strategy combines same-store growth, new store expansion, and international acquisitions. Whole Foods intends to increase its market share domestically by building larger stores in areas with generally higher concentrations of college-educated consumers.
Management & Stewardship
We think corporate governance at Whole Foods is sound. Founder John Mackey earned a very reasonable salary and bonus of $482,000 in 2005. The company has an interesting policy related to management compensation that effectively ties it to 14 times the average salary of its regular employees. In effect, Whole Foods employs a yearly salary cap. Even as a high-growth company, Whole Foods values capital discipline. The extent to which the firm achieves returns in excess of its cost of capital factors heavily in determining incentive compensation, impacting employees all the way down to the store level. Financial disclosure is excellent. Same-store sales are broken out into five groups of stores based on age, and the company is pretty open about costs to open new stores, ongoing costs for remodeling, and long-run goals for sales and operating margins. While we agree with the desire of Whole Foods to better align the interests of its employees with its own through the use of stock options, we think the amount given out annually has been excessive. The company took a significant one-time charge in 2005 to immediately vest all options outstanding, attempting to skirt annual expenses for options issued in previous years.
Profile
Whole Foods is the largest U.S. retailer of natural and organic foods. It owns over 180 supermarkets targeting customers interested in health, nutrition, food safety, and the environment. The stores sell high-grade conventional and organically grown produce and grocery products; environmentally safe household items; meat, poultry, and seafood free of growth hormones and antibiotics; bakery goods and takeout meals; and vitamins, homeopathic remedies, and body-care products.
Growth
The company has averaged 20.7% sales growth over the past five years, thanks to new store growth, some small acquisitions, and 11.1% average increases in same-store sales. We expect internal revenue growth over the next five years to average about 23% per year.
Profitability
We think margins will remain around 5.6% over the next few years as the company uses efficiency gains to lower prices.
Financial Health
The company carries very little debt, and operating cash flows are more than sufficient to fund capital expenditures, payment of a dividend, and a $200 million share buyback. The company also recently announced a $4 per share special dividend.
Morningstar Rating
04-05-2006
Stock Price
As of 04-05-2006
$64.78
Fair Value Estimate
$85.00
Consider Buying
$65.50
Consider Selling
$106.50
Business Risk
Avg
Economic Moat
Narrow
Stewardship Grade
A
Analyst Note
Whole Foods Reports 1Q
Mitchell P. Corwin, CFA, CPA 02-09-2006
See All Notes
Bulls Say
Same-store sales growth continues to be exceptionally strong, averaging 11.1% over the past five years, including 12.8% in fiscal 2005.
We think square footage will increase faster in 2007 and 2008 than the expected 14% growth this year. Square footage under development represents 66% of the company's current square footage.
Markups on natural foods are well above those on ordinary groceries, making a Whole Foods store more lucrative, per dollar invested, than most traditional store formats.
Competition in natural foods is sparse, with the company's largest pure competitor, Wild Oats Markets OATS, still in turnaround mode.
Stores are mainly in the top 25 American metropolitan areas and have significant room to expand before reaching saturation. The company is also exploring international expansion with stores in Canada and the United Kingdom.
Bears Say
Whole Foods took a significant one-time charge in 2005 to account for immediate vesting of current stock options rather than ongoing hits to future earnings as it begins to expense options.
Unlike low-price leaders such as Wal-Mart, Whole Foods dominates because of its brand image, which is trickier to manage and less impervious to competitive threats.
Whole Foods has a high-price image among some consumers that may limit its long-term growth potential.
The shares trade at a high price/earnings ratio for a food retailer and have significant downside risk.
Whole Foods Market WFMI
by Mitchell P. Corwin, CFA, CPA
Thesis 04-05-2006
Whole Foods sets the standard for differentiation in the supermarket industry, in our opinion. The firm doesn't look at itself simply as a delivery vehicle for everyday foods, like so many of the traditional supermarkets. Rather, it has created a brand image that connects with high-end food shoppers.
Sales of natural and organic products increased nearly 7% in 2004, and we think that growth rate can average mid- to high-single digits in the coming years, thanks to more demand from mainstream consumers.
Whole Foods benefits from that trend. However, the true success story for the firm has been its evolution from a simple purveyor of alternative foods to a unique, upscale supermarket. The company recognized early that there was a growing movement of food enthusiasts clamoring for stores that shared their love of food. With a pleasurable setting and well-paid workers who care about customer service, Whole Foods today delivers some of the best stores for those embracing healthier lifestyles, in our view. It helped make organic foods hip among baby boomers and young urban professionals, carving out a new niche in food retailing.
While supermarkets continue to expand natural-food offerings, none can match the selection in Whole Foods' newer 50,000-80,000 square-foot stores, in our view. Plus, while supermarkets are forced to lower prices on many products to compete with the likes of Wal-Mart WMT, Whole Foods competes in an entirely different market; its customers will pay up for its exotic fruits and hearth-baked breads. With the increasing buzz factor and the ability to charge premium prices, the firm posted nearly 13% same-store sales growth in fiscal 2005 and should continue to post low-double-digit same-store sales in 2006. Also, operating margins are 5%-6%, compared with the 3%-4% earned by the large supermarkets. With robust free cash flows, Whole Foods can afford to pay quarterly dividends and still fund its ambitious growth using internally generated funds.
