I keep a list of growth stocks that I might be interested in buying if they ever tank enough to sell at less than 20 times earnings. Whole Foods Market (WFMI), currently selling at 32 times earnings, is on the list.
This stock has enjoyed phenomenal growth, but it has been in a downtrend for the last year. I have been watching for signs that WFMI is bottoming out, but recent developments lead me to believe that the company is headed for more trouble in the months ahead.
WFMI is currently operating 191 stores and it has plans to open 80 more this year. Whole Foods’ stores in large cities have certainly done well, but as the company grows they are of course forced to open their new stores in smaller cities, such as Birmingham, AL, pop 231K; Boise, ID, pop. 193K; Sugarland, TX, pop 76K; and Portland, ME, pop. 64K.
I think you need a much larger city to be able draw enough of the kind of customers who shop regularly at WFMI. You need people who have bought into the Whole Foods philosophy: people who feel better about themselves when they pay premium prices for goods that are readily available at better prices elsewhere. There may be 100K people like this in New York or Los Angeles, but how many are there in Boise?
WFMI also appears to be opening these new stores with a complete lack of insight into the sensitivities, loyalties, and regional traditions of smaller U.S. communities.
A Feb. 7 AP article, "Maine Whole Foods to Sell Live Lobsters", illustrates the problem. Whole Foods is opening a 46K square foot store in Portland next week. Although they do not sell lobsters in their other stores, “in the name of crustacean compassion”, they are planning to sell them in Portland. But instead of buying lobsters off the Portland wharf several blocks away from the store, they are planning to use a New Hampshire distributor who meets their “demands for how the lobsters should be treated”.
This has already caused incalculable PR damage in Portland. “I think it’s unfair to suggest that the 7,000 (Maine) lobstermen and hundreds of lobster dealers and retailers don’t know how to handle a Maine lobster,” said Kristen Millar, executive director of the Maine Lobster Promotion Council. Tom Martin, a Portland lobsterman, noted that “When they say they buy local and support local fishermen and farmers, and then they tell us we’re doing everything wrong, obviously it doesn’t sit very well with us.” If you are going to sell lobsters in Maine, you need to know that Maine citizens will not buy lobsters imported from New Hampshire, even if the crustaceans were originally caught in Maine waters.
Furthermore, to prevent customers from boiling their lobsters live in the traditional manner, Whole Foods plans to electrocute them in the store with a device called a “CrustaStun”. Tom Martin, the lobsterman, was quoted as saying: “A lobster electric chair? I wonder how that will sound for their public relations, that they’re going to give the lobster the electric chair.” And to finish off this public relations catastrophe, which must have alienated almost all of Whole Foods’ potential customers in Maine, P.E.T.A. weighed in on the issue: “Our expectation is that all Maine stores that sell live lobsters will have to implement animal welfare protocols in order compete with Whole Foods... ” Nothing could be further from the truth.
It could be that Whole Foods is about to learn an expensive lesson. I am not a short seller, but this is tempting.