In Supermarkets, Culture May Count More Than Cost
“It is always worth paying up for the best of breed,” Cramer told viewers during Monday’s Mad Money.
So Safeway trading at $21 may look cheaper than Whole Foods at $37, but the smart money’s in the latter. All investors need to do is consider the grocery stores’ most recent quarters for the proof.
Safeway’s earnings came in at the Street’s expectations on sales that were up just 0.6% year-over-year. Management, though, dropped its full-year forecast by 8% on a potential decline of between 1% and 1.5% in non-fuel identical store sales, or same-store sales in the supermarket business. The new numbers may be more realistic, Cramer said, but he thinks they still might need to come down more.
Whole Foods, on the other hand, also delivered earnings that were in line with analysts’ expectations, but those profits were up 52% year-over-year. And same-store sales jumped 8.8%, a noticeable bump from the 2.5% dip in the same quarter last year. The company also raised guidance for its 2011 fiscal year, starting in September, predicting revenue growth of 10% to 13%. In contrast to Safeway, though, Cramer thinks these numbers may be too low, prompting a possible upside surprise the next time around.
The bearish case against Whole Foods is that, in this weak economy, consumers won’t pay up for the store’s high-end products. But the fact that they will is the very reason Cramer likes the company so much. Whole Foods is synonymous with healthy eating, he said, “a long-term secular growth trend that’s not going away anytime soon.” And it’s an aspirational brand whose customers are willing to pay up for the privilege of saying they shop there.
How can Safeway compete? It can’t really, Cramer said. An attempt to move into high-quality prepared foods fell short—customers thought the prices were too high—and prices across the board have been falling. Plus, the company competes against Walmart , Costco and Target . Compare that to Whole Foods, which saw increases in both pricing and foot traffic at its stores and competes only with privately held Trader Joe’s.
And Whole Foods is cheaper, too, fetching a high 22 price-to-earnings multiple on 18% growth. Safeway’s multiple sits much lower at 12, but that’s with a much lower growth rate of 9%. As previously stated, there’s nothing wrong with paying up for those results.
“We like high-quality growth, which is why if I were you I would be a buyer of Whole Foods right here,” Cramer said, “down over 13% from its high, and I’d be a seller of Safeway, less than three points above its low.”
When this story published, Cramer's charitable trust owned Costco.
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