We don't foresee anything stopping this dominant firm's continued double-digit growth. That said, switching costs aren't high in this type of business, and Whole Foods appeals to a finicky customer base. Therefore, we continue to assign the firm a narrow economic moat rating and would seek a decent discount to our fair value estimate to invest.
Valuation
We think Whole Foods is planning to bump up its annual square footage growth in 2007 and 2008 beyond the 14% increase the company expects in the current year. As a result, we have increased our assumptions for new-store growth in those years, and our fair value estimate is now $85 per share compared with $74. We expect square footage growth of nearly 20% in 2007 and 2008, slowing down to 15% thereafter. We expect annual sales to increase 21.4% in 2006 and average 23%-24% over the next five years. In our previous model, we assumed sales increased 21%, on average. Operating margins should remain relatively flat because the company intends to use cost efficiencies gained from operating a larger store base to lower prices. We assume capital expenditures rise at a slower rate than sales, declining from 6.1% of sales in 2006 to about 4.4% in 2010.
Risk
Whole Foods relies heavily on its brand; any concern about the company's image would probably damage sales heavily. Our model incorporates low-double-digit same-store sales increases. This implies that Whole Foods continues to appeal to more mainstream consumers. Should the company's customer base fail to continue to grow at a robust rate, the firm's intrinsic value would be significantly impaired.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Whole Foods Market 5,000 9,000
* Kroger 56,434 14,918
* Wild Oats Markets 1,124 523
* Albertson's 41,273 9,463
* Safeway 38,416 11,364
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 01-31-2005
Strategy
The company's growth strategy combines same-store growth, new store expansion, and international acquisitions. Whole Foods intends to increase its market share domestically by building larger stores in areas with generally higher concentrations of college-educated consumers.
Management & Stewardship
We think corporate governance at Whole Foods is sound. Founder John Mackey earned a very reasonable salary and bonus of $482,000 in 2005. The company has an interesting policy related to management compensation that effectively ties it to 14 times the average salary of its regular employees. In effect, Whole Foods employs a yearly salary cap. Even as a high-growth company, Whole Foods values capital discipline. The extent to which the firm achieves returns in excess of its cost of capital factors heavily in determining incentive compensation, impacting employees all the way down to the store level. Financial disclosure is excellent. Same-store sales are broken out into five groups of stores based on age, and the company is pretty open about costs to open new stores, ongoing costs for remodeling, and long-run goals for sales and operating margins. While we agree with the desire of Whole Foods to better align the interests of its employees with its own through the use of stock options, we think the amount given out annually has been excessive. The company took a significant one-time charge in 2005 to immediately vest all options outstanding, attempting to skirt annual expenses for options issued in previous years.
Profile
Whole Foods is the largest U.S. retailer of natural and organic foods. It owns over 180 supermarkets targeting customers interested in health, nutrition, food safety, and the environment. The stores sell high-grade conventional and organically grown produce and grocery products; environmentally safe household items; meat, poultry, and seafood free of growth hormones and antibiotics; bakery goods and takeout meals; and vitamins, homeopathic remedies, and body-care products.
Growth
The company has averaged 20.7% sales growth over the past five years, thanks to new store growth, some small acquisitions, and 11.1% average increases in same-store sales. We expect internal revenue growth over the next five years to average about 23% per year.
Profitability
We think margins will remain around 5.6% over the next few years as the company uses efficiency gains to lower prices.
Financial Health
The company carries very little debt, and operating cash flows are more than sufficient to fund capital expenditures, payment of a dividend, and a $200 million share buyback. The company also recently announced a $4 per share special dividend.
Morningstar Rating
04-05-2006
Stock Price
As of 04-05-2006
$64.78
Fair Value Estimate
$85.00
Consider Buying
$65.50
Consider Selling
$106.50
Business Risk
Avg
Economic Moat
Narrow
Stewardship Grade
A
Analyst Note
Whole Foods Reports 1Q
Mitchell P. Corwin, CFA, CPA 02-09-2006
See All Notes
Bulls Say
Same-store sales growth continues to be exceptionally strong, averaging 11.1% over the past five years, including 12.8% in fiscal 2005.
We think square footage will increase faster in 2007 and 2008 than the expected 14% growth this year. Square footage under development represents 66% of the company's current square footage.
Markups on natural foods are well above those on ordinary groceries, making a Whole Foods store more lucrative, per dollar invested, than most traditional store formats.
Competition in natural foods is sparse, with the company's largest pure competitor, Wild Oats Markets OATS, still in turnaround mode.
Stores are mainly in the top 25 American metropolitan areas and have significant room to expand before reaching saturation. The company is also exploring international expansion with stores in Canada and the United Kingdom.
Bears Say
Whole Foods took a significant one-time charge in 2005 to account for immediate vesting of current stock options rather than ongoing hits to future earnings as it begins to expense options.
Unlike low-price leaders such as Wal-Mart, Whole Foods dominates because of its brand image, which is trickier to manage and less impervious to competitive threats.
Whole Foods has a high-price image among some consumers that may limit its long-term growth potential.
The shares trade at a high price/earnings ratio for a food retailer and have significant downside risk.
