Seeking Alpha: Natural Grocers Needs Some Growth Hormones For Store Traffic

Natural Grocers by Vitamin Cottage (NYSE:NGVC) (or "Natural Grocers") may not have the same image issues as Whole Foods (NASDAQ:WFM) (aka "Whole Paycheck") or cause the same consternation with the crunchiest of organic food shoppers - Whole Foods, Sprouts (NASDAQ:SFM), and Fresh Market (NASDAQ:TFM) do all sell some conventional products - but it does have its challenges. In a market where organic/natural food is becoming more and more mainstream, alternative destinations like Trader Joe's, Kroger (NYSE:KR), and Target (NYSE:TGT) continue to represent ongoing threats to Natural Grocers' traffic and growth plans.

These share are down another 20% from where I last left them, which isn't too good next to Sprouts or Whole Foods, but isn't too awful next to Fresh Market or United Natural Foods (NASDAQ:UNFI) (a wholesaler and distributor of organic and natural foods). Unfortunately, weak comps remain a key issue with the company and the stock, as sub-5% comps just don't get the job done in terms of long-term sales per store and margin leverage.

At these levels, I'm getting more interested in the shares. I do believe the disappointing comp traffic growth is a serious threat to the long-term bullish argument, but I also think that Natural Grocers has an attractive and defensible business plan that can still work.

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Natural Grocers Needs Some Growth Hormones For Store Traffic

Seeking Alpha: In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Back in February, I had concerns that Natural Grocers by Vitamin Cottage (NYSE:NGVC) (or "Natural Grocers") shares were running a little ahead of themselves on hopes that the company was past the competitive pressures of new store entries into key markets. The shares have fallen 18% since then, as the company's respectable same-store sales growth has continued to come in a little lower than sell-side expectations and concerns about the economy and competition won't go away.

I believe there is a credible argument to be made that Natural Grocers shares are undervalued, but there is a lot of risk attached to the calculation. The company will very likely continue to generate negative free cash flow for three to four years, and the big improvements in free cash flow are well down the line. Add to that the intense competition in the natural/organic food space (arguably getting worse), and this is not exactly a can't-miss prospect.

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In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Seeking Alpha: Natural Grocers' Comps Recovering, But Can It Last?

Natural Grocers By Vitamin Cottage (NYSE:NGVC) ("Natural Grocers") had a rough time of it in 2014 as competition, particularly from Trader Joe's, had a very real impact on same-store growth and investors' previously boundless enthusiasm for natural/organic finally found some boundaries.

The underlying story at Natural Grocers hasn't changed all that much, though, and the company has still penetrated less than 10% of its theoretical footprint. Investors can rightly question whether shoppers will continue to flock to stores like Natural Grocers, Whole Foods (NASDAQ:WFM), and Sprouts (NASDAQ:SFM), particularly as conventional grocery stores/supermarkets increase their organic/natural product selections, but the same can be said for many aspirational/luxury goods (nobody *needs* a Coach bag or Starbucks latte). If Natural Grocers can continue to create a shopping experience that resonates with its core target market, I don't see the shares as unreasonably expensive.

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Natural Grocers' Comps Recovering, But Can It Last?

Seeking Alpha: Natural Grocers Still Looks Like An Unnatural Growth Opportunity

In the five or so months since I wrote about Natural Grocers by Vitamin Cottage (NGVC), and suggested that growth-oriented investors should check out this emerging organic/natural foods retailer, the shares have climbed a solid 25%. That's not bad relative to the approximately 10% gain in the S&P 500, the slightly lower gain in Whole Foods (WFM), or the very disappointing performances of The Fresh Market (TFM) and Sprouts (SFM). What's even better is that Natural Grocers' underlying financial performance continues to validate a call that this is a solid growth stock for investors to consider.

Natural Grocers is only about 6% along its path to a 1,100-store national footprint. What's more, the company is still too small to really benefit from better pricing from distributors and leveraging its own private label brands. Plenty can still go wrong along the path towards being a "next Whole Foods", and this is by no means a safe stock, but the growth potential can support a fair value in the neighborhood of $40 to $45 today.

