Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for the Inner Circle.

This week, one Inner Circle member asked Pat how he thinks one growing U.S. consumer chain measures up as a stock market investment. Tapping into the increasing demand for a healthier diet, this stock has already made its presence felt in Canada and aims to continue its ambitious expansion program.

Q: Pat: Can I have your recommendation on Whole Foods as an investment? Thank you.

A: Whole Foods Market Inc. (symbol WFM on Nasdaq; www.wholefoodsmarket.com) is the largest retailer of natural and organic foods in the U.S. Whole Foods was founded in Austin, Texas, in 1980, when three local businessmen decided the natural-foods industry was ready for a supermarket format.

Whole Foods now operates 329 stores in the U.S., Canada and the U.K. However, the U.S. accounts for 97% of its sales. The company plans to open around 70 new stores within the next two years.

Whole Foods sells a selection of perishable foods, mainly natural foods or organic products. It also sells mainstream national brands. The company’s food comes from all over the world, but it focuses on selling foods from local farmers.

In August 2007, Whole Foods bought its main competitor, Wild Oats Markets, for $565 million in cash. It also assumed $148 million of Wild Oats’ debt.

Wild Oats had 106 stores in 23 states and three stores in British Columbia. Competition regulators made Whole Foods sell 32 outlets in 17 cities where the two companies both had stores. As well, Whole Foods cannot use the Wild Oats brand and related trademarks.

In Whole Foods’ 2012 third quarter, which ended July 1, 2012, its sales rose 13.6%, to $2.7 billion from $2.4 billion a year earlier. Same-store sales, which exclude the impact of the 19 new stores the company opened in the past year, rose 8.2%.

Earnings rose 32.1%, to $116.8 million from $88.5 million. Earnings per share rose 26.0%, to $0.63 from $0.50, on more shares outstanding.

The company has repaid most of the $700 million it borrowed to buy Wild Oats. On July 1, 2012, its long-term debt was just $18.8 million. Whole Foods also held cash of $1.1 billion, or $5.79 a share.

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Whole Foods eliminates waste, chops operating costs

Demand for organic foods continues to grow strongly. As well, Whole Foods has improved its inventory management systems and cut down on waste. That’s a big plus for the company, because perishable foods, such as fruits and vegetables, supply two-thirds of its sales. These were the main reasons for the higher earnings.

As well, Whole Foods’ operating costs have fallen; that’s helping it keep its prices down in the face of rising competition.

Whole Foods’ stock trades at 37.2 times the company’s forecast 2012 earnings of $2.52 a share.

The company now expects its sales to rise 15.6% to 15.8% in fiscal 2012, and by a similar rate in 2013.

Whole Foods suspended its $0.20-a-share quarterly dividend in 2008 to conserve cash after the Wild Oats takeover. It resumed quarterly payments of $0.10 a share in 2011. This year, it raised the quarterly dividend to $0.14 a share. The new annual rate of $0.56 yields 0.6%.

In the most recent Inner Circle Q&A, Pat looks at whether Whole Foods can expand its niche market in the face of increased competition from specialty stores and supermarket-style health food chains as well as regular grocery stores offering more organic food. He also considers whether it can justify its high p/e ratio with continued growth. He concludes with his clear buy-hold-sell advice on this stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Do you think that healthy eating is a growing trend in society? Or, do you see it as a vestige of an earlier time, when people were inclined to take better care of themselves and their families? More to the point, do you think the trend toward widespread obesity will ever reverse? Or will people simply depend more on universal health care to deal with the side effects of excess eating and poor food selection? Let us know what you think in the comments section below. Click here.