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Spoiled for Choice with Natural Grocers

Valuation concerns aside, I was quite impressed with the company's fourth-quarter and full-year results. With revenue and same-store sales advancing 28% and 11%, respectively, Natural Grocers has proven worthy of the Street's optimism. And with management's consistent approach to disciplined cost controls, leading to a robust 60% jump in fourth-quarter profits, you can see how easy it is to fall in love with this business.

At the same time, I refuse to ignore that both Whole Foods and Fresh Market have already blazed the same trail. Today, their numbers are not as gaudy and their valuations and stocks have come down to more reasonable levels relative to where they were. Nevertheless, that hasn't changed my cautiousness (cautiousness, not bearishness). Given that they no longer corner the natural and organic market, they will face challenges in the future.

In that regard, these same sorts of competitive risks would be heightened for Natural Foods, given that it's a much smaller company relative to Fresh Market and Whole Foods. And I believe that pressure from Wal-Mart and Kroger, which have much better leverage, can apply the sort of squeeze to Natural Grocers that Whole Foods and Fresh Market may not immediately feel. Then there's the likes of Sprout (SFM), which has organic ambitions of its own.

I do believe, though, that Natural Grocers does have a slight edge in terms of organic ratings. The fact that the company products are guaranteed to contain no artificial preservatives, flavors, colors or sweeteners is a meaningful advantage over Whole Foods and Fresh Market. Natural Grocers also has a strong pricing strategy that sets it apart from its peers.

Nevertheless, as beneficial as the pricing advantage might be to consumers, this isn't enough to make this stock a buy for investors. Until Street estimates come down, I believe it will be harder for Natural Grocers to reach those expectations, given the increased competition in the organic and natural arena.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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