Whole Foods Stock Riding Price Cuts and Foodie Fads in 2016

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Whole Foods Market, Inc. (NASDAQ:WFM) is poised to benefit from its price cuts and 2016 food trends, and shares of the organic grocer’s stock should improve nicely as a result.

whole foods stock earnings wfm stockAs WFM stock sees better results going forward, it could be a big relief to Whole Foods stock holders who endured a more than 30% decline in 2015.

Seeking to become more competitive with other supermarket chains, WFM stock execs said in September that it would lower its prices and open many smaller stores that sell cheaper products. But the price cuts may not hit WFM’s bottom line and margins too significantly, since the chain simultaneously announced that it would cut its costs by eliminating about 1,500 jobs, representing about 1.6% of its work force.

In a sign that the price cuts are already having a positive impact,  research firm Oppenheimer stated earlier this month that Whole Foods’ sales “trends have likely stabilized at least through the end of November.”

It’s true, as Business Insider pointed out, that Whole Foods’ prices remain higher than those of one of its conventional supermarket rivals, such as Kroger (KR). However, WFM charged the same or roughly equivalent prices for some items, such as organic baby spinach (both companies charged $5.49 for a pound), coffee (both charged $5.50 for 12 ounces), and organic marinara sauce ($2.87 for Whole Foods versus $2.79 for Kroger’s).  All told, Whole Foods’ prices are less than 5% above those of Kroger’s for seven out of 30 food items checked by Business Insider.

Moreover, some of the comparisons may have been apples to oranges, since WFM pointed out that a number of its products, such as mayonnaise “contain no artificial colors, sweeteners, preservatives, or hydrogenated fats common in packaged goods.” It’s unclear if Kroger’s products meet the same standards.

A Strong Brand is Good for WFM Stock

That brings up an important distinction between Whole Foods Market and other grocers. I think it’s clear that consumers trust Whole Foods much more than chains like Kroger to provide truly healthy, organic products. So just as a dentist with a much better reputation can charge significantly higher prices for the same services than one with a mediocre reputation, WFM can charge meaningfully higher prices than Kroger for the same food items.

Meanwhile, Whole Foods and WFM stock look well-positioned to benefit from food trends that are expected to be dominant in 2016.  According to Consumer Affairs, vegetables “are getting new respect and will be seen more in teas, yogurt, and ice cream.” In addition to being added to other foods, vegetables will become more popular as a substitute for meat, predicted the Food Network.

There will be “continued increase in consumers looking to legumes, pulses and nuts as key sources of protein and the development of new meat substitutes “from vegan hamburgers and chicken strips to milk, cheese and eggs,” the network added.

Of course, Whole Foods has long catered to vegetarians and vegans, and offers many vegetable based options, such as tahini, celery roots and butternut squash that may not be readily available at traditional neighborhood supermarkets. As someone who is extremely lactose intolerant and sometimes shops at WFM,  I can also personally attest to the fact that, unlike many supermarkets, it offers a wide array of plant-based ice cream products, as well as not one but two kinds of cheese-free pizzas.

According to the Food Network, exotic breads will also be popular in 2016, with “flatbreads topped with everything, ancient wheats and local mills, and cheesy breads from all over the world” becoming popular. With its array of exotic breads, Whole Foods should be very well-positioned to capitalize on that trend as well.

Following the large decline in WFM stock this year, the shares trade at about 20.5 times analysts’ consensus 2016 EPS estimates, not too much above Kroger’s 18.2 level. Yes, Kroger’s sales have been rising significantly, while those of Whole Foods declined last quarter. But given Whole Foods’ price cuts, the report by Oppenheimer that the company’s sales have stabilized, and its tremendous exposure to expected 2016 food trends, Whole Foods stock looks cheap at current levels.

Investors should buy WFM stock to take advantage of this situation.

As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.

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Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/price-cuts-food-trends-propel-wfm-stock-higher/.

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