Investor's Education: Whole Foods Found Organic Healthy For Its Bottom Line

When the first Whole Foods Market (NasdaqGS: - ) opened its doors in Austin, Texas, back in 1980, it had just 19 employees and little competition.

There were fewer than a dozen natural-food supermarkets in the entire country. Whole Foods stood out from the competition: It was bigger than most health-food stores and it was laid out like a grocery store.

But just eight months after its opening, Austin was struck by a devastating flood that wiped out most of the fledgling store's inventory and heavily damaged its equipment. To make it worse, it had no insurance.

But the store recovered quickly and managed to reopen for business in less than a month. A few years later, it expanded into other Texas cities and ultimately across the U.S.

Today, thanks in part to a series of acquisitions in the 1980s and 1990s, it has 198 stores in North America and the United Kingdom.

The stores feature food that is, as the company says, "in its purest state." In other words, it doesn't contain artificial additives, colorings or preservatives.

No Margin For Error

Profit margins are notoriously tight for grocery stores, and same-store sales often are difficult to grow amid changing consumer tastes.

But Whole Foods has establish a loyal customer base that has been willing to pay a bit more for the sort of natural products it sells. And that's helped keep its earnings and sales fairly solid over the years.

When Whole Foods broke out of a base in November 2003, it had logged earnings gains of 24%, 21%, 17% and 6% during the previous four quarters. Its sales growth came in at 18%, 16%, 15% and 18% during the same time period.

Its five-year earnings growth rate was 20% and its Earnings Per Share Rating stood at 80. But its Relative Strength Rating was in unimpressive 49. That low score was due in part to the downturn the stock underwent as it formed its base.

That base formed over 27 weeks starting in May 2003. It was shaped like a cup with handle, with a 26% correction from peak to trough.

On a weekly stock chart, the base had six up weeks of above-average volume and five down weeks with above-average volume. That action -- more up weeks than down weeks on heavy volume -- is what you want to see in a base pattern.

The stock broke out of its base Nov. 13, 2003, gapping up more than 10% on volume that was more than eight times heavier than usual (point 1). The night before, Whole Foods had posted estimate-beating earnings results and raised its guidance.

The market was choppy throughout much of 2004 and '05, which made Whole Foods a tough stock to keep in your portfolio.

It regularly dropped below its 10-week moving average for a few weeks at a time.

That's just what it did in late 2004 and early 2005 as it formed a new base (point 2). It broke out of that base in February, gained a bit of ground and then pulled back. That became a base-on-base pattern from which Whole Foods broke out in May (point 3).

It built a third base in late 2005 (point 4). By then its run was growing old and it seemed to be running out of steam. Whole Foods' track record of steady earnings growth and stock gains was well-known.

The stock split 2-for-1 on Dec. 28, 2005, and the news sent its share gapping higher (point 5). That marked the top and the end of its long run. Tops often occur around stock splits, and after more than tripling in less than two years, Whole Foods had reached its top.