Organic Growth

These thoughts were on my mind this week as I passed through the Whole Foods Market (WFMI), which now has outlets in New York City just steps both from my office and my apartment. I've generally been a skeptic about Peter Lynch's much-quoted advice to invest in companies whose products or services you know and like. But after a few trips to Whole Foods a few years ago, I bought stock and have periodically recommended it. I invested in it simply because I admire what the company has been able to achieve and like the idea that I'm using my money to support it, not to mention earn a profit.

Consider the plight of the urban grocery shopper just a few years ago. At my neighborhood supermarket, the meat department smelled like the pet food area. Sawdust covered the floor, which appeared to be filthy. Shelves were crammed to the ceiling and aisles were so narrow that on several occasions shopping carts ran over my foot. The employees, never to be found when you needed them, were surly and knew little or nothing about the contents of the store. I could never pry apart the plastic bags for the limp produce. And if you think prices were low, think again. True, there were (and still are) Zabar's and Fairway, specialty food stores where you could fight it out with hordes of other desperate New Yorkers competing to get to the deli counter.

I've never experienced worse supermarkets than in New York City, but I'm not so sure suburbanites and rural shoppers have it all that much better. I once shopped in a vast wharehouse of a supermarket in Jacksonville, Fla. You could have driven an SUV down the wide aisles and needed a down vest in the frozen food arena. But when I asked for parsley and garlic, I was directed to parsley "flakes" and prechopped garlic in a jar.

Then along came Whole Foods. After my first visit, I was nearly in shock. The store was beautiful, well-lit and spotless. Employees went out of their way to smile, to offer advice and explanations, to direct you to items you were looking for. Lines moved with amazing speed, and the charmingly theatrical employee who kept them moving made such an impression that he merited a brief profile in The New Yorker magazine. The checkout people were nice, too. The quality and range of what the store sold was amazing. I haven't even mentioned the organic angle, which of course is Whole Foods' main calling card. There are plenty of messages around the store about sustainable coffee farming and local farm produce that make you feel simultaneously well-fed, healthy and virtuous.

But I suspect the main reason people shop at Whole Foods, and are willing to pay more for the experience, is that it's fun. When you think about it, the Whole Foods concept is pretty revolutionary. It's reinventing food retailing, and might change agriculture. I think of it as a stealth Google (GOOG), a company with huge potential but a small fraction of Google's hype. Like Google's founders, Whole Foods' top executives eschew the usual quarterly guidance and earnings predictions.

Wall Street analysts tend to think of it as a supermarket chain, which is myopic. Whole Foods is competing not just with the old-line supermarkets, but also with restaurants, catering businesses, coffee bars and chains like Starbucks (SBUX), wine and beverage retailers, and even cosmetics sellers. Whole Foods is becoming what the department store was in its heyday — a destination, a meeting place, a community center, a town square.

Like Google, the question for investors shouldn't be whether to own it (you should), but at what price. Whole Foods delivered a pleasant surprise a little over a week ago when it reported a 31% jump in net income and said its goal of $10 billion in sales by the year 2010 appears to be "well within reach." The stock jumped 10% on the news, and recently hit an all-time high of nearly $140, more than triple the price when I first recommended it. At around 54, its forward price/earnings ratio reflects its new status as a bona fide growth stock. So, like the dry-aged, grass-fed beef it sells, Whole Foods is expensive.

But sometimes you have to pay for quality. I never buy stocks at 52-week highs, and I think Whole Foods will pull back some before its next earnings release. Like Google, Whole Foods says it's managing for the long term, not Wall Street's quarter-to-quarter expectations, and in the past, there have been major buying opportunities when Whole Foods' results were even slightly below expectations. For now I'm holding my shares, and at $120 or below, I'd be a buyer. In the meantime, I'm enjoying my status as a shareholder in a company that's not only making money, but also changing our lives for the better.