No. of Recommendations: 6
I recently delved into a comparison of Whole Foods Market (WFM), Kroger (KR), and Safeway (SWY) (see post here: Kroger and Safeway are the largest conventional grocers in the U.S., both of which have steadily been increasing their organic and natural food offerings over the past decade. As competition heats up for Whole Foods, we also need to pay attention to the smaller up-and-coming competitors.

Whole Foods has been joined by Natural Grocers by Vitamin Cottage (NGVC), The Fresh Market (TFM), and Sprouts Farmers Market (SFM) in recent years on the public stage. These businesses are considerably smaller than Whole Foods (Sprouts is the largest of the three with a market cap of $4.12 billion), but are nonetheless competing for consumer dollars with Whole Foods.

A background of the competitors

Natural Grocers by Vitamin Cottage was founded in 1955 by Margaret and Philip Isely and remains under the control of the Isely family today. Until the second generation of Isely’s took over in the late 1990s the company did not focus on expanding outside of Colorado, but has since opened a total of 72 stores in 13 states. Each Natural Grocers store is only 12,300 square feet in size on average, less than a third the size of a typical Whole Foods store and the smallest of the grocers evaluated here.

The Fresh Market was founded in 1982 in North Carolina and today operates 151 stores in 26 states. The company’s largest market is Florida, where it had 33 stores at the close of the 2013 fiscal year. The average size of a Fresh Market store is roughly 21,000 square feet.

Sprouts Farmers Market opened its first store in 2002 and has since opened 170 stores in 9 states (most of which are concentrated in the Southwest U.S.). This makes Sprouts both the youngest and the largest of these three competitors. Each Sprouts location averages 27,500 square feet in size.

As a recap, Whole Foods Market was founded in Austin, Texas, in 1980. At the close of fiscal 2013 Whole Foods operated 362 stores in 40 U.S. states, the District of Columbia, Canada, and the United Kingdom. Only 15 of those stores are outside of the U.S., and each store averages approximately 38,000 square feet in size.

Whole Foods: the cash flow behemoth

We know that competition is only going to increase for Whole Foods as organic and natural foods become increasingly cost effective for grocers to carry. With that in mind, let’s explore just how successful (or not) these smaller competitors have been compared to Whole Foods when it comes to generating cash flow.

Let’s start with Natural Grocers, which produced $25.72 million in cash flow in fiscal 2013. This equals $357K of operating cash flow produced by each store.

The Fresh Market produced $140.37 million in operating cash flow in fiscal 2013, equating to $930K of cash flow produced by each store.

Sprouts Farmers Market produced $160.59 million in cash flow in 2013; each store produced approximately $945K in cash flow.

Whole Foods produced $1.01 billion in cash flow or $2.79 million in cash flow per store, more on a per-store basis than these three competitors combined.

Leading where it counts: free cash flow

Of course, what really matters is free cash flow -- operating cash flow less capital expenditures -- because it measures the cash retained by a business after making capital investments to maintain current stores and open new locations.

Over the course of fiscal 2013 Whole Foods produced a total of $472 million in free cash flow or $1.3 million per store. Sprouts Farmers Market produced $73.13 million in free cash flow or $430K per store. Fresh Market produced $18 million in free cash flow or $119K per store.

Natural Grocers was free cash flow negative for the year, posting free cash flow of -$13.99 million or -$194K per store. This means that the Natural Grocers business is not producing enough cash flow itself to finance expansion. Natural Grocers’ Chairman and co-president Kember Isely says that the company will be free cash flow neutral in fiscal 2014. So far the company is still free cash flow negative, but there are two quarters remaining this fiscal year.

Once again, on a per-store basis Whole Foods generates and retains more cash than these three smaller competitors combined. This gives you an idea of just how powerful of a cash generator we have in Whole Foods.

Let’s take it a step further

We can take this analysis a step further and evaluate the cash flow and free cash flow generated on a square foot basis. This is a helpful metric because, as noted above, these businesses have different store sizes in terms of average square feet per store. Looking at per-store numbers only gives us a piece of the picture. We can really see how efficient (or not) each business is when we compare the cash flow generated per square foot.

