WFM stock is a long-term winner and should be grabbed before it recovers.
Whole Foods Market (NYSE:WFM) is the worst performing stock in the S&P 500 this year. I believe the selloff is overdone, and this may be a generational opportunity to get a growing brand at a discount. There may be some more downside, but I would start to buy in at the present price and look to add.
There are several reasons why I think Whole Foods stock has a lot of upside from here. All the negative news regarding same store sales and revenue misses are likely short-term blips in a long-term story that is incredibly compelling.
1. It Remains the Dominant Brand
I find many parallels between Whole Foods and another legendary American success story: Starbucks (NASDAQ:SBUX). They are both dominant brands in an industry with only a few large players.
Starbucks has always faced competition from other players like Peet’s Coffee, Coffee Bean & Tea Leaf, Caribou Coffee, and other regional chains. Sure, the other brands have some nice market share, but Starbucks has always been the dominant brand.
The brand has powerful associations, and the same applies to Whole Foods. When consumers think of the coffee industry, they generally think of Starbucks. Comparably, Whole Foods is associated with organic food.
2. Larger Footprint
Whole Foods has a more expansive presence than competitors Sprouts Farmer’s Market (NYSE:SFM) and The FreshMarket (NYSE:TFM). Fresh Market has 156 stores in 26 states. Sprouts has 170 stores in 9 states. Whole Foods has 360 stores in the US, Canada, and the UK.
More importantly, Whole Foods has far more capital to expand than its peers. Whole Foods sits on $1.2 billion in cash and has almost no debt. Farmers Market is a tiny payer, with only $11 million in cash and $51 million in debt. Sprouts has $149 million in cash and must service its $423 million in debt.
Whole Foods’ balance sheet, along with its robust cash flow, allow it to win any kind of race to expand.
3. Other Competition Isn’t Significant
The market is making a big deal about grocery chains like Kroger (NYSE:KR) and Wal-Mart (NYSE:WMT) moving into the organic space by offering increasing numbers of organic options. I actually believe this will ultimately have little impact on WFM stock. To understand why, investors must consider shopping habits.
The WFM shopper is an upscale consumer, who has strong brand loyalty, and considers Whole Foods to be a premium provider of organic food. The upscale shopper does not want to pick up a few items at Whole Foods, a few organic items at Kroger, and finish up at Wal-Mart. The Whole Foods shopper wouldn’t be caught dead in a Wal-Mart.
That’s because the upscale shopper can afford Whole Foods prices. That consumer doesn’t need or want to go to other stores. The only factor that might influence Whole Foods customers to shop at their local Kroger or Wal-Mart would be if either store vastly expanded its offerings, providing more Whole Foods-comparable options.
Another possibility would be that if the economy dropped low enough to force Whole Foods shoppers to seek cheaper alternatives. This scenario didn’t occur during the financial crisis so I don’t believe it will happen at all.
Conversely, the Kroger or Wal-Mart shopper doesn’t shop at Whole Foods. If they are attracted to organic food, they will buy it at the store they usually visit.
4. The Sales Misses are Likely Tied to the Economy
First quarter results across the entire retail sector were abysmal, and now we know why – the GDP contracted by 1.0% in the quarter. I believe this is the primary reason Whole Foods stock saw same store sales increase less than anticipated. It’s amazing that the market punished Whole Foods stock for delivering a same store sales growth that most retailers would kill for.
5. Whole Foods Stock is Oversold
All of these reasons add up the notion that I believe Whole Foods stock is oversold. It is now more than 40% off its 52-week high. The long-term picture for Whole Foods remains solid. The organic movement shows no signs of slowing and, based on the fact that all these other stores are getting into the space, is only increasing.
People believe organics are healthier and taste better. Whole Foods is an upscale brand, and even if luxury retail takes a hit, upscale people still have to eat. The last place they are likely to cut expenses is on the food they eat everyday.
If there is enough negative sentiment, Whole Foods stock could drop even lower. With that in mind, I have taken a small position with the intent to add on every 10% drop going forward. I believe that over the long term, this investment will return multiples of orignial dollars invested, just as Starbucks has done for its investors.
Lawrence Meyers owns shares of WFM and SBUX.
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