Whole Foods Market, Inc. (WFM), Fairway Group Holdings Corp (FWM): Organic Food Market Heats Up

Page 1 of 2

Whole Foods Market, Inc. (NASDAQ:WFM)Equities are back in favor. The pace of IPO issuance is rapidly approaching its best performance since 2007. New issues have raised some $18.7 billion in the U.S. and the IPO market hasn’t seen this much activity since 2007, according to the Wall Street Journal.

Sprouting up profits

One of those new issues has taken the markets by storm. Organic food store Sprouts Farmers Market has more than doubled its value since its IPO, putting other new issues, like Facebook, to shame.

Sprouts Farmers Market, has 163 stores across the U.S. and competes with Whole Foods Market, Inc. (NASDAQ:WFM). But unlike its larger and higher-end competitor, Sprouts Farmers Market prides itself on offering organic food at value prices. It does this by using its size as leverage to suppress costs and then subsequently pass those savings on to consumers. As long as this model is in place, it shouldn’t suffer any margin compression.

It generated $2 billion in sales for 2012, compared to the $3.1 billion in revenue that Whole Foods Market, Inc. (NASDAQ:WFM) generated in its third quarter alone.

The good news for investors is that Sprouts Farmers Market is looking to grow. It plans to open approximately 40 stores by 2014. The bad news is it’s looking to expand in the U.S. where its larger competitor already has some 335 stores strategically located across the country. According to company research, the U.S. has room for some 1,200 Sprouts Farmers Market locations. Whole Foods Market, Inc. (NASDAQ:WFM) has projected that it can comfortably support 1,000 stores.

Who wins?

With its lower prices and manageable cost environment, Sprouts Farmers Market could expand its margins and become a formidable competitor for Whole Foods Market, Inc. (NASDAQ:WFM). But with Whole Foods lowering its prices, the fight for the organic customer seems to be heating up.

Company officials recently revealed that Whole Foods Market, Inc. (NASDAQ:WFM) has taken a defensive position on pricing in order to compete more effectively. On the company’s third-quarter conference call, Walter Robb, co chief-executive, said:

“We are continuing to implement various value efforts, including more aggressive price matching against select competitors.”

Like Sprouts Farmers Market, Whole Foods Market, Inc. (NASDAQ:WFM) is in growth mode and has earmarked some $650 million for expansion and store remodels this year. And its return on invested capital (ROIC) continues to impress. Robb added:

“For the quarter, our 25 comparable stores less than two years old produced an after-tax ROIC of 19%, another Q3 record.”

As these companies look to outdo each another, it’s the consumers and shareholders who will benefit. Whole Foods has $1.5 billion in cash, and in its third quarter, paid $37 million in shareholder dividends and repurchased $25 million in stock. Don’t be surprised to see Sprouts Farmers Market pursue a similar strategy to attract investors. Just be patient — there’s a credit facility in place that prevents it from paying a dividend.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!