Whole Foods Market: Still a Premium Stock?

Whole Foods Market, Inc. (WFMI) is the world’s leader in natural and organic foods. Based on its most recent quarterly report filed on 02/27/09, it operated 279 stores: 268 stores in 38 U.S. states and the District of Columbia; six stores in Canada; and five stores in the United Kingdom, with total approximately 10.2 million square feet.

Whole Foods is coming off a miserable 2008 in which its stock price fell 75%. The company recently suspended its dividend payouts as well. The economy has definitely pinched its customers who have been paying premium prices for its products. Competition continues to be a factor as retailers fight over fewer food dollars being spent. No wonder its comparable store sales decreased 3.4 percent during the last quarter ended January 18, 2009, the first negative comparable store sales figure in company’s 29-year history.

Whole Foods’ current cash position of $272 million was from issuing of 425,000 shares of 8.00% Redeemable Convertible Exchangeable Participating Preferred Stock on December 2, 2008. Principal historical capital requirements have been the funding of the development or acquisition of new stores and acquisition of property and equipment for existing stores. With 10 planned new store openings for fiscal year 2009, the company expects total capital expenditures to be in the range of $350 million to $400 million.

In the meantime, Whole Foods has seen steadily increasing competition from rivals like Wal-Mart (WMT), Safeway (SWY), Kroger (KR), and in Canada, LOBLAWS (LBLCF.PK) -- all of which provide organic foods. Also, more and more small local farms offer same product though direct order. No wonder these days some organic foods, like apple, are almost the same price as regular food.

As you can see from table below, its operating data are clearly worse than its direct competitors: Revenue growth is lower, while P/E is much higher.

Source: Yahoo Finance as of 03/06/2009.

According to Feb 26’s Bloomberg News, Goldman Sachs Group Inc.’s top U.S. stock strategist said the Standard & Poor’s 500 Index may sink as low as 650 because home prices haven’t stabilized and losses for financial institutions aren’t diminishing. Last Friday's headline was banks issuing 99-year 10% bonds to boost their tier-1 radio. How sustainable is it for banks to borrow at 10%, and lend to customers for 5%?

Without fundamental improvement of economic, I don’t believe Whole Foods could run ahead of the market. However, in the long term, as more and more people are aware links between disease, health and food, the natural and organic food market will no doubt continue to grow. Also there are quite a lot loyal customers, especially families with special need such as Allergy, Asthma, Attention Deficit Hyperactivity Disorder (ADHD) and Autism, among others.

After all, Whole Food has been ranked by Fortune Magazine for nine consecutive years as one of the “100 Best Companies to Work For.” So it must have done something right.

Disclose: I have no position on WFMI for now.

Comments

[pokernut:]

>>After all, Whole Food has been ranked by Fortune Magazine for nine consecutive years as one of the “100 Best Companies to Work For.” So it must have done something right.

I have spoken to many WF employees on the job. It may have been a good place to work a few years ago, but not anymore. I would never want to work there.

Mar 08 11:18 AM

[HTHTFH:]

Whole Foods? More like Whole Paycheck.

Mar 08 03:21 PM

[Patrick Garot:]

WFMI was a great momentum play 3 to 4 years ago. The only momentum at current price (at 15X forward EPS) may be from a short-covering rally. Shorts are 13.5% of total float (per Yahoo Finance). Think the shorts have had their best days on WFMI, and the only shorts left are just being lazy now. So a limited $2-$3 upside is possible. That said, as your article points out, not a lot of reasons to own this thing.

Mar 09 01:35 PM

[ppeer:]

For an interesting dcf valuation case, sensitivity analyses and a simulation, see equitycatwalk.com


best regards
Peer

Mar 18 12:30 PM

[borisb:]

if WFMI stopped the expansion and concetrated on upkeep of exisitng stores, free cash flow would be $600 million a year or $4 a share before dillution. The p/e metric of 30x on 75 cent estimate for 2009 is wrong one for the bulls, the FCF situation is the right one.

May 30 09:16 PM