3 Big Reasons Warren Buffett Is Wrong About Whole Foods

Updated from 2:05 pm to include second-quarter sales, earnings results and comments on new store format.

NEW YORK (The Street) -- Warren Buffett may think otherwise, but there are plenty of Americans who like shopping at Whole Foods Market (WFM), a grocery chain known for its organic and health foods and other products.

Defending Berkshire Hathaway's  (BRK.A) investments in companies like Coca-Cola (KO), Heinz and Burger King (BKW), Buffett said most Americans like junk food rather than the healthy variety.

"I don't see smiles on the faces of people at Whole Foods," the billionaire investor said at Berkshire's recent annual meeting.

Buffett, an admitted lover of junk food at age 84, probably didn't look closely enough at Whole Foods before praising the virtues of investing in junk food. Berkshire is also in the process of acquiring Kraft (KRFT), which ironically just announced it was shedding all the artificial ingredients in its popular macaroni and cheese product.

If Buffett did venture deeper into Whole Foods outposts -- where organic food fanatics line up days before a new store opens -- he would find a company that does bring smiles to shoppers and investors.

Whole Foods dished out record sales of $3.3 billion last year. Average weekly sales, at $722,000, were also a record -- as were sales per gross square foot of $990. On Wednesday, however, the organic grocer's second-quarter sales and earnings played a bit into Buffett's downbeat commentary. 

Shares plunged 11% in after-hours trading on Wednesday as Whole Foods reported EPS of 43 cents a share, in line with consensus forecasts. It also stated sales of $3.6 billion; analysts had expected sales of $3.7 billion. The company announced its plans to pursue a new store format, one geared toward value-conscious millennials who have grown up eating organic food. Whole Foods is currently negotiating leases for the unnamed format. The stores are likely to be smaller than a traditional Whole Foods venue so as to better cater to tech-oriented, time-starved 30- to 35-year-olds.

Beyond a single quarter of so-so earnings, Whole Foods continues to do one big thing right -- that is, feed U.S. consumers who are willing to pay a little more for products with all-natural, easy-to-pronounce ingredients.

"I would say that 2015 may be the year where we have the biggest conversation ever about the quality of food and about what it means to our physical health," said Whole Foods co-CEO Walter Robb in a Dec. 18 interview with TheStreet.

Robb added, "It's not an elite thing, but it's actually something that is an American thing -- it comes up because McDonald's (MCD) and Yum! Brands (YUM) have finally realized their stuff isn't selling anymore."

As luck would have it, Robb's comments foreshadowed what has been a significant year of change in the food business, where high-profile names like PepsiCo (PEP) and Chipotle (CMG) have sought to improve the health of their products by removing artificial additives.

TheStreet takes a look at three ways Whole Foods is creating smiles, following the release of its latest earnings.

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