Whole Foods Market, Inc. (WFM), The Fresh Market Inc (TFM): A Price Cut You Don’t Want to Miss

Since its most recent earnings report, shares of Whole Foods Market, Inc. (NASDAQ:WFM) have fallen to trade near the bottom of their 52-week range. Fears that lower projected top lines and margins will inevitably cut into earnings growth gave Wall Street enough of an excuse for a big sell-off.

Despite a recent focus on lowering prices, I don’t think this is the kind of price cut management envisioned for its investors. Yet, for stock shoppers with a healthy appetite, now is a great opportunity to invest a whole paycheck (or more) in Whole Foods.

Whole Foods Market, Inc. (NASDAQ:WFM)Margin notes

A big part of the Wall Street panic came from management’s reiteration that they will continue to focus on price and providing value to the customer. However, given Whole Foods Market, Inc. (NASDAQ:WFM) has some of the highest prices in the industry as well as some of the highest margins, the huge drop in share price seems like a bit of an overreaction.

The grocery industry is filled with companies producing significantly thinner margins. As food prices rise, those margins continue to decline as grocers compete to keep customers happy. Grocery giant The Kroger Co. (NYSE:KR) is a great example as its seen gross margin decline from 23.2% in 2009 to 20.9% in 2011 and 20.3% in its most recent quarterly report.

Comparatively, over roughly the same period, Whole Foods actually grew margins from a whopping 34.8% to 35.5%. Those are some of the highest numbers in the industry, so it’s safe to say Whole Foods can definitely give customers a bit of a price break.

Why lower prices will work

Last quarter, consumers looked to cut down expenses any way they could with the looming fiscal cliff and tax hikes at the forefront of everyone’s mind. This sentiment may be to blame for the slowdown in the company’s comp sales from the usual 8.5%-8.9% to 7.2% last quarter.

We’ve seen this before. When Whole Foods faced headwinds from a dismal macro-economic environment in 2009-2010, the company cut prices and focused on costs. The results speak for themselves, as Whole Foods has seen its profits and stock price grow significantly in the years since.

Now, in another volatile economy, with higher payroll taxes and consumers looking to spend less, Whole Foods is poised for a redux of the strategy. Co-CEO Walter Robb explains they’re “going for the big prize, which is those folks that are not eating as healthy.”

As the pricing gap narrows, the value proposition for less healthy eaters becomes quite compelling. After all, most people know that they should eat healthier foods. Even with a rapidly growing organic foods market, Whole Foods believes it can accelerate that growth while capturing a large part of the market.

Growing sales and stores

There were a lot of great pieces of information to come out of the earnings report two weeks ago. Sales increased 14% as the company opened 10 new stores – more than any other quarter. While same store sales were down, compared to the previous four quarters, 7.2% is still one of the best numbers in the industry.

Even rapidly growing specialty grocer The Fresh Market Inc (NASDAQ:TFM) usually sees comparable sales growth lower than Whole Foods’, and also saw a downtick in its latest quarterly report to 5.6%. The slowdown in comparable sales and a disappointing forecast led to a similar sell-off of The Fresh Market’s stock. However, whereas analysts expect The Fresh Market Inc (NASDAQ:TFM)’s same store sales to grow at just 0%-4% rate when it reports next, Whole Foods is still expected to come in with a growth rate of 6.6%-8% for this quarter.

What’s more, Whole Foods is growing its store count at a faster pace than ever before on an absolute basis. It currently has 85 stores in development, and plans to expand its store count from 345 to 1000. The growing store count will continue to supplement the fantastic same store growth.

A long-term investment

While Whole Foods trades at a high P/E ratio compared to its peers, I believe that its price is completely justified by the excellent growth prospects the company presents. However, investors should note that like most high P/E stocks, even the slightest bit of bad news can cause the stock to tumble. That’s the time when long-term investors, who understand the company’s growth strategy, can buy shares at a discount. That time is now for those considering Whole Foods.

The article A Price Cut You Don’t Want to Miss originally appeared on Fool.com and is written by Adam Levy.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

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!