We are what we eat, which would make me one giant banana. But is that banana my healthiest choice or could I be shopping in an organic and whole food store in order to eat something that didn’t take a daily bath in pesticides? Enter healthy food supermarkets and companies, such as those listed below. Let’s see whether green markets are truly a healthy alternative for our portfolios or if they are just a couple of bad apples in investors’ eyes.
Whole Foods Markets Inc. (WFMI)*
Snapshot: The natural and organic foods supermarket chain was founded in Austin, Texas, in 1978. It owns and operates more than 180 stores in the United States, Canada and the United Kingdom. The company just announced a merger with competitor Wild Oats Markets, which seems like a move to drive the competition into oblivion.
- The stock has averaged nearly 35 percent in gross margin growth every year since 2002, which is quite impressive for sure.
- Registers have been ringing at Whole Foods to the tune of 20 percent sales growth over the last five years. While a good part of this trend is due to new store growth, the company’s organic (same-store) sales have certainly been satisfying to the palette as well – accounting for 11.5% of the revenue growth, even more than the contribution from the shiny, new stores.
- The company plans to see healthy sales growth for FY2007 with expectations for $6.57 billion in revenues.
- The stock price has been shaved in half since the company split its shares 2-for-1 in January 2006. The shares sold for approximately $80 post split and are now about half that.
- Buying healthy food is a smart move for our bodies, but it is also very expensive. The company finds itself in competition with grocery store chains that can slash prices, which means Whole Foods either competes or is the "high guy." So, either its margins or market share are set to drop. Certainly not good news either way.
- Another issue is how long it will take for earnings growth to get back on track, especially with analysts ratcheting down expectations for the company’s FY 2007 to just 2.5% year-over-year EPS growth. It’s a matter of determining whether Whole Foods is a deep value stock or a company whose shares may need a cleanup on aisle nine.
Wild Oats Markets Inc. (OATS)
Snapshot: Wild Oats owns and operates 114 supermarkets in the United States and Canada. Founded in 1987, the company offers grocery products including meat, poultry, seafood, dairy, frozen foods, bakery items, vitamins and supplements. Wild Oats received a buyout offer recently from rival Whole Foods Markets. Expect shares of Wild Oats to trade percentage wise in lockstep with Whole Foods. If the feds approve the purchase by Whole Foods, Wild Oats will likely become a former legend of the Wild West Days of natural food grocers.
- Northeast grocer Pathmark is, you guessed it, um, sewing its Wild Oats by distributing the natural food grocer’s products in 141 Pathmark stores.
- The stock has rebounded nicely from losses mostly due to bad management decisions. Since a management coup a few years back, shares have jumped from $5 to nearly $20, roughly where Wild Oats’ stock stood in 2002.
- Final 2006 earnings per share are forecasted to expand nearly 3-fold to 43 cents per share, after earning 11 cents in 2005. This year, annual earnings are expected to leap another 30 percent to 56 cents per share.
- While annual earnings have been impressive, Q4 2006 results were expected to bring some sour grapes to the table, as Wild Oats’ bottom line results were forecast to fall from 11 cents per share in Q4 2005 to 8 cents per share last quarter.
- The company is still finding itself playing second fiddle to Whole Foods, which has triple the return on investment, double the operating margin and more than triple the net margin on sales than Wild Oats. Well, now that the two are likely bedfellows, I guess the second fiddle has been promoted to first chair.
- It can’t be good for the company’s public and investor relations departments when the Motley Fool website nominates Wild Oats as its pick for "The Worst Stock for 2007." Talk about leaving a company au natural. Of course, they weren’t expecting Whole Foods to step in and chew up Wild Oats shares when the Motley Fool made this "foolish" forecast.
United Natural Foods, Inc. (UNFI)
Snapshot: The company distributes natural and organic foods to natural foods and traditional supermarket chains. It also owns and operates 12 natural products retail stores.
- Its shares have expanded nearly six-fold in the last five years, growing from approximately $7 per share to nearly $39 per share late last year.
- The company supplies both Whole Foods and Wild Oats market chains with its products. Whole Foods is expected to add 18-20 new stores so that expansion will only add to United Natural’s very impressive bottom line. Just a question of how many Wild Oats stores Whole Foods will keep around?
- FY 2007 earnings are supposed to be naturally sweet, projected to grow 27 percent over the previous fiscal year to $1.30 per share. And if you can trust the carnival barkers on Wall Street, that growth is forecast to expand another 18 percent in FY 2008 to $1.42 per share.
- Company took a $7 million hit on its sales when Wild Oats shut down seven stores last year. However, the dent was softened by Wild Oats also opening four new stores as well. That’s still a net loss of three stores, which does certainly add some sour grapes to the equation. Again, wonder how many Wild Oats stores will be left standing when the merger dust clears?
- United Natural is expecting to spend as much as $45 million for new facilities this year. These capital expenditures are double what the company spent in 2006. While the company can save money in the long-run from improved operational efficiencies from these distribution centers, watch out for some stock price hiccups in the short run!
Expect some strict regulatory review of the merger of Whole Foods and Wild Oats, as there could be a squeezing of the competition. What favors Whole Foods getting the Feds’ blessing is that regular grocery stores are now in the natural food mix.
Michael Abramowitz is a freelance writer based in Florida. (*Full disclosure: He owns shares of Whole Foods Markets, which have gone the way of spoiled produce ever since he purchased them.)
- Price quotes are from March 14, 2007.
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