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Natural Grocers Still Looks Like An Unnatural Growth Opportunity

Investopedia: The Fresh Market Can't Put Margin Worries To Bed

As I wrote a quarter ago, The Fresh Market (NYSE:TFM) is a highly-valued growth stock in the food retail space, and one where the company is starting to see some real pushback from the market as to the company's margin structure and competitiveness. I didn't expect all of the concerns to get resolved in one quarter, but the company's willingness to increase promotions and accelerate store builds seems to be exactly what the Street does not want to hear right now. As I suspect there's a good chance of these shares getting even cheaper, investors may want to keep on eye on this name as a growth stock increasingly trading at a reasonable valuation.

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Investopedia: Will Less Scarcity Value Harm Whole Foods?

Whole Foods (NYSE:WFM) is still most commonly identified as the supermarket for organic, natural, and healthier foods. While plenty of shoppers know about chains like Sprout's (NYSE:SFM), Natural Grocers (Nasdaq:NGVC), and The Fresh Market (NYSE:TFM), just about everybody has been to a Whole Foods once. With more organic/healthy food options in the stock market, not to mention a significant expansion at conventional retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), just how special is Whole Foods anymore? While the numbers continue to support the notion that Whole Foods is an uncommonly well-run retailer with considerable growth potential, it's increasingly challenging to justify the price on the shares.

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Seeking Alpha: Natural Grocers Boldly Going Where Others Have Gone Before

If imitation is the sincerest form of flattery, Natural Grocers (NGVC) (also known by its full name of Natural Grocers by Vitamin Cottage) is paying some big compliments to Whole Foods (WFM), The Fresh Market (TFM), Trader Joe's and Sprouts. The company is pursuing a growth strategy in the organic/natural food retailing sector that seems to be taking some of the best ideas of these larger chains and coupling them with an even tighter focus on the hard-core healthy eating community. While these shares have had a big run in 2013 and sport pretty robust valuation multiples, it may be hasty to assume that the stock is overpriced today on a long-term basis.

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Natural Grocers Boldly Going Where Others Have Gone Before

Investopedia: The Fresh Market Facing Its First Real Challenge

Every company has growing pains, and what separates the long-term winners from the flash-in-the-pans is how management responds to those challenges. The Fresh Market (NYSE:TFM) continues to post very strong returns on capital and has a sound business plan that looks to exploit more affluent shoppers' desire for high-quality produce that they cannot find in conventional supermarkets. For now, though, the company's comps growth appears to have stalled and a renewed emphasis on produce from major competitors threatens the company's value proposition to the customer.

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Investopedia: Whole Foods Back On Pace

There will come a time when this is no longer true, but it still seems to be the case that Whole Foods (NYSE:WFM) is a stock you want to buy when comps disappoint and sell-side analysts start collectively clutching their pearls and/or talking about slowing store expansion in favor of capital returns to shareholders. While consumer confidence is still pretty shaky, Whole Foods seems to be doing well with its value positioning and there's still ample store growth potential. Whole Foods isn't cheap today, but I'd be slow to part with these shares if I already owned them.

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Investopedia: Big Valuation/Small Miss Wrong Combo For The Fresh Market

What's going on in the wake of the third-quarter earnings report from The Fresh Market (Nasdaq:TFM) will be altogether familiar for veteran investors. Here we have a great growth company, perhaps one of the best growth plays today on the mass-affluent customer category, but with a stock that carried nosebleed valuations. Q3 earnings showed a hiccup in store traffic and margin leverage, and the stock got pummeled. Although I still like the growth story at The Fresh Market just fine (as well as the stores themselves), I'm still a long way from liking the stock.

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Investopedia: Whole Foods Still Not Cheap, But It's A Reliable Grower

Investors can look across the various sectors and industries in the stock market and find many examples of stocks that enjoy seemingly outsized valuation premiums, largely because of the consistent growth that the companies offer. Whole Foods Market (Nasdaq:WFM) belongs on that list, as this high-end food retailer continues to deliver excellent growth but also sports a pretty hefty valuation. Although I wouldn't be in any great rush to sell these shares today, investors will almost certainly have to face an eventual valuation adjustment, and that will likely be a painful process.

