While that reputation hasn't exactly changed -- and there is ample evidence that this new healthy-eating lifestyle among Americans is here to stay -- Whole Foods no longer corners the "health market." I fear this fact is not yet reflected in today's share price.
I'm not discounting the fact that Whole Foods is a well-run company, one that operates at a high rate of efficiency. But at the same time I'm not willing to ignore that chains such as The Fresh Market
If that was not enough, when you couple these new arrivals with the fact that "regular" retailers including Wal-Mart
This doesn't mean the company won't still be successful. Without a crystal ball there is really no way for me to say that when that time comes that Whole Foods' management would not have found new growth opportunities. My issue, as I've said, is today the stock -- which trades at a price-to-earnings ratio of close to 40 -- is expensive.
While management has certainly fed the Street's insatiable appetite for growth, there will be a point when, say, Wal-Mart decides it wants to apply more pressure on Whole Foods' margins. Let's assume that I'm slightly overestimating Wal-Mart's capabilities -- there's still Target, which has just as good an infrastructure and resources to squeeze out Whole Foods with competitive market/promotions.
Now, aside from these potentially larger rivals, Whole Foods must still contend with Fresh Market, which is now growing at a faster rate. At this point, when it comes to operational results, the Street has always given the edge to Whole Foods. But the numbers between the two companies tell a much different story, including the fact that Fresh Market outperforms Whole Food in both revenue growth and earnings per share growth.
Now I do understand Whole Foods is a much bigger company, so the disparity between the growth rates are somewhat skewed. But the Street's expectations for Whole Foods are nonetheless higher. The good news is this affirms the Street's belief that the trend towards healthy eating and the demand for fresh/organic foods is not just a fad. But this, too, is an invitation for Wal-Mart and Target to steal some of that market.
To that end, given the strong rate of growth by Fresh Market, it would come as no surprise if, say, Wal-Mart or Target were to make a "fresh offer." I believe this would be the quickest way for either giant to attack Whole Foods by immediately increasing their market presence.
Let's not forget, there's also Amazon
All of that said, I want to make it known that I am a frequent shopper at Whole Foods. I've always been well-treated when I go there. This, however, doesn't change the fact that the stock is expensive at this level. Given the many new organic/fresh options that have emerged over the past couple of years, I believe it will be hard (not impossible) for management to duplicate its past success. I'm not guaranteeing any sort of outcome -- just some food for thought.
At the time of publication, the author held no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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