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.
Another new issue
Fairway Group Holdings Corp (NASDAQ:FWM), a New York-based specialty grocer had its maiden trading session in April. The stock has more than doubled since debuting at $13.00 per share. It has a market cap of $1.1 billion, compared to $5.2 billion and $20.7 billion for Sprouts Farmers Market and Whole Foods, respectively.
Fairway Group Holdings Corp (NASDAQ:FWM)’s plans are less ambitious than its rivals; it hopes to open some 300 stores around the U.S. and has just about a dozen locations today. It’s well known in the New York City metropolitan area, which is a region that spans New York, New Jersey, and Connecticut. As part of its expansion, Fairway Group Holdings Corp (NASDAQ:FWM) will open as many as four new locations each year. While its New York-metro focus might seem limited, Fairway projects the area represents a $30 billion food-retail market, which is the greatest opportunity in the U.S. So it’s New York focus seems to be on target.
The problem with Fairway Group Holdings Corp (NASDAQ:FWM) is that it isn’t profitable. In its last fiscal year, it reported a net loss of nearly $63 million and expects losses to continue through 2014. But the company is in growth mode and the cost of opening new stores is hurting, not helping the bottom line. It generated $661 million in net sales last year and Whole Foods is growing its presence in its biggest market.
Bottom line
I think value grocers like Fairway Group Holdings Corp (NASDAQ:FWM) and Sprouts Farmers Market are giving Whole Foods Market, Inc. (NASDAQ:WFM) a run for its money. Because of this, Whole Foods seems to be willing to concede some margin and that could hurt. For now, I’d go with the smaller grocers as they seem to be changing the rules.
The article Organic Food Market Heats Up originally appeared on Fool.com and is written by Gerelyn Terzo.
Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Gerelyn is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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