Whole Foods Eats Up Bigger Share of Organic Market

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One of the big challenges of selling natural and organic food is convincing people to fork over the extra money for it.

Because organic food cost more to produce than nonorganic, it carries a higher price tag.

That's been a bit of a hurdle for grocery retailers, such asWhole Foods Market ( WFM ), that specialize in organic, natural and cruelty-free products.

But the hurdle might be getting smaller. In its 2012 Green Mission Report, Whole Foods says it has made "important headway" over the past three years on the prices of its organic produce.

The company says it can offer organic items for the same price as, and occasionally less than, conventionally grown counterparts.

It expects to see the price differential continue to decline in coming years as organic production becomes more widespread and Whole Foods is able to source new organic products in other countries with good organic agricultural practices.

"We anticipate that availability will continue to rise while some prices, especially for in-season items, fall more in line with conventionally grown produce," the report said.

More Organic Food

If so, that should bring in even more customers to Whole Foods. The impact could be substantial, considering how well the company has done with its current customer base. Sales and earnings have grown in double digits for 10 straight quarters despite a number of head winds.

"Even in the current economic environment, it appears people don't want to cut corners on healthy, high quality food," Citibank analyst Gregory Badishkanian noted in a recent report on the natural food sector.

He cites data showing that regardless of current food prices, 72% of adults said they "don't want to compromise" on the quality of food they buy.

"On top of that, 73% of adults said that if prices are comparable, they prefer to buy natural/organic foods over conventional ones," added Badishkanian. "Also, 72% responded that they would find ways to be able to buy natural/organic foods within their budget."

Whole Foods is the nation's biggest organic and natural food grocery, with 329 stores in the U.S., Canada and the U.K. The company offers the usual staples, such as fresh produce, seafood, canned and dry goods, meat and poultry, baked goods and prepared food.

It also offers nutritional supplements and vitamins, beer and wine, body care and educational products, and various household items.

In the organic and natural food category, Whole Foods mainly competes against smaller regional and local chains.

Among publicly traded companies, the grocery chain that most resembles Whole Foods is probablyFresh Market ( TFM ), a Greensboro, N.C.-based specialty grocer with more than 120 stores in 24 states.

Like Whole Foods, Fresh Market has been on a strong financial run, with six straight quarters of double-digit sales and earnings growth.

In an Aug. 29 note, JPMorgan analyst Ken Goldman said he believes Fresh Market "makes a compelling case" for long-term earnings expansion. "(But) we think there may be more short-term earnings volatility with Fresh Market than with Whole Foods, the latter of which is further along its growth story and has proved its ability to beat earnings on a more consistent basis."

All of these companies still occupy a pretty small niche in the overall food market.

Citi's Badishkanian estimates that the natural/organic food segment represents only about 6% of the total food industry.

"It is still underpenetrated as a percentage of total food purchases," he noted. "There is much more room for the industry to grow."

Badishkanian reckons the natural/organic food category will expand by the mid- to high-single digits over the next three years.

Whole Foods should outpace that growth rate, thanks in part to a rapid expansion plan. Analysts expect it to report annual revenue growth of 16% for fiscal 2012 and 13% for fiscal 2013.

The company opened a record nine new stores, including one relocation, during its fiscal third quarter, which ended in June. It was due to open seven more stores during the fourth quarter for a total of 25 stores opened during fiscal 2012. The company projects 28 to 32 store openings next year and 33 to 38 in fiscal 2014.

Market Share

"Our accelerated growth plans are on track, and we believe we will continue to gain market share through further differentiating our shopping experience, improving our relative value positioning, and reinforcing our position as America's healthiest grocery store," Walter Robb, Whole Foods' co-chief executive, said in a statement following the company's fiscal third-quarter results.

The company reported Q3 earnings of 63 cents per share. That was an improvement from the 50 cents of the prior year's third quarter and 2 cents above views.

Revenue rose 14% to $2.73 billion, in line with estimates. Same-store sales gained 8.2%.

Whole Foods' stock price has been trending higher for nearly four years. Its shares, which topped the 100 mark for the first time in September, hit an all-time high of 101.87 on Oct. 5.

Whole Foods is slated to report fiscal Q4 and full-year results in the next few weeks. Analysts polled by Thomson Reuters expect it to post quarterly earnings of 60 cents a share, up 43% from the prior year.

Full-year profit is seen rising 31% to $2.52 a share.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: TFM , WFM

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