Whole Foods Markets Inc. (NASDAQ:WFM) co-Chief Executive Walter Robb sent many tongues wagging last month when he said the specialty foods retail stock planned to triple the number of stores it had in the United States. Missing from headline-grabbing proclamation was any sense of when this wondrous event would occur for Whole Foods.
Fast forward to today. Pipper Jaffray analyst Sean Naughton initiated coverage of the retailer with a buy rating and a $77 price target, well ahead of the stock valuation under $65 where it trades now. According to Avi Salzman of Barron’s, Naughton believes the “company still hasn’t hit peak productivity … and should be able to grow profitably as it triples its store base over the next few years. The increasing attention given to healthy eating practices doesn’t hurt either.”
There are a couple of problems with those statements. For one thing, they accept as fact a company’s ambitious plans which may not come to fruition. Secondly, while it’s true that organic sales continue to rise, so do the number of places that sell them. Yes, dear foodies you can buy organic milk at places like Target Corp. (NYSE:TGT). It brags on its website that its Archer Farms brand has “more than 100 delicious organic food choices.” The Kroger Co. (NYSE:KR) and other supermarket chains sell lots of organic products as do smaller players such as Trader Joe’s and closely held Wegman’s and Trader Joes. This trend is born out in industry data.
“In 2009, 54% of total organic food sales were handled through mainstream grocers, club stores and retailers,” according to the Organic Trade Association. “Meanwhile, natural and specialty retailers were runners-up, with 40 percent of sales. Direct sales through farmers’ markets, co-ops, community-supported agriculture (CSAs), and the Internet, as well as exports, represented the remaining 6%.”
Whole Foods is certainly in a strong position financially with $554 million in cash and short-term investments and only $208 million in debt. Management should be commended for turning the company around. But for Robb’s dream to become a reality, Whole Foods will have to convince less affluent shoppers that the company’s stores won’t devour their whole paycheck, as the terrible joke goes. That challenge gets even tougher in an uncertain economic climate where customers are more concerned about price than anything else though some analyst argue that its prices on organic food are competitive.
Experts polled by RetailWire are skeptical, pointing to among other things the logistical challenges in stocking 1,000 stores with hard-to-find organic products.
Shares of Austin, Texas-based Whole Foods are up more than 26% this year, indicating that investors must be enjoying the taste of Lakewood Pure Purple Carrot Juice and other products the company sells that most consumers have probably never heard of.
