Whole Foods Market, Inc. (WFM): Too Expensive?

Over the past 30 years or so, Whole Foods Market, Inc. (NASDAQ:WFM) has taken advantage of the American dietary trend toward healthier and more natural foods, and has grown into the largest retailer of natural and organic groceries in the United States. With shares trading over 10% lower than their 52-week high at a time when everything else in the market seems to be reaching new highs daily, is Whole Foods Market, Inc. (NASDAQ:WFM) worth a look, or is the rapid growth potential of this company a thing of the past?

About Whole Foods

As mentioned, Whole Foods Market, Inc. (NASDAQ:WFM) is the largest organic and natural food retailer in the U.S., with over 340 stores in 37 states. The company tries to create an atmosphere that specifically caters to health-conscious consumers. The company has grown tremendously over the past few decades, as shown in the last 10 years’ revenues:

The average Whole Foods store is 38,000 square feet and sells about $36 million annually. The stores contain a wide variety of products including natural and organic foods, dietary supplements, personal care products, and household items.

Will there be Growth?

One of the ways that Whole Foods Market, Inc. (NASDAQ:WFM) tries to differentiate itself from other supermarket chains is by its emphasis on perishable food items, which account for almost 70% of the company’s sales. This causes customers to shop more often, increasing inventory turnover and reducing waste, allowing the stores to run more efficiently.

Lately, Whole Foods Market, Inc. (NASDAQ:WFM) has begun offering more lower-priced products, in direct contrast to most organic food stores, which should lead to above-average growth. The company has also placed a renewed emphasis on expansion, and plans to open about 85 new stores in the near future.

Too Expensive?

At over 32 times last year’s earnings, Whole Foods does appear to be a bit on the expensive side. The consensus calls for a forward growth rate of about 15% annually, which doesn’t really justify such a high multiple. The company does have a very attractive balance sheet with over $1.2 billion in cash and virtually no debt; however this is quite frankly not enough to justify such a lofty valuation, despite the stable nature of the company and the upward trend in organic and natural groceries.

The Alternatives

For comparison’s sake, let’s see how more traditional grocery retailers are valued. The Kroger Co. (NYSE:KR) is one of the largest grocery chains in the market, and Wal-Mart Stores, Inc. (NYSE:WMT) does more grocery business than anyone else in the United States.