by Alyssa Oursler | August 24, 2012 8:00 am
When the popularity of Whole Foods Market (NASDAQ:WFM) first took hold, it was because of its niche offerings. Whole Foods was at the forefront of the organic movement, presenting a simple solution to the many customers freaked out by the likes of Food Inc. and other harsh realities relating to what we put in our mouths.
And its all-natural, all-local options — or even those of its smaller rival The Fresh Market (NASDAQ:TFM) — served up a simple, albeit sometimes pricy, solution that was good for consumers’ health and environmental conscience.
And, of course, good for the company.
As other grocers saw shoppers opt for discounters like Costco (NASDAQ:COST) and Family Dollar (NYSE:FDO) or saw margins squeezed by their attempts to lure those same cash-conscious shoppers back, WFM just kept on growing.
Just take a glance at WFM’s most recent quarter, which had everyone talking. The company’s profits jumped 32%, same-store sales rose over 8% and total sales gained by 14% — quite a different story than the one struggling supermarket SuperValu (NYSE:SVU) is telling.
And while that quarter made for the 13th consecutive period of both earnings and sales growth, Whole Foods sure isn’t stopping there.
Instead, the retailer has plans to grow so much you would think it’s using some kind of chemical fertilizer — which, of course, it isn’t. Its latest goal is to triple its store count to around 1,000, and its plan of attack is to go places it’s never gone before, including deserts and smaller markets.
In some places, that will mean squeezing its stores into a smaller format — just as Target (NYSE:TGT) has been doing in the city. And in others, it will just mean more stores in an area where it has already set up shop.
The thing is, that isn’t such a novel idea.
Wal-Mart (NYSE:WMT) — one of consumers’ favorite grocery stores — and SuperValu also have similar plans in conjunction with First Lady Michelle Obama’s health-oriented initiatives, and even pharmacy Walgreen (NYSE:WAG) is on board. Plus, more grocery stores have added Whole-Foods-esque offerings to their shelves as the organic movement has gone mainstream.
And across the board, competition in the grocery world is stiff, to say the least. As organic food in particular expands both in its popularity and scope, it remains to be seen if Whole Foods will lose its edge or just gain even more customers — and its ambitious expansion sure is one way to find out.
Plus, the company isn’t used to having to compete for consumers who stock up on snacks at Save-a-Lot or Dollar General (NYSE:DG), but it will have to do just that as it moves into new areas.
But all reservations aside, investors have been all over the stock of late. Shares are up just under 40% since January and over 70% over the past 12 months. By contrast, Kroger (NYSE:KR) and Safeway (NYSE:SWY) are each pretty solidly in the red over the same time periods.
That run-up, though, makes Whole Foods just as pricey as the fresh-picked potatoes it peddles. Shares are sitting at nearly $100, giving the company a whopping forward P/E of more than 33.
Safeway and Kroger both trade at a forward valuation around an eighth of that number — and both offer tempting dividends. Kroger’s yield is just over 2%, while Safeway’s is a hefty 4.4%.
So, while Whole Foods has indeed seen some eye-popping success, it seems a little late to hop aboard the expensive organic food stock now. And although its expansion could pay off big-time, the niche company could be in for a rude awakening if it wanders too far out of its comfort zone.
As of this writing, Alyssa Oursler didn’t own any securities mentioned here.
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