If you’re a millennial, you may have jumped on the healthy food bandwagon. You’ve replaced your morning Froot Loops with Kashi and blueberries. The Wonder Bread sandwiches and Doritos for lunch turned into whole wheat veggie pitas and Greek yogurt. And gone are the days of Bagel Bites for dinner — hello, fresh Atlantic salmon with a side of kale and quinoa.
Though you squirm at the checkout line watching the cashier ring up your receipt during each grocery run, you exit the store lugging that reusable Whole Foods bag with your head held high. After all, you’re not ashamed to tell the world, “I buy organic food.”
Given that annual sales of natural food products are around $90 billion, odds are a few of your friends carry those reusable bags — and have one too many stuffed in their closets, too.
Now, if you’re as conscious about your finances as what you eat these days, you’ll want to listen up.
Why you should consider Whole Foods stock. “If you’re a millennial, and you have a really long [investing] time frame, there’s an opportunity here,” says Brian Yarbrough, a consumer research analyst with Edward Jones who tracks food retailers such as Whole Foods Market (ticker: WFM), Wal-Mart Stores (WMT) and Kraft Heinz Food Co. (HNZ). Just last year, organic food sales jumped 11 percent, generating $39.1 billion, according to the Organic Trade Association. What’s more, a 2014 Gallup poll found more than half of 18- to 29-year-olds “actively” try to include organic food in their diets. More than half of 1,200 families surveyed by the OTA say they’re buying more organics than a year ago, too.
“Anyone that’s selling groceries is trying to get on the natural and organic grocery trend, and that’s because grocery sales have really been pretty lackluster over the last several years,” says Ken Perkins, an equity analyst at Morningstar, a Chicago-based financial research firm. “Organic and natural is actually one of the few places that’s generating meaningful growth.”
Traditional grocers such as Kroger Co. (KR), Costco Wholesale Corp. (COST), Wal-Mart and even Target Corp. (TGT) have upped their natural product lines to edge into this healthy foods space. And newer players such as Sprouts Farmers Market (SFM) and The Fresh Market (TFM) are gaining momentum. As a result, analysts are curious to see if Whole Foods Market, the organic foods powerhouse that has sprouted to 417 stores since opening in 1980, will remain the go-to grocer for cage-free eggs and hormone-free cheese. Some say a forthcoming new brand of Whole Foods stores that caters to millennials and their budgets is one move to protect their crown.
“I’m not questioning whether Whole Foods will be standing necessarily 20 or 30 years from now, but I think the big question is what [will] the competitive landscape look like?” says Karen Short, managing director of Deutsche Bank. “As it sits today, the competitive landscape keeps getting tougher.”
In light of the competition, U.S. News went on a stock shopping trip to see if Whole Foods would be a wise investment for a 20- or 30-something looking to capitalize on their investing time horizon and peers’ healthy eating habits. After all, those Lunchables days don’t look like they’re coming back.
In the parking lot. Before stepping through the sliding door and pouring your hard-earned dollars into organic squash — er, we mean stocks — let’s sit in the car a second.
“A lot of times, millennials get all excited about one stock in a company and forget the whole ‘you should be diversified’ thing,'” says Katie Brewer, a Dallas-based certified financial planner and owner of the financial firm Your Richest Life. An organic-based company “should be a very small piece of a total portfolio,” says Brewer, who specializes in coaching Gen Y on investments. “[Millennials] should be first building the ‘boring’ diversified portfolio, and then if they’ve got extra ‘fun’ money, that’s where they should be investing in an individual stock.”
You say you’re diversified, with a mix of stocks, bonds and cash? You can get out of the car and grab a cart.
The produce section. It’s hard enough choosing between the Washington, Fuji and Honeycrisp apples, let alone keep the red Chilean grapes and navel oranges from filling your basket before you even make it to the potatoes.
As far as Whole Foods’ competition goes, Sprouts and The Fresh Market are two publicly traded grocers to watch. Short, who has a “hold” rating on Whole Foods, has her eye on Sprouts, a natural organic retailer that launched in 2002 and has more than 200 stores in a dozen states. Last year, unit growth reached 14 percent.
“Given their current growth on an annual basis, they will have significant unit growth for the next 15- to 20-plus years,” says Short, who touts Sprouts’ lower price tags. Meanwhile, The Fresh Market has more than 160 stores in 27 states and saw its income grow by 25 percent in 2014.
Traditional grocers are getting more aggressive in their offerings as well. “They’ve added organic, they’ve added naturals, they’re promoting them and they’re offering lower prices,” Yarbrough says.
It doesn’t help that Whole Foods competes with “everybody,” says Short, ticking off a list of conventional grocers selling natural products such as Safeway (SWY) and Costco. Meanwhile, Perkins points to Trader Joe’s Co., which is privately held, as a large Whole Foods competitor that’s trendy among millennials and more affordable.
