Whole Foods’ strategy invites look from long-term investors

Whole Foods Market (Nasdaq: WFM) recently posted strong quarterly results, with gross profit margins hitting a record 36.3 percent. That number might slip a bit in future quarters, though.

As co-CEO and founder John Mackey explained: “We’re managing our business for the next 20 years, not the next quarter or two. … We want to continue to increase the value for our customers, in terms of lower prices.”

Despite the recession, Whole Foods has managed to adjust its pricing to compete admirably in a tough marketplace. In the last two fiscal years, it increased its sales by 12 percent each year, and sales at stores open more than a year increased by 7.1 percent and 8.5 percent.

Speaking of gross margin, Whole Foods is a gem in the industry. Its best-performing peers are lucky to approach 30 percent.

Is the stock a buy now? Well, given its tremendous run over the past year, potential investors might want to wait a bit to see if some temporary bearishness might produce a lower price for purchase. Still, over the long haul, Whole Foods has been worth its historical premium.

When companies commit to building their businesses for the next 20 years instead of simply trying to beat next quarter’s expectations, they’re speaking long-term investors’ language. (The Motley Fool owns shares of Whole Foods and its newsletters have recommended it as well.)

Ask the Fool

Q: What are these “one-time charges against earnings” that I see in company earnings reports? – R.P., Madison, Ind.

A: They’re meant to reflect unusual costs a company bears (for example, due to closing a plant, experiencing an extraordinary crop loss, writing off bad investments, etc.). The charges are often added back to company earnings, ostensibly to more accurately reflect the firm’s operating performance.

Imagine that Acme Explosives Co. (ticker: KBOOM) earns $50 million in a quarter, but it also lays off many employees then, making significant severance payments. If these costs amounted to $5 million and were labeled as one-time charges, then the company would be suggesting that its business really earned $55 million in the quarter. Beware of companies with too-frequent “one-time” charges.

My dumbest investment

I was still relatively new to the investment game and, being a sustainable energy supporter, I fell for Pacific Blue Energy’s talk about solar panel farms. Literally the day I invested, the stock price started falling. Blind faith that things would turn around sooner or later proved very blind. I ended up losing around $10,000. But being badly burned once is usually an excellent motivation to improve your investing skills. It was soon after that that I joined The Motley Fool. – Ingrid, online

The Fool responds: First of all, be careful when you refer to investing as a game. It’s easy to think of investing as gambling, but you’re doing much more than just speculating if you’re investing in healthy, established, growing companies with proven track records and competitive advantages.

Unfortunately, Pacific Blue has mostly been a penny stock. Penny stocks, often hyped and manipulated, are like gambling and are best avoided. Many have high expectations for solar energy, but it’s not booming quite yet, partly due to supply-and-demand issues. With all stocks, buy on strength, not rumors, promises or possibilities.