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Whole Foods brings the world of natural and organic foods into the supermarket format.
Top of a Floppy Morn’, Fools,Monkey is fixin’ to plop down some bananas in exchange for co-ownership shares of Whole Foods Market. Below are the reasons he’s doing this––there must always be very good reasons to do something else with your bananas besides eating them.1) Benjamin Graham, grand-pappy of value investing and mentor to all the greats, refused to even look at a stock whose price multiple was 25 times (or more) the earnings of the company. But that’s because he was looking for moist cigar-butt businesses that nobody else wanted in order to buy them for way less than they were worth in concrete assets, the stuff you could basically sell and turn into cash. Growth was not even a thing for Graham until way later in the evaluation. So what? Whole Foods is now trading at just around 24.98 times its earnings, meaning even the super cheap-skate Graham would begin to notice. But when you realize that Whole Foods is pretty much just starting to grow, and that the P/E ratio has fallen a staggering 43% from its October high––from 44 to 25––you have one of those extraordinary and rare opportunities to buy a tremendous business for a completely reasonable earnings multiple that is still early in its growth cycle. Friends, this is the HOLY YELLOW FRUIT of investing! 2) The growth part: Whole Foods currently has about 360 stores. The goal is 1,200 domestic stores. So we’re only at 30%! There is so much potential growth Monkey needs to do a back-flip out of unequivocal exuberance. And did Monkey even mention that the return on invested capital––ROIC––a very important number that tells you how hard future money will continue to make even more money, is roughly about 15% per store, which is a lot. So Whole Foods makes a lot of money on its high grocery store margins (it’s all relative, industry-wise), and then invests that money to open more stores that make even more money at high margins. Repeat. Do you see how tantalizingly exciting it is that the price of this business just fell so much? 3) But why has the price fallen 43% from its 52-week high? Pretty much all of it has to do with increased competition. Competition is the big bad wolf ready to huff-and-puff and blow down the thatched-straw-hut that is Whole Foods. 4)Obviously Whole Foods is not a thatched straw hut, friends. Have you shopped in one? It is the exact opposite of a thatched straw hut. It is like a banana stand that has money in it. The wolf of capitalism can huff-and-puff and Whole Foods will not blow-over. It’s been in the business for 34 years and in fact its growth rate is accelerating which is a fancy word humans have for going even faster than you were going before, which is pretty fast to begin with.5) The positive way of looking at the competition situation is that when the capitalistic system works, increased competition raises all the boats that don’t have holes. Some Whole Foods stores have bars and restaurants in them. Does that sound like a dirty sock with holes in it?6) The more Monkey thinks about the above point, the more he feels comfortable equating the Whole Foods experience to why people choose to pay more for coffee at Starbucks: the atmosphere is worth the price. Perform this mental experiment: would you prefer to shop in a place that has florescent lighting and shopping carts with wheels that turn maddeningly to the left and lots of white plastic bags blowing around in the parking lot or at Whole Foods where you can drink beer, eat a cuisine-quality meal, help save the planet, and enjoy a non-utilitarian atmosphere? After swinging all day in the branches, there are fewer more enjoyable options for a tired Monkey than a trip to Whole Foods. Seriously though: Whole Foods = Starbucks of grocery stores. 7) As the global climate change disaster starts to become more and more precipitous, people will begin to understand that conscientious food practices are one of the most direct ways of reducing carbon emissions. Shopping at Whole Foods will become not merely a pleasant experience, but a way to save the planet. Monkey only wishes he were exaggerating.8)But people are wary of how expensive Whole Foods is. This is precisely the strategy discussed on the latest conference call: Whole Foods has the muscle and the established sales volume to offer both cheaper goods for those with less income and to continue stocking the higher margin items. It’s mostly an effective and corrective marketing campaign that needs to be carefully employed and those aren’t hard to come by given the outstanding resources at Whole Foods’ disposal: 1.08 Billion in cash and only $60 million in debt. If marketing is what’s needed, then marketing we shall have and Monkey is confident of leaving those decisions up to Mackey/Robb. 10)This is the thing about humans: they can trick themselves into believing false idols–– But once people realize that Whole Foods doesn’t have to be as expensive as their image falsely suggests, they will begin to make healthier food and the delightful shopping experience a higher priority. Healthy food and saving the planet shouldn’t be optional. Whatever’s left over from the budget after eating healthy––those things should become discretionary. Humanoids and their big brains have a tendency to overthink and miss out on what’s really important. But give them time and a little bit of help from their simian cousins and they’ll get it right eventually. The Big So What? !!!) Whole Foods is no-two-ways about it the leader in conscientious food in an industry that is growing quickly. Competition will help raise awareness about the tremendous importance of eating well. The business is easy to understand. The leadership genuinely cares about the business from an ethical and big-picture perspective and is not looking to merely make a buck. Mr. Market has temporarily blown a fuse by mistaking the need for an adjustment to long-term strategy with a foregone conclusion that the undisputed leader with a huge lead in the industry is going to lose to young whipper-snappers who sell half as many items per square foot as does Whole Foods. As with all-things investing, if you invest your bananas in Whole Foods today, and check back no sooner than 5 years, you will find yourself a wealthier person. And then those bananas will taste that much sweeter. @@@) P.S. Ever wanted to teach your children about investing? For their next birthday, instead of buying them some gizmo they don’t need, why not buy them a share of Whole Foods and help them understand why you’ve just made them rich?
Love this post Monkey! I agree wholeheartedly with your assessment. I am off to shop at WFM this afternoon in fact.
Is Whole Foods the Nordstrom of groceries?
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