Filed under: Company News, Earnings, Industry News, Food & Beverage, Investing
Going by the recent performance of former market darling Whole Foods Market (WFM), investors may think that the once-hot trend for organic and natural foods is cooling down. After all, the leading organic grocer has lowered its guidance three times this year alone.
Shares of Whole Foods Market — one of the market’s bigger winners over the past decade as consumer appetite for natural foods widened — have been disappointing lately. The stock has plunged by more than 40 percent since peaking late last year. The market has generally been kind to consumer stocks this year, but Whole Foods Market has shed nearly a third of its value in 2014.
If you think that the prices at Whole Foods Market are high, think about the investors that now have even less to spring on soy milk and 5-Step Animal Welfare-rated meats. However, stock watchers writing off the organic industry based on a weak bellwether may be missing the boat on an industry that’s still booming and blooming.
In Hain Sight
Hain Celestial (HAIN) reported better than expected quarterly results on Wednesday. The company behind Terra snack chips, WestSoy soy milks, Earth’s Best baby foods and Celestial Seasonings natural teas saw net sales climb 26 percent to $583.8 million in its fiscal fourth quarter relative to the prior year. Adjusted earnings from continuing operations soared 45 percent.
To be fair, this isn’t all “organic” growth. Hain Celestial collects smaller companies like Justin Bieber collects bad publicity.
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It’s been a great model for Hain Celestial. It can take small companies making organic or natural foods and health products in small batches and expand their distribution through its growing outlets. Hain Celestial is a big supplier for Whole Foods, but it also sells to faster-growing organic grocer Sprouts Farmers Market (SFM) and most major supermarket and mass merchandise chains. Hain Celestial revealed during Wednesday morning’s earnings call that Amazon.com (AMZN) is one of its 10 largest accounts.
Even if the heady sales growth was padded by acquisitions earlier this year of Rudi’s Organic Bakery and Tilda, Hain Celestial is still getting a lot of mileage out of its workhorses. Its 13 biggest brands — accounting for the lion’s share of its revenue — grew at an average clip of 7 percent over the past year.
Sprouts’ Season
It’s not just Hain Celestial running hard. Whole Foods Market rival Sprouts is expected to grow its sales 21 percent this year and 19 percent come 2015.
Heady expansion at Sprouts accounts for some of that octane, but even at the store level the concept is rocking. Comparable store sales growth soared 9.5 percent in its latest quarter, and that’s a lot better than the average per-store uptick of 3.9 percent that Whole Foods Market posted.
There’s a growing market for organics out there. Don’t let a single disappointing stock chart over the past few months convince you otherwise.
Growing Demand
The weakness at Whole Foods Market could be a positive for the industry. After all, it’s not a lack of sales growth that’s holding back the stock. It’s not growing as quickly as it used to, but it is at least still growing.
Investors are concerned about the retailer’s margins as it competes with grocery stores and now, apparently, Amazon.com. Walmart (WMT) recently said that it aims to slash prices on its private label organic items. Companies don’t benefit from an industry price war, but it could go a long way to expand demand for organics.
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Even with the potential of a domestic price war on organics, let’s not understate the growth potential overseas. A big contributor to Hain Celestial’s blowout performance was big gains in the United Kingdom, where the company is now generating more than a third of its sales.
Hain Celestial products can be found in 65 countries, but sales outside the U.S. and U.K. accounted for just a little more than 10 percent of its business. There’s a high ceiling out there if Hain Celestial can gain traction in a few wealthier overseas markets.
Hain Celestial’s guidance for the new fiscal year — calling for 17 percent to 23 percent earnings growth and as much as 30 percent in net sales growth — is encouraging. Even Whole Foods Market could be appealing at this point. It is trading at 25 times this fiscal year’s profit target. That is not low, but it is for Whole Foods, which has historically traded at much higher P/E multiples.
Don’t fear the organic stocks. The trend’s alive and well with plenty of growth to be harvested.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Hain Celestial and Whole Foods Market. The Motley Fool owns shares of Amazon.com, Hain Celestial and Whole Foods Market. John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Try any of our newsletter services free for 30 days.
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Source: Investing