All this is to say that you can now find organic strawberries anywhere, and it could affect Whole Foods’ earnings. “For the past 15 to 20 years, [Whole Foods] has owned the space, and there hasn’t been a lot of competition,” Yarbrough says, “but now you have all this competition coming in, that’s going to pressure profitability.”
The frozen food section. You might want to bypass this aisle with overpriced chicken and shrimp. We’ll explain …
Last year, Whole Foods generated $14 billion in record sales, with record weekly sales averaging $722,000. Yet its comparable store sales slowed to 3.6 percent in the second quarter — compared to four years ago when store sales growth reached nearly 10 percent.
Two things drive a retail stock, Yarbrough says: square footage growth and same-store sales. While the company added 38 new stores last year — it hopes to reach 1,200 — the drop in comps concerns some analysts. “There’s some people out there saying they think their same-store sales could go negative next year, which would be the first time since the economic downturn,” Yarbrough says.
What’s causing the dip?
Some point to the recent media attention around the New York City Department of Consumer Affairs finding of “systematic overcharging for pre-packaged foods.” (Chicken tenders were reportedly overpriced by $4; coconut shrimp rung up $14 extra.) Then there was the asparagus water incident in August when the store charged $5.99 for asparagus stalks in a jar of water. (After a social media maelstrom, a spokeswoman said the price was “an accident.”)
“When competition is getting stronger, I think it’s just very bad timing,” Yarbrough says. “The asparagus water — that doesn’t bother me as much. I do think the overpricing in the New York stores and the press around that is having some impact.”
Perkins adds that the incidents only reinforced the skepticism surrounding the company’s prices. “They have worked to improve their pricing and their competitiveness, but at the end of the day, they still have the ‘Whole Paycheck’ reputation, and to change that perception takes a lot of effort, sometimes a lot of financial investment and a fair amount of time.”
The samples. In July, Whole Foods announced plans to open five new stores, called 365 by Whole Foods, that may appeal to millennials who can’t afford organic almonds.
“These new stores are for anyone who want products that meet and/or exceed Whole Foods Market’s very high quality standards, but at value prices,” Whole Foods spokesman Michael Silverman wrote in an email.
The stores are slated to open in mid-2016, with the first in Los Angeles, followed by Houston; Portland, Oregon; Bellevue, Washington; and Santa Monica, California. The company plans to double the number of 365 by Whole Foods stores by 2017.
Yarbrough expresses concern that the new stores could “cannibalize the core Whole Foods brand” and affect sales at nearby non-365 stores.
However, the concept, he says, makes sense. “I think that’s where they need to go because there’s so much competition out there ; they cannot take prices low enough in their core Whole Foods business to be competitive … because it’s going to wipe out margins.”
In Short’s opinion, Whole Foods doesn’t capture its fair share of millennial shoppers, and the 365 stores may change that. “Whole Foods has been battling their ‘Whole Paycheck’ reputation for a long time, and they’re still battling that, and the reality is they need to reduce their price point,” she says. Millennials are very price conscious, she adds, and “all the things that draw in a millennial customer in terms of loyalty … Whole Foods lacks.”
The wine aisle. Just like that chardonnay you sneaked in your cart, this investment may taste better in the future.
“Millennials have longer time horizons and a greater ability to bear risk,” Perkins says. “[They] can also ride it out and benefit from the long-term trends that Whole Foods will benefit from.”
But he warns: “There’s risk to an investment like this,” since the large-cap stock is subject to the volatility of the stock market, like other equities. In other words, millennials should consider their housing costs, debt and essential expenses before splurging on this wine.
The checkout line. Let’s breeze past the $15 pies and brownie bites and see what this shopping trip will cost you. WFM stock is down more than 35 percent for the year, trading at close to its 52-week low, and is down more than 50 percent from its all-time high. “The stock presents fairly good value at current levels,” Perkins says. “It’s trading at a low $30 range, so it’s fallen quite a bit.”
WFM stock also sports an attractive price-to-earnings ratio of 18.2 — a drop from about 50 — making it comparable to The Fresh Market’s 17.3 and much better than Sprouts’ P/E of 28.3.
Last month, Whole Foods announced plans to cut 1,500 jobs, or 1.6 percent of its employees, before December. However, Yarbrough stresses there are no problems with the business model and the company is not “going away.”
“We just think near term, there’s some pressures, and it might take a couple years to work through that,” he says.
Maybe by the time that happens, your aged chardonnay will be ready to uncork to celebrate a healthy investment.
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Should Millennials Invest in Whole Foods Stock? originally appeared on usnews.com
