Is it Whole Foods (WFM) vs. Kroger (KR)? Or is the world big enough for both?
I think the answer is the latter, and while Whole Foods has stumbled of late and Kroger's been red-hot, I am beginning to wonder if we aren't nearing the end of the lack of performance from the best natural and organic retailer in the country.
First, a word about Kroger. It is a magnificent performer, once again, this week, talking about accelerating comparable-store sales -- an astounding 4.8% when I was looking for slightly more than 4% -- and an exciting integration of both Vitacost, an on-line vitamin company, and Harris Teeter, a recently purchased supermarket chain. The former gave the company terrific e-commerce tools and the latter is just the kind of classic expansion that allows for Krogerization of the North Carolina operation. Kroger's still selling at less than a market multiple despite its excellent execution, amazingly strong private label operation and a healthy embrace of natural and organic foods.
Whole Foods, on the other hand, has experienced a slowdown from high-single-digit comparable-store sales all the way down to 3% numbers. I have been fretting about it seemingly forever because despite its aggressive growth, it hasn't been able to make as much money as it used to or attract as many consumers as it once did. That's because of the accelerated expansion of many competitors in its space, including Trader Joe's, The Fresh Market and Sprouts Farmers Market, all of which have been killing each other to take share. Plus, of course, the rest of the food-selling industry -- whether it be Kroger or Costco (COST) or Target (TGT) or Wal-Mart (WMT) -- is all over natural and organic as each player recognizes this is the only double-digit grower in their food aisles.
Meanwhile, Kroger made it clear on its conference call that people increasingly like stores that have everything in them, not just organic and natural foods, and cited that as a reason for its excellent numbers.
So why even consider Whole Foods? First, it is a stock that has been hammered. It's down an amazing 33% for the year and even though it has been a great long-term performer, that's some real compression.
Of course, it could be Coach (COH), another company that catered to high-end consumers that was eviscerated by Kate Spade (KATE) and Michael Kors (KORS). Maybe the price to earnings multiple is still too high given the low-single-digit growth. Do you want to pay 25x next year's earnings for Whole Foods when you can buy Kroger for 15x earnings, even though it is now growing a full percent faster than Whole Foods and has become the most consistent performer as some would say Whole Foods has become far less consistent?
But what if we are looking at it too statically? What if new initiatives move the needle?
First, Whole Foods is an early adopter of Apple's (AAPL) Apple Pay payment system. So is Kroger, but you have to believe that the more upscale Whole Foods will have more iPhone customers per store than Kroger will have, which will certainly make a difference in take rates.
Second, Whole Foods is rolling out its affinity plan and it will be done in conjunction with the iPhone, which could be very exciting for a company that has fallen way behind, by its own admission, in that department. Co-CEO Walter Robb confirmed that to me in an interview on "Squawk on the Street" this very morning.
Third, it's now using the customer-friendly Instacart for its pick-up and delivery systems again -- something that costs a little extra, which could be daunting for Kroger customers, but would be considered a bargain for Whole Foodies.
Finally, Whole Foods is beginning its first national ad campaign, distinguishing how Whole Foods is different from the other guys. I haven't seen this campaign yet, but I bet it is going to be similar to the kind of soft campaign that Chipotle has done, one where you are reminded in a subtle way that you can only trust Whole Foods for the real natural and organic goods.
Oh, and Two-Buck Chuck, look out. Trader Joe's is going to get a run for its wine money when Whole Foods adds premium wines for non-premium prices, something Robb went into in some detail this morning.
Why not take the big swing? Because it looks like for the moment that perhaps Whole Foods has really lost its first mover edge over the others. If you can get the same suite of fresh products at "the other guys," then what is the point of what is perceived as the high prices of Whole Foods, even as it has kept prices much more reasonably than the perception? We know that because it isn't making the kind of money per basket that it used to.
If the company can get that spirit back, however, and show that its name still means the Good Housekeeping seal of approval for what's available in the categories it sells, it can woo customers back who have been lost to other stores. Advertising costs money and it can hit the bottom line. This stock trades on comparable-store sales, though, and it is difficult for me to believe that it can't see some sort of acceleration versus the easy comparisons that are developing after this quarter.
Several forces are causing headwinds to the stock. Food inflation for natural and organic is horrendous. I keep thinking about how Annie's (BNNY), the company that sold out to General Mills (GIS) this week, had a 40% price increase in organic wheat really deck the last quarter. We also heard that, despite the decline in a basket of regular commodity foodstuffs to levels we haven't seen since 2010, that Kroger says the fresh produce aisle's been rocked by price increases. That's a key portion of the business of Whole Foods, so that's just plain bad news.
Whole Foods is an intensely competitive company, though. Many people wrote off this $38 stock when it traded at $5 in 2009. I sense people are writing it off again. It has a ton of cash and virtually no debt, so it has massive flexibility in terms of what it might want to do with its capital structure. Perhaps a buyback that makes a real dent in its share count? It can raise the dividend even as it expands its store count aggressively.
Ultimately, while it might be too early to buy until after the quarter, the idea that Whole Foods is somehow a losing stock with losing management when it is the most forward company in the industry on the eve of national ads, an affinity program and more aggressive delivery seems wrong to me. Again, the comparisons won't be good until after this quarter. But right now, the company has the fewest buys on its stock that I can recall and I think the risk/reward's getting better, not worse.
In other words, it's time to start kicking the tires ahead of what could be the last bad quarter when it reports in November, a gateway into better times ahead.