They Were Wrong About Whole Foods

 | May 22, 2013 | 7:19 AM EDT  | Comments
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Younger people hate the food chain. It's like Ronald Reagan with Russian missiles. He was willing to trust them, but he wanted to verify. The millennials, who will be about 30% of this country in a half-dozen years, want their food vetted and verified.

That's exactly what Whole Foods (WFM) does. What it stands for. The millennials believe Whole Foods wouldn't sell something unless it were as good as it can be for them. I say "good as it can be" because, even if it is made or sold at Whole Foods, it can still be fattening. It can still be "bad for you," so to speak. But you need Whole Foods to protect you from a world of mass production the way you needed Upton Sinclair's The Jungle as a way to expose the wretched unsanitary conditions of the meatpacking industry at the turn of the century.

Now Whole Foods just reported a terrific quarter that saw the stock shoot up 10 points before proceeding to advance 3 more points. This is another stock that didn't fill in the gap once it took off because we are in a much more powerful market than most understand or think about. The stock had spent a lot of time in the low-$80s wilderness as growth­-stock portfolio managers had become convinced that the ardor for "expensive" public stores that sell organic food had dimmed. In their place, went the thinking, had come initiatives from Target (TGT), Wal-Mart (WMT) and Kroger (KR) on the mass-merchant side, and Trader Joe's from the cult organic side.

I never thought Whole Foods lost a step, and I stuck by that. But, more important, the company heard what was wrong, adjusted, cut expenses, cut shrinkage, improved the supply chain and introduced some lower-priced merchandise that brought the numbers right back up and then some.

Plus, with the lack of cannibalization in what was thought to be the saturated area around Boston, the company hinted that that its total target goal for 1,000 U.S. stores could be low. It has about 350 locations currently.

The company achieved same-store­-sales success of the 21 stores in college-filled Massachusetts, almost double the locations it has in New York State -- and that's not to mention the instant hit that is the store in South Bend, Ind., home of Notre Dame. I think that, in light of this, you could argue that every college needs a Whole Foods nearby because of the millennials' desire for healthier eating.

Plus, the company hasn't even rolled out plans for a loyalty or affinity program. I think that, judging by the Starbucks (SBUX)-like mindset of Whole Foods -- Starbucks being the best of the loyalty-program issuers -- this could be an instant boost to sales. Do not underrate the process of hospitality, as restaurateur Danny Meyer has taught us well, as it can be the most powerful force to get lifetime customers, exactly whom Whole Foods is looking for.

Another catalyst out there might be the opening of the Brooklyn, N.Y. location in November. I have been watching the construction of this amazing, giant-sized store, replete with a 25,000 square foot greenhouse up top, and have marveled at how a borough of 2 million people is just now getting a Whole Foods. It is a reminder of just how much runway there really is for this company.

Whole Foods splits 2-for-1 next week. I know it sounds silly right now, but splits are working for companies with loyal users. This stock isn't done going higher. In fact, it is just now breaking out, and it is setting the stage for multiyear expansion -- and, yes, multiyear multiple expansion -- as the path to long-term growth becomes clear once again.

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