Whole Foods rides recovery among the wealthy

The upscale grocer appeals to niche consumers who are well on their way to economic revival. Goldman Sachs has added the stock to its list of picks.

By Kim Peterson Jul 11, 2011 2:50PM

Image: Groceries (© Tetra Images/Corbis)As the recession lingers, a grocer nicknamed "Whole Paycheck" shouldn't be doing well. But Whole Foods Market (WFMI) is on fire, with shares up an astonishing 70% in the past year.

And now Goldman Sachs (GS) has added the stock to its Conviction List. Analyst Stephen Grambling thinks sales and profits will come in better than management has forecast for 2011.

Those beats will come in as the chain expands, Grambling says. He set a $76 target on the stock, which is about 18% higher than Monday's price.

So why is Whole Foods doing so well in this time of high unemployment and economic turmoil? The grocer is capitalizing on a growing divide in this country between the well-to-do and the middle- to low-income households. Wal-Mart (WMT) shoppers are still living paycheck to paycheck, struggling to make ends meet and shopping at dollar stores when they can.

In the following video, one analyst explains why Whole Foods shares are a buy.

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By contrast, wealthier households are well on their way to recovery. And they're shopping again at Whole Foods with a vengeance. Whole Foods doesn't have the intense competition from dollar stores and other retailers, so it can flourish and expand as much as its customer base allows. The grocer wants to grow to 1,000 U.S. stores, from 293 currently.

That doesn't mean Whole Foods is ignoring the recession, however. The chain has lowered prices on some items and focused on its store-branded products, which tend to be less expensive.

Some analysts think Whole Foods is cheaper than traditional grocery stores on some items, such as orange juice and pasta sauce, The Associated Press reports.

The stock has a 17.1% expected growth rate on its long-term earnings, Barron's reports, which is far higher than the 12.7% industry average. However, trading at about 30 times forward earnings means this stock is no steal.

2Comments
Feb 16, 2012 4:08PM
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Even though Whole Foods is very expensive for me, I still go there to shop as the foods are very healthy.
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