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Here is an equation that does not work for me: paying 32 times earnings for a company that, if it hits the high end of analyst estimates, will grow 9.4% this year and maybe 17% next.

When you consider this company has missed the last three quarters estimates, and four of the past six, one has to wonder what investors are thinking.

The company?

Whole Foods Market (WFMI).

Two years ago if I wanted organic foods, I had two choices: Whole Foods or the local health food store. Since Whole Foods was the low cost purveyor of those items, sales at WFMI surged and investors enjoyed a huge run in the stock. Today I can go to Sam’s Club, BJ’s Wholesale or and of my local markets and get organic food. The question now is since I can get the same items, cheaper, at numerous other locations, why go to Whole Foods? The answer is that I wouldn’t, and not many other people would either, as same store sales growth last quarter was non existent at .3%. Further dampening the outlook is there is no growth impetus for the company on the horizon to justify the lofty PE that shares now enjoy.

In an effort to jump start sales in February, WFMI agreed to purchase the Wild Oats Markets chain that lost $16 million last year. Revitalizing this chain will not be that easy as cash on hand, for WFMI has plummeted from $267 million to $46 million in the last 12 months and cash from operations has seen a steady decline during the same period. Even should they sink the money into this chain, sales growth from it will not be impressive due to the much smaller square footage at Wild Oats locations vs. Whole Foods. Simply put, investments in Wild Oats will need to be accomplished by the addition of debt without tremendous payoff, further squeezing margins.

Much like Starbuck’s Corp. (NASDAQ:SBUX), Whole Foods is a company whose best years are behind it. Competitors have encroached on its theme and the originality that made it such a fast grower is gone. Both companies are selling products that are perceived by most people as equal to their competition for higher prices. In today’s price sensitive environment, that is not a recipe for growth.

It especially does not deserve a PE over three times its growth rate. Current investors of Whole Foods are in for a painful lesson in growth vs. the premium investors will pay for shares.

WFMI 1-yr chart:

WFMI

Source: Whole Foods: Don't Pay High Prices For Low Earnings