NEW YORK (CNN/Money) -
Organic spelt flatbread at Whole Foods isn't cheap, and at about $150 a share, the natural food grocer's stock isn't either.
Whole Foods (Research) has been one of hottest stocks of the decade. The stock is up nearly 60 percent this year, putting it on track for a sixth consecutive year of double-digit returns.
The Austin, Texas-based natural food retailer has carefully cultivated a culture of hippie charm and foodie sophistication, emphasizing socially-conscious, environmental and nutritional values. These values extend to corporate governance, with caps on executive pay and compensation, for example.
This consumer and employee friendly strategy has won the company praise in recent years, including Fast Company's 2005 "Customers First Award" and eight appearances on Fortune Magazine's "100 Best Companies to Work For" list. The turnover rate for non-executive employees is an impressively low 2 percent.
More importantly for shareholders, Whole Foods has reported sales growth of about 10 percent at stores open at least a year, an important measure for retailers, and earnings growth of about 20 percent a year since 2000.
The company is scheduled to report results on Nov. 9 and analysts expect earnings will come in at 53 cents a share for the quarter, up 16 percent from a year earlier, according to Thomson First Call. Sales are forecast to jump 22 percent to $1.1 billion.
But analysts say Whole Foods is at a crossroads. Can the company nurture and expand its niche market in the face of growing competition?
For investors, the healthiest thing about Whole Foods isn't its organic fruits and vegetables, but the company's growth potential.
Bear Stearns research shows that the natural food retail segment accounts for less than 5 percent of the total grocery market, worth $604 billion in 2004. Moreover, Whole Foods and its closest competitor Wild Oats (Research) make up only 15 percent of the highly fragmented natural foods market.
So there's a lot of room to grow, something which Whole Foods has excelled at so far. From a single store in 1980 to 180 locations in the U.S., Canada and Britain, the company grew rapidly through a series of mergers and acquisitions putting into markets full of consumers of organic foods.
Whole Foods is still expanding aggressively, with 47 new stores in the works. Several analysts said the company could sustain between 400 and 500 stores and that same-store sales should keep growing at least 10 percent for at least the next few years, a growth rate unheard of for supermarkets.
"The company created and defined its own category, and now the name is synonymous with organic food stores," said Edward Aaron, an analyst with RBC Capital Markets. "It's similar to what Starbucks did for the coffee shop. You can't name the No. 2 coffee chain."
Still, some investors are concerned that growth will slow down once Whole Foods saturates urban markets. And if demand for organic products becomes mainstream, the company is sure to face more competition.
"If companies like Wal-Mart (up $0.11 to $47.56, Research) and Albertson's start carrying organic foods cheaper and direct competitors like Trader Joe's and Wild Oats become larger, then the company will have to rethink its pricing structure," said Jason Whitmar, an analyst with FTN Midwest Securities.
And if Whole Foods is forced to lower its prices at some point, that could hurt the company's rich profit margins.
First name in organic
Like Apple (down $0.92 to $60.93, Research) or Starbucks (Research), analysts say Whole Foods stands out because customers see their patronage as a lifestyle choice. The company puts many new stores in high traffic locations with a large number of college-educated residents.
In some respects, the company's growing reputation as the place for well-heeled, health-conscious consumers to shop has insulated it from economic ups and downs.
"It's the Tiffany effect," said Whitmar. "While other grocers and restaurants have seen people downgrade over the last three to five years, make fewer trips and tighten their budgets, the Whole Foods shopper hasn't followed suit."
To that end, while there are many other MP3 players on the market, the one most consumers want to be seen with is the iPod. Similarly, the grocery bag these folks want to be seen with says Whole Foods on the side.
On the other hand, some analysts worry that Whole Foods could suffer a backlash like once trendy firms such as Pier 1 (up $0.65 to $12.31, Research) and Krispy Kreme (up $0.28 to $5.18, Research). In other words, eating healthy could be just a fad.
"If a significant number of customers are more interested in being fashionable than in the organic-natural lifestyle, sales could slow quickly, new stores could be less productive and market saturation levels cold be reached sooner," Banc of America Securities analyst Scott Mushkin wrote in a recent report.
Put it in the cart?
And despite its strong track record, analysts are divided on whether the stock is a buy after its huge run. The shares trade at about 50 times earnings estimates for fiscal year 2006 while other traditional grocers such as Kroger (down $0.17 to $19.44, Research), Albertson's (Research) and Safeway (Research) trade at a multiple of about 16.
Many analysts say Whole Foods is priced for perfection and that the smallest slip in sales or earnings growth could send the stock tumbling. Few companies are able to keep expanding without hitting some financial bumps along the way.
But others say Whole Foods deserves its premium P/E since earnings are expected to grow about 20 percent a year, on average, for the next five years, more than double the projected growth rate of traditional competitors.
Whole Foods bulls also note that the company and its stock performed solidly during past economic slowdowns, and the company's emphasis on more affluent consumers could cushion it from future rough patches.
So investors can probably expect another few years of stellar performance from Whole Foods. After all, anybody who bet against the company earlier this decade turned out to be wrong.
None of the analysts quoted in this story own shares of Whole Foods and their companies do not have investment banking relationships with the company.
Is more healthy junk food on the horizon? Click here.
To find out how supermarkets are striking back against Whole Foods, click here.