10/20/06 12:51:26
According to the Organic Trade Association, sales of organic food have grown about 20% during the last five years, with this year’s tally expected to top $15 billion. And, according to a 2004 Whole Foods survey, more than one-quarter of Americans are eating more organic products than a year ago. At the same time, more than half of Americans have tried organic products.
But, why the accelerated growth in organic foods?
The most obvious answer is health. Most consumers buy organic foods to protect their bodies from toxins and hormones. These people believe that certified organic (foods produced without toxic pesticides, sewage sludge, antibiotics, growth hormones and irradiation) -- are better for their health than conventionally produced foods.
Not surprisingly, organic grocers have multiplied and the biggest food manufacturers have bought up some of the best-known organic brands and started their own line of products. Coca-Cola owns Odwalla, General Mills owns Muir Glen and Cascadian Farm. Smuckers bought Knudsen and Santa Cruz Organic.
Whole Foods Market (WFMI:NASDAQ) clearly benefits from this trend. The company enjoyed explosive success once it moved from a simple supplier of alternative foods to a unique, upscale supermarket. The company recognized early that there was a growing movement of food enthusiasts clamoring for stores that jointly shared their love of food.
With a pleasurable “third place” setting and well-paid workers who care about customer service, Whole Foods today delivers some of the best stores for those embracing healthier lifestyles. This premium supermarket helped make organic foods hip among baby boomers and young urban professionals, carving out a new niche in grocery retailing.
Appetizing Revenues
This past April, Whole Foods debuted on the Fortune 500 list, ranking #479 among the largest U.S. companies based on sales, and in December, S&P added the company to its benchmark 500 index.
These are remarkable accomplishments for a company that just celebrated its 25-year silver anniversary last year.
The biggest challenge for Whole Foods in 2005 was to surpass its record-breaking performance from 2004. The firm’s goal was to increase sales from 15% to 20%, mostly driven by a 15% square-footage growth and comparable store sales growth of 8–10%.
For 2005, Whole Foods came in a little light on the square footage growth, opening 15 stores for a 13% increase in square footage; however, the company still surpassed its sales growth goal, increasing sales 22% due to the new stores producing average sales of $630,000 per week and due to the company’s stronger-than-expected comparable stores sales growth of 12.8%. Whole Foods’ sales per square foot for the year were a record $870, and six of the stores had average sales exceeding $1 million per week.
The company has produced eight consecutive quarters of double-digit comparable store sales growth. The robust sales the firm is seeing across all regions, all departments and all age classes of stores are driving healthy returns on invested capital as well. Comparable stores produced a return on invested capital of 37%, including a 69% return for Whole Foods stores over 11 years old.
Whole Foods isn’t just kind to its employees and customers; the company also looks out for its shareholders. Last year alone, Whole Foods returned $55 million to shareholders in cash dividends. In addition, it continues to improve its balance sheet to make the stock as valuable as it can.
Last year, the company increased cash and cash equivalents, including restricted cash, by $124 million to $345 million, and the firm reduced total long-term debt by $152 million to $19 million.
Whole Foods insatiably believes it will continue to produce consistent cash flow from operations and stock option exercises in excess of the capital expenditures required to meet its growth goals.
As an economic value-added company that believes in maximizing returns on invested capital to its shareholders, Whole Foods announced recently announced a strategy to manage its cash balance consisting of a 20% increase in its quarterly dividend to 30 cents per share (the firm’s third increase since implementing a cash dividend in November of 2003), a special dividend of $4 per share and a $200 million four-year stock buyback program. The company also announced a two-for-one stock split, the third stock split since going public in 1992.
As a writer for Diligent Investor, my research is derived from Wall Street Institutional research reports and news articles on trends in the recommended company’s respected industry. Sticking with the theme of Diligent Investor, my objective is to find above-average value opportunities and Whole Foods fulfills this criteria.
Investors looking to build a position in Whole Foods (WFMI:NASDAQ) should consider picking up shares at any price below $60 and holding for at least a 12-month period. It’s also prudent to remember to add a 20% trailing stop loss to any position in this investment.
Sincerely yours,