I don't like seeing anyone lose money on stock. But I don't mind knowing that it happened as I tried to help (won't say I told you so).
To that end, although Whole Foods (NASDAQ:WFM) remains a clear-cut leader in its industry, the company's first-quarter results affirmed my bearish thesis, which an all-out assault on the organic and natural foods business is on the way. And companies like Wal-Mart (NYSE:WMT) and Kroger (NYSE:KR) are salivating at the chance to devour Whole Foods' business.
The stock began to tank roughly 18% following Tuesday's report, which arrive after markets closed. And as of this writing, shares are down to a new 52-week low $37.31, more than 13% below my bearish target of $44. Current investors have some decisions to make (won't say I told you so).
On Tuesday, the reported flat earnings, which arrived at $142 million, or 38 cents per share. Recall, the Street was looking for an 8% year over year jump. Although the company did post an increase in revenue, this also fell short of Street estimates. of $3.34 billion. And on top of all of that, management spooked investors by cutting its 2014 forecast, which were already lowered to begin with. This makes the third consecutive quarter of lowered guidance.
From my vantage point, Whole Foods disappointed in every single metric. And it's only going to get worst as Wal-Mart just announced its arrival in the organic foods industry by offering Wild Oats organic products at a 25% discount. As Americans developed healthier eating lifestyles and shifted towards organic and natural foods, Whole Foods as with rivals like The Fresh Market (NASDAQ:TFM) have grown to prominence.
Wal-Mart said that in the coming months, it will introduce Wild Oats at roughly 2,000 stores, which is half of its national footprint. To the extent that Wild Oats is able to gain enough traction against Whole Foods, Wal-Mart will likely roll it out to the rest of the country, which makes sense. Wal-Mart management wants to ensure that there are no hiccups with things like supply and distribution.
As it stands, I don't see how Whole Foods will be able to hang on to the market share that it has established in this category. Several analysts are asking the same question, including Cantor Fitzgerald's Ajay Jain, who just lowered his rating on Whole Foods from "hold" to "sell" with a $38 price target, which is already higher than current value.
In his assessment this morning, Jain addressed concerns about competitive threats, which we discussed here Monday. He doesn't believe that management's guidance and details about earnings and the company's 2018 store development plans are going to matter in the near term. Jain also added:
"While we prefer not to pile onto the stock with this downgrade following more bad earnings news, we don't believe the stock has gotten a critical look from investors for quite some time. We believe (Whole Foods) finally deserves a lot more scrutiny."
Also weighing in was Sterne Agee analyst Charles Grom. While lowering his rating on the stock to "neutral" from "buy," Grom questioned the company's decision to speed up store growth against the more challenging backdrop that it faces. Grom believes "a more tepid approach is required." (won't say I told you so)
Whole Foods is not alone in its misery. Rivals like Sprouts Farmers Market (NASDAQ:SFM), which had also grown to prominence, is finding it difficult to avert the threat of Wal-Mart. The market has suddenly appeared skittish about this industry. And Whole Foods management has to figure out a way to convince investors that their business can survive amid these threats.
For now, investors have to assess where the bottom might be. At $37.31 these shares still aren't cheap. The stock is trading at a P/E of 25, which is still 10 points higher than Wal-Mart. This means the Street is still expecting double-digit long-term revenue growth, which doesn't seem like it will hold for the next several quarters. At around $37 per share, there is still possible 20% downside before the stock bounces off $30 on the basis of continued deceleration of growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.