Whole Foods’ appetizing stock

By GABRIEL LOWENBERG. Special to The Globe and Mail, Published Friday, July 19th, 2013.

Let me begin with a confession. I am not a health food fanatic. It’s possible that I purchased something organic once or twice but, if I did, it was an accident. Yet as I approach the border of my late 40s, my doctor’s advice is beginning to resonate: eat less, exercise more.

The parallel in financial planning, of course, is spend less, save more. That’s often what I tell clients as a prelude to charting their investment strategy. But just as good financial planning is not only about spending less (although it helps), wellness is not only about eating less. It’s also about eating healthy.

media-Globe-whole-foods-xlg960wEnter Whole Foods Market Inc., a stock I have invested in because I believe it exemplifies the trend to healthier eating.

This is not an aging baby boomer thesis. Consumers of all ages are becoming more conscious of the quality of food they eat. And with good reason: The most recent study, published in the Journal of the American Medical Association, tracked more than 70,000 people over six years. Vegetarians reported 12 per cent fewer deaths than meat-eaters, and were 19 per cent less likely to die from heart disease. Even Bill Clinton has taken notice and become a vegan.

Whole Foods is positioned at the centre of this growing trend. It sells a teeming smorgasbord of meats and vegetables, but much of it is produced and farmed organically. That’s the key – no genetically engineered seeds or crops, no long-lasting pesticides, herbicides or fungicides. Whole Foods provides a total package of wellness, premised on the health and environmental benefits of adopting organic standards.

The numbers confirm the business case. Almost seven million customers visit its stores each week, according to the company. In a flattish North American grocery segment, with low to moderate food-price inflation, Whole Foods has generated an impressive 15.9 per cent increase in comparable store sales over the past two years.

This sales growth has big benefits for the bottom line. Rent, labour, electricity and other items are relatively fixed costs. Thus, incremental increases in sales, less the cost of products sold, fall directly to the net income line, providing operating leverage. For its April, 2013, quarter, revenue increased 13 per cent, but earnings per share rose 18 per cent, including preopening store expenses. The bottom line: Earnings per share grew faster than revenue, even with preopening expenses. This is a good thing.

Health food is no longer a niche segment. In its past fiscal year, Whole Foods racked up almost $12-billion (U.S.) in sales – up from $2-billion in 2001 – or roughly $35-million per store. As of June, 2013, there were 352 Whole Foods stores. Over the longer term, the company’s target is 1,000 in North America alone. Clearly, its owners don’t see the healthy eating trend declining. Nor do I.

The bigger picture is this: Companies that provide products that improve your life tend to make better business models and better investments. Think of BlackBerry, when it first made e-mail available on cellphones, or Apple, when it introduced the iMac, iPhone, iPod and iPad.

The Whole Foods thesis is the same. Its product is the organic lifestyle. It’s not just free-range chicken and high-fibre oatmeal customers are buying – it’s a wellness package. And their numbers will grow, especially as the economy improves and U.S. unemployment falls below 7 per cent.

You may argue that Whole Foods’s valuation is relatively high, or that its business model is not sustainable, or that it could lose market share to Safeway, Wal-Mart, Trader Joe’s, Kroger, The Fresh Market or Loblaw. But valuation, I submit, is only one aspect of the decision to invest in a company’s equity.

To do real research on Whole Foods, camp out in one of their stores. Count the people buying premade smoothies in the morning and organic meat on the way home. Then, you’ll understand why it generates almost $1,000 per square foot per year in revenue, nearly double its nearest direct competitor, The Fresh Market. Three years from now, I believe today’s stock price will look cheap in hindsight. Investors who shop at Whole Foods will earn a double reward – a healthier diet and, I predict, a healthier portfolio.

I believe there is ample room for a niche food company, just as there is room for niche coffee at a premium price (Starbucks), niche handbags (Coach) and niche exercise wear (Lululemon). Note, however, that while all these companies began as niche products, they have become mainstream, creating wealth for their equity owners.

In my hometown of Ottawa, Whole Foods has agreed to become a tenant at the redeveloped Lansdowne Park. I intend to be among its first customers.

© 2013 The Globe and Mail Inc. All Rights Reserved.

Read the complete article at The Globe and Mail website: www.theglobeandmail.com

About Gabriel Lowenberg

Gabriel Lowenberg is CEO and president of Lowenberg Investment Counsel Inc., an independent wealth investment management firm. The views and opinion expressed in this article are those of Mr. Lowenberg and do not constitute investment advice.

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