Can Whole Foods’ Organic Growth Continue?

Whole Foods Market (NASDAQ:WFM) opened its first store in Austin, Texas, in 1980 and it has since become the undisputed king of organic grocers. The company has laid out plans to open 1,000 stores in the U.S. in the coming decades, but it remains to be seen if its business model can support this kind of growth in the long term. Let’s use our CHEAT SHEET investing framework to decide whether Whole Foods is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

Shares of Whole Foods jumped almost 10 percent on May 7 as the company announced strong second-quarter earnings. The organic grocer improved its gross margin by five basis points in the second quarter. This alleviated some concerns by investors that Whole Foods margin would erode as the competition intensified in the organic food space. Additionally, some analysts thought that Whole Foods’ investments in price discounts and promotions would hurt its margins. Instead, these investments were offset by a reduction in administrative expenses due to greater economies of scale and strong comparable store sales growth of 6.9 percent.

The company is scheduled to announce its third-quarter earnings on July 31. Greater capabilities in customer analytics and more investments in price discounts and promotions should give way to increased growth in same-store sales. Whole Foods continues to demonstrate a high return on invested capital, even in its oldest stores, and expects to open 32 more outlets this year. The company has opened 16 new stores in the first half of the fiscal year and bought the leases of six Johnnie’s Foodmaster stores in the greater Boston area last quarter. While it is too early to tell whether Whole Foods can meet its ambitious goal of opening 1,000 stores across the country in the long term, new store openings will boost economies of scale, strengthen supplier relationships, and increase national brand recognition.