The space of every Whole Foods store equaled 13.76 million square feet at the close of fiscal year 2013. Natural Grocers had 886K square feet, Fresh Market had 3.17 million square feet, and Sprouts Farmers Market had 4.68 million square feet.

First, let’s look at operating cash flow per square foot. Since I didn’t include this particular figure in my previous post comparing Kroger and Safeway, let’s start with those two. Kroger produced $24.09 in cash flow per square foot, while Safeway produced $19.56 per square foot. Natural Grocers produced $29.04 in cash flow per square foot of store space. Fresh Market produced $44.26 per square foot. Sprouts Farmers Market produced $34.35 per square foot. Whole Foods produced $73.42 in cash flow per square foot, making it a decisive leader in cash flow production once again.

But free cash flow is really where our attention should be focused. Because of its negative free cash flow, Natural Grocers produced -$15.78 in free cash flow per square foot. Fresh Market produced $5.68 in free cash flow per square foot. Sprouts Farmers Market produced a respectable $15.68 in free cash flow per square foot, but it is still less than half of the $34.31 in free cash flow per square foot produced by Whole Foods.

In this instance, Whole Foods produces more free cash flow on a square foot basis than these three smaller competitors combined. In fact, Whole Foods produces just under the amount of free cash flow per square foot produced by Kroger, Safeway, Fresh Market, and Sprouts Farmers market combined (which is $35.36). If you include the negative numbers from Natural Grocers, of course, Whole Foods produced more free cash flow per square foot than these five competitors combined.

Below are these numbers in table form. All numbers are from fiscal year 2013 except for cash and debt, which are taken from the most recent quarter.

Company Stores Op. Cash Flow Cash Flow/Store Free Cash Flow FCF/Store Avg. Store Size Cash Flow/SqFt FCF/SqFt Cash Debt

Whole Foods Mkt 362 $1.01B $2.79M $472M $1.3M 38,000 SqFt $73.42 $34.31 $1.08B $60M

Kroger 2640 $3.88B $1.28M $1.05B $398K 61,000 SqFt $24.09 $6.52 $401M $9.65B

Safeway 1335 $1.24B $928K $477M $357K 47,500 SqFt $19.56 $7.52 $2.69B $4.45B

Natural Grocers 72 $25.72M $357K -$13.99M -$194K 12,300 SqFt $29.04 -$15.78 $7.91M $19.56M

Fresh Market 151 $140.37M $930K $18M $119K 21,000 SqFt $44.26 $5.68 $19.12M $34.17M

Sprouts Farmers Mkt 170 $160.59M $945K $73.13M $430K 27,500 SqFt $34.35 $15.64 $149.1M $433.46M

Foolish bottom line

Whether you are comparing Whole Foods to conventional grocers like Kroger and Safeway or smaller up-and-comers like Natural Grocers, Sprouts Farmers Market, and The Fresh Market, no company comes close to the cash flow efficiency of Whole Foods. This is an especially important item for investors to remember in times such as these where the stock/business has fallen out of favor with the market and financial media. Just about every report from the financial media (save most of those from the Fool) focuses on short-term numbers and completely overlooks the incredible cash production power of Whole Foods.

It is not easy to find a business with experienced and innovative leadership, a top notch employee culture, and visionary purpose that also delivers cash flow performance and efficiency far and above what the competition has been able to achieve. What it really comes down to is the fact that Whole Foods is redefining success in the grocer space. No other grocer -- conventional or alternative -- is yet to come close to generating the cash flow of Whole Foods on a square foot basis.

There is a lot of power with the Whole Foods brand. With a record number of stores in the development pipeline along with a probable market capacity to open 2-3 times more stores in the U.S. in the coming years, I am all the more confident in my recent purchase of Whole Foods. This will likely be a business for Foolish investors to hold for the next 20 years and beyond.

David K

(My first write-up of Whole Foods this month can be found here:
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