Winn-Dixie Vs. Whole Foods: Get Ready For Market Cap Spread To Contract

Includes: WFM, WINN
by: Mark Krieger
Winn-Dixie (NASDAQ:WINN) and Whole Foods (NASDAQ:WFM) are both grocery store chains. WINN has 484 locations while WFM runs 302 stores. WINN’s latest annual sales were $6.88 billion, while WFM rang up $9.85 billion. Wall Street currently values each WINN location at $804,000, while being infinitely more generous when espousing its opinion on WFM’s locations, at approximately $43 million each (wow, 53 times higher). Now if you take it one step further, and compare the two, based on enterprise value (market cap - cash + debt) your jaw will really drop, as the difference is absolutely staggering. WINN’s enterprise value per location drops significantly to just $467,000, while WFM’s falls a minor amount to $40.6 million per store (a staggering 87 times more).Simply mindboggling when you consider WFM’s sales are roughly 50% greater, yet it is priced 87 times higher?
Why the huge disconnect? Could it be because WFM’s EBITDA is nearly $700 million greater, at $824 million, versus $130 million? Probably so, but earning seven times more on an EBITDA basis shouldn’t warrant an enterprise value 87 times higher. What gives here? Logic would dictate that with everything else equal, WFM’s valuation should only be seven times higher, not 87!
Either WFM is way overvalued or WINN is way undervalued, or a little of both. The only explanation I can come up with in solving this conundrum is that the market perceives WINN will continue to flounder, while WFM’s growth will maintain its expansion. I see clues of inefficiencies, in an efficient market, that the savvy investor could exploit between these two supermarket titans. The problem for WFM is, its bar has been set very high, while WINN’s bar has been set very low. Who do you think will have an easier time meeting the market’s expectations? It appears that the drastic difference in valuations will begin to close in on one or the other.

Disclosure: I am long WINN.