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Summary

  • Until management shows that it can produce better comps, investors should stay away from this stock.
  • At around $36 per share, which is near its 52-week low, Whole Foods looks like a falling knife.
  • But if shares should fall below $30, then I'll reconsider.

It would be a gross understatement to say that investors in Whole Foods (NASDAQ:WFM) are starving for some good news. With shares down 36% on the year to date, investors have been eaten alive by Whole Foods shorts.

The stock closed Monday at $36.53. And with the company due to report fiscal third-quarter earnings Wednesday, Wall Street is no longer certain that Whole Foods has a business model that can withstand the advances of rivals like Wal-Mart (NYSE:WMT) and Kroger (NYSE:KR) -- two traditional retailers that are now eating up market share in the natural and organic foods market.

Complicating matters, despite Whole Foods' recent declines, the shares are still not cheap. The stock is trading at a P/E of 25, which is still 10 points higher than Wal-Mart and 8 points higher than Kroger. This means the Wall Street is still expecting double-digit long-term revenue growth, which doesn't seem like it will hold for the next several quarters.

On Wednesday, Whole Foods management has to convince analysts that the company can satiate their appetite. Analysts will be looking for 39 cents in earnings per share on revenue of $3.39 billion. Earnings are projected to grow 2.6%, while revenue is projected to increase by roughly 11% year over year. Will this be enough.

I believe Whole Foods has to beat these numbers with enough conviction to keep the bears at bay. Even more important, the company has to guide in a manner that alleviates fears about saturation, which some experts believe has already impacted markets like Boston and San Francisco. These are cities in where Whole Foods has roughly 20 stores each.

Recall, Wal-Mart announced its arrival in the organic foods market 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 has grown to prominence. But with Wal-Mart's ability to apply pricing pressure, Whole Foods' management is not likely to raise expectations too high, especially since Wal-Mart plans to introduce Wild Oats at roughly 2,000 stores.

Recall, in the most recent quarter, Whole Foods reported flat earnings, which arrived at $142 million, or 38 cents per share. 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.

All told, the market has tuned skittish on Whole Foods. And management, which is also dealing with a noticeable deceleration in same-store-sales growth, has a tough job to turn that sentiment around.

From my vantage point, Whole Foods is a tough buy at this point. Until management shows that it can produce better comps, investors should stay away from this stock. At around $36 per share, which is near its 52-week low, Whole Foods looks like a falling knife. But if shares should fall below $30, then I'll reconsider.

Source: Can Whole Foods Deliver On Investors' Growth Appetite?