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Whole Foods: Pricey But Irresistible

Posted: Feb 09, 2010 10:44 AM by Sham Gad

Tickers in this Article: CMG, SBUX, WFMI, WMT

Whole Foods Markets (Nasdaq:WFMI), the nation's largest natural foods supermarket, has had to endure the most perfect storm during this recession. Often referred to as "Whole Paycheck" due to its premium prices, consumers' ongoing cash crunch has plagued the company. Yet despite a terrible stretch of years, Whole Foods may still be a tasty bet in the long run.

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Where's the Value?
Shares in Whole Foods don't look like any more of a bargain than many of their products. The shares currently command a 23 forward earnings multiple and trade at more than 2 times book value. Followers of Whole Foods, however, will remember that shares once traded at over $80 and valuations multiples were much higher. That was when the company was the darling of Wall Street. Top- and bottom-line growth at Whole Foods was as certain as the quality of the company's products. That was then, and this is now.

What's Changed?
In its past life, Whole Foods was propelling its growth by expansion. Credit was abundant and consumers were buying. Cities would rejoice when a Whole Foods came to town as it signified a certain status to have this upscale trendy grocer open its doors. Nevertheless, despite the success the company has always had, the company's expansion became too much when the economy began to collapse. As the growth that Wall Street was used to slowed down the shares took a beating.

Yet under the excellent leadership of founder and CEO John Mackey, Whole Foods responded. The company has curtailed growth and is focusing on making its existing locations more profitable. Make no mistake, Whole Foods is still adding stores. It's just that the company is doing so with a healthier respect for consumers' financial position. With around 300 locations, Whole Foods has plenty of growth ahead of it, and while many retailers have fallen to the mighty Wal-Mart (NYSE:WMT), Wal-Mart's attempt to expand its organic and natural foods selection has not had any material effect on Whole Foods.

An Iconic Brand
The fact that Whole Foods has spent years of establishing itself as not just a brand but a lifestyle store is one of its most valuable assets. Just as people have come to rely on a morning latte from Starbucks (Nasdaq: SBUX), many shoppers have settled on the healthy lifestyle that Whole Foods helps them achieve. And my recent visits to its stores reveal a growing selection of private label goods that are much easier on the paycheck. Whole Foods trades at 6 times enterprise value/EBITDA versus 11 for Starbucks. Even Chipotle Mexican Grill (NYSE:CMG), a fast casual restaurant serving fresh and natural Mexican food, trades for 4.5 book value and 11 times EV/EBITDA. (For related reading, check out Digging Into Book Value.)

Like its products, a long-term view on Whole Foods suggests that even today, the shares are a healthy investment. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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