Good News for Whole Foods Stock
Whole Foods Market, Inc. (NASDAQ:WFM) has changed an important—even if bland at first glance—aspect of its sourcing policy. This shift, however, is significant enough to raise the food retailer’s appeal, translating to a higher Whole Foods stock price.
Whole Foods stock appears to have a resistance level of $33.90. The stock has not broken through that price range at any point so far in 2016. Yet the company’s latest move should help WFM break past that wall. Whole Foods said it would replace the fast-growing chickens it offers now with slower-growing ones. This move coincides with a better quality of life for the chickens themselves and suggests that the company has adopted an overall plan to source and sell higher-quality meat and products in general.
The industry tends to breed chickens such that the animals gain pounds quickly, meaning there’s more meat to sell from a single chicken in a shorter timeframe. Whole Foods believes that slower-growing varieties enjoy better lives prior to being butchering, translating to better-tasting, healthier, and more ethically sourced meat. (Source: “Whole Foods Shifts to Slower-Growing Chickens,” The Wall Street Journal, March 17, 2016.)
Current chicken varieties stocked at Whole Foods stores, such as the Red Ranger or Naked Neck, need about 23% more time to reach market size than those sold at more downscale food stores. (Source: Ibid.) What Whole Foods proposes is rather revolutionary, in fact.
This is because for the past few decades, geneticists and chicken breeders have studied all kinds of ways to make chickens gain weight faster. The idea behind their fast growth is that over time, the birds consume less food and water than if growth were allowed to continue at a natural pace, costing such meat packing companies as Tyson Foods and others much less to produce more meat. The goal has been to make the chicken itself more profitable.
With its latest shift, Whole Foods will gain a positive reputation and likely more customers. The “slow-growth” chicken acts as a kind of Trojan horse, raising interest in the full range of more genuine and natural items the store chain offers. Whole Foods needed something special to resume its role as the go-to supermarket for those wanting to get healthy, organic, and whole foods.
Over the last few years, Whole Foods stock has had trouble adjusting to a number of competitors that have encroached on its turf, such as Walmart, Target, Costco, and Kroger. Slow-growth chicken may be the item the company needed to re-calibrate the distance between itself and lower-market competitors.
Most consumers understand that quality costs more and are willing to accept the fact that Whole Foods is “expensive” for this reason. But in 2015, Whole Foods gained the reputation of being overpriced. That is an entirely different matter, full of negative connotations. Whole Foods has had trouble shaking off the perception that its products are overpriced since then.
Last year, sales took a hit when the company was accused of overcharging customers for items in New York City. Regulators became involved and Whole Foods apologized and settled.
So it’s no wonder that investors have shunned the stock. Over the past year, Whole Foods stock is down about 45%. By refocusing on the quality of its products, Whole Foods can reposition itself as the more expensive but much healthier and tastier alternative.
Whole Foods stock is rather cheap now. Whole Foods was trading at $53.80 exactly a year ago, but you can buy it today for $33.80. The company’s price-to-earnings (P/E) ratio has dropped by more than 50% over the past few years: it is about 22.42, rather than its 45.00 mid-2012. (Source: “Whole Foods Market PE Ratio,” YCharts, March 18, 2016.)
If that is not enough to make Whole Foods a food retail investment for your watch list, consider that WFM also delivers a 1.57% dividend yield. That’s almost twice as much as the 0.90% yield a year ago. This is a nice bonus to encourage investors to give the company a closer look. (Source: “Whole Foods Dividend Yield,” YCharts, March 18, 2016.)
Ultimately, Whole Foods stock has suffered over the last year, but the company has the tools to recover its reputation and customers. That means the company has plenty of room for growth. At its current valuation, Whole Foods stock looks like a bargain.