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Investopedia: The Fresh Market Needs To Be Whole Foods 2.0

It's rare enough to find a retailer that trades at an enterprise value-to-revenue ratio of even 1.0, let alone the 2.17 times of The Fresh Market (NYSE:TFM). Clearly, then, investors are putting a premium on what is one of the few exciting growth stories in food retailing today. While there's a lot to like about this story, including a massively under-penetrated market, accelerating comps and good margins, the bulls seem to have this story well ahead of itself. At these prices, The Fresh Market pretty much has to be the next Whole Foods (NYSE:WFM) to support the implied valuation.

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http://stocks.investopedia.com/stock-analysis/2012/The-Fresh-Market-Needs-To-Be-Whole-Foods-2.0-TFM-WMT-WFM-KR0601.aspx

Investopedia: The Fresh Market Is A Breath Of Fresh Growth

It's almost traditional (if not quite cliché) to take Wal-Mart (NYSE:WMT) to task for ruining that pastoral ideal that was the American Main Street shopping experience. More recently, neo-hippies have done battle over whether Whole Foods (Nasdaq:WFM) has "gone corporate" by forcing many smaller organic specialty stores out of business, and catering every bit as much to the Audi and soccer mom set as the patchouli and hemp-shirt set.

With that backdrop, it may seem daft to try to enter the market with yet another food market concept. Even with a market already full of choices, companies like Aldi, Trader Joe's and The Fresh Market (Nasdaq:TFM) are showing that customers still aren't completely satisfied with the retail landscape. While The Fresh Market is going to have to prove that it can manage its growth (and make it a profitable growth), this is one of the most interesting retail growth stories going on today.

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Investopedia: Does The Fresh Market Have A Real Chance

It may be hard to imagine that America really needs another food retailing concept. There are traditional supermarkets like Kroger (NYSE:KR) and Safeway (NYSE:SWY), organic-focused stores like Whole Foods (NYSE:WFM) and Earth Fare, value options like Aldi, and emerging concepts like Trader Joe's and Lowe's. And that's hardly the end of the list - major discount retails like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) long ago moved into food retailing, and deep-value "dollar stores" and pharmacies like Walgreen (NYSE:WAG) have added more and more perishable food to their shelves. 

But wait, there's more. A renewed interest in eating food that hasn't sat on a truck for a week has sparked more interest in farmer's markets and community-supported agriculture programs. So this is the market that The Fresh Market (NYSE:TFM) is facing. While this company has been around for a while now (it started in North Carolina in 1982), it is relatively new as a public company and has just begun to build a significant presence outside of the southern U.S.

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Investopedia: Optimism Already Built Into United Natural Foods

There is nothing new about the organic food industry anymore, and investors are already well-attuned to the big names like Whole Foods (Nasdaq:WFM) and leading distributor United Natural Foods (Nasdaq:UNFI). The question, though, is whether there is still enough runway in front of UNFI to make the stock a worthwhile addition or holding for growth-oriented portfolios. While it is true that many major supermarkets like Kroger (NYSE:KR) and warehouses like Costco (Nasdaq:COST) could go even further in stocking more organic products, much of this seems to already be factored into UNFI's stock price. 

A Good Third Quarter, But With a Few Spots 

For the most part, United Natural Foods had a solid fiscal third quarter. Reported revenue rose more than 22%, while revenue rose more than 12% on a like-for-like basis. While better than 10% growth from major customer Whole Foods was a bit below average, UNFI did see nearly 20% like-for-like sales growth in the conventional supermarket category. (For more insight, see Organic Food For Thought.)

Unfortunately, that supermarket growth comes at a bit of a cost, because it is not as profitable as UNFI's more traditional channels (smaller organic-focused chains with much less bargaining power). Gross margin slipped about 30 basis points as a result. UNFI made some of this up through operations, though, and 15% operating income growth mitigated the operating margin erosion to about 20 basis points. 

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