With Whole Foods (WFM) stock down 11+% on ten times the normal volume, I thought it would be good to review this very high P/E company.
The news about Whole Foods Market should not have come as a surprise, but it still disappointed investors who chose to be mildly optimistic. Before Whole Foods Market reported it's fourth quarter earnings for the fiscal year 2013, analysts had already warned about not expecting too much from the organic grocery giant. Subsequent events proved them right. Whole Foods Market performed below par. Revenues were lighter than investors had hoped and their shares are sinking like a stone.
Still, this news did come as a surprise to many investors despite earlier market analyst warnings for a number of reasons: First, the organic food giant is continuing to open new stores; second, more revenue is flowing in; and third, the Wild Oats acquisition is beginning to pay off. Additionally, the market for healthy foods appears to be higher than ever as more information becomes publicly available about the side-effects of artificial food additives in regular packaged foods.
So why is Whole Foods not doing as well as expected?
The answer is actually fairly complex because there are two things that are undermining Whole Foods: increased competition and a crumbling reputation as a consumer champion for whole foods.
Increased Competition, Decreased Market Share
One reason for Whole Foods drop in performance compared to stellar numbers in the fourth quarter of their last fiscal year is the number of competitors in the market for healthy foods. They may have fallen short simply because other natural grocers are expanding their presence in the market place. Trader Joe's, Sprouts Farmers Market (SFM), Harris Teeter, Hannaford, Food Lion, and Pathmark have highly efficient operations that are winning over health-conscious consumers. Alone, they may not be considered worthy rivals, but combined, they are a formidable force with thousands of new stores all over the country offering the same thing as Whole Foods. Moreover, these rivals are often selling at a cheaper price and with better customer service.
In fact, even regular grocery stores like Safeway (SWY), Albertsons, Publix (OTCQB:PUSH), King Soopers, and Super Target (TGT) now have special aisles for the health-conscious consumer. With more organic or natural products for health, beauty, and diet available, Whole Foods has been forced to revise its previous retailing strategies. As a result of this upsurge in competitors, Whole Foods has been much more conservative in its sales forecasts. It can't afford to be too pricey because consumers now have alternatives. As a result of these changes, investors have become jittery and Whole Foods shares have tumbled. In order to stay competitive in a growing health-conscious consumer market, Whole Foods has had to do two things: first, it has had to revamp its pricing; second, it has had to improve on its value offering.
Crumbling Reputation as a Consumer Champion for "Whole Foods"
If competition alone were the reason for Whole Foods fall from grace, an argument could be made that given enough time, the organic giant will be able to turn the tide and regain its former glory. After all, on the surface, things still look good: the company is now operating 367 stores. In the fourth quarter alone, it opened 12 outlets and 5 new stores. Further, it is now planning on opening 5 more stores. However, despite this apparent success, Whole Foods has a problem that is not going away, and which is actually getting worse.
Here's the problem in a nutshell: Whole Foods is losing consumer confidence. The media has been consistently reporting its monopolistic trends, questioned its products, and exposed its corporate missteps. In fact, police can now be found in the stores due to protestors.
Here is a short list of why Whole Foods is drawing unfavorable comparison with Wal-Mart and McDonalds.
1. It is ruthless. The company has absorbed numerous rivals with unmitigated aggression. The list includes once popular outfits like Mrs Gooch's Natural Foods Market, Harry's Farmer Market, Bread of Life, Food for Thought, Nature's Heartland, Merchant of Vino, Bread of Life, Fresh Fields, Bread & Circus, and Wild Oats.
2. It may be unethical. Despite its considerable branding efforts to portray itself as a champion of consumer health and protector of social interests, Whole Foods has been repeatedly exposed for preferring to make money over doing the right thing. For instance, while it proclaims itself as supportive of small, local farmers, it has often purchased from large-scale corporate farms. Additionally, it has often labeled things as local when they were not. For example, it has been known to label its beef as local despite the fact that it has been shipped from as far as 1,400 miles away.
Whole Foods has also been exposed for the following issues by aggressive consumer advocates:
1. It may not come clean on its GMO labeling, as well as its use of possible toxic products in baby bottles.
2. It voted for the use of ammonium nonanoate on the National Organic Standards Board.
3. It has refused to protect endangered sea turtles, accepting produce from shrimp vendors who used nets that also trapped sea turtles.
4. It has labeled produce from China as organic when that country has a completely unregulated farming industry.
5. It may have packaged some of its products to deceive consumers. Their "California Blend" products are actually made in China.
6. Fish sold at Whole Foods has been found to be high in mercury, according to the Center for Disease Control which also occurs in other stores.
7. It may have sold beef contaminated with e-coli even when it was supposed to be recalled. Similarly, it had an outbreak of bad milk which they did not recall.
see the footnotes to the following article for example
The company also has labor issues-it is arguably anti-union, has been found guilty of poor working conditions, and for paying low wages.
Additionally, CEO John Mackey was discovered posing as someone else on the Yahoo Finance board online to trash Wild Oats to reduce its stock value; the company has refused to let shareholders speak up at meetings; and the company has obfuscated executive compensation figures.
Whole Foods is a company that is continuing to ride the momentum that it has built up over the years. However, it's disappointing fourth quarter may be a sign of its underlying problems with increased competition and reduced consumer confidence.
Investors would be wise to consider taking some profits in this high flying stock.