Whole Foods Market, Inc. (WFM), The Kroger Co. (KR), Wal-Mart Stores, Inc. (WMT): This Top-Notch Supermarket Chain Has One Big Weakness

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You can play the health-conscious consumer in many different ways, one of them being Whole Foods Market, Inc. (NASDAQ:WFM). Whole Foods Market, Inc. (NASDAQ:WFM) primarily sells natural and organic foods, which are in high demand. But one factor that makes Whole Foods so appealing to investors is also its biggest weakness.

Quality results and high expectations
Sales popped 12.1% to $3.1 billion in the third quarter. You might be wondering how many new stores were opened to assist that number, but it was only four. And comps screamed higher by 7.5%. Comps are one of the most important numbers for any company selling goods in a retail space since the calculation eliminates results from new store openings thereby distinguishing between sales growth from the additional stores and growth from improved operations at existing locations. Basically, new store results can make top-line growth misleading.

Whole Foods Market, Inc. (NASDAQ:WFM)

Whole Foods Market, Inc. (NASDAQ:WFM) is seeing impressive numbers because consumers want to eat and feel healthier. Whole Foods defines natural foods as minimally processed and with limited-to-no artificial ingredients or unnecessary chemicals. It defines organic foods as being grown via renewable resources and aiding the conservation of water and soil.

So, Whole Foods Market, Inc. (NASDAQ:WFM) accomplishes two goals here. One, if you shop at its stores, you’re going to eat food that’s better for you, and you might feel better and live longer. Two, the company’s practices are “green,” or good for the environment.

Currently, Whole Foods Market, Inc. (NASDAQ:WFM) has 351 stores throughout the United States, Canada, and the U.K. Whole Foods wants to accelerate its store openings, which would increase its market share. Currently, the company produces enough cash flow for 94 new store openings, and it ultimately desires 1,000 stores. Considering Whole Foods’ expectations for the next two years, these goals seem reasonable. Take a look at FY 2013 and FY 2014 estimates.

FY 2013 FY 2014
Sales Growth 11% 12%-14%
Comps Growth 7.2%-7.3% 6.5%-8%
Diluted EPS Growth 15%-16% 17%-18%

Whole Foods will increase its value offerings and promotional activity to help accomplish its current goals.

Greatest strength and biggest weakness
Thanks to its strong brand and locations in high-income areas, Whole Foods Market, Inc. (NASDAQ:WFM) is able to charge premium prices for its products. This, of course, helps the top line. But this also presents a danger.

If the economy isn’t as strong as advertised and the consumer weakens, then Whole Foods isn’t likely to perform as well. I know what you might be thinking, which is that the high-end consumer is doing well and isn’t as susceptible to a weak economy. However, this is a misconception based on the current economic environment.

High-end consumers actually have the most downside risk at the moment simply because in many cases, a large portion of their net worth is tied to the stock market and real estate market. If and when interest rates increase, stocks and real estate markets aren’t likely to perform as well as they have recently. Actually, based on all of the liquidity being pumped into the system since 2009, the downside risk could be high.

The point here is that high-end consumers will either react in one of two ways. One, they will shop somewhere else. Two, and a more likely scenario, is that they will continue to shop at Whole Foods, but they will reduce their spending. Either way, it’s a negative for Whole Foods.

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