Whole Foods Market: Different Year, Same Story

After reading about Whole Foods' (WFMI) recent quarter, I revisited a post I did on the subject last May. In it I said:

Here is an equation that does not work for me. Paying 32 times earnings for a company who, 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 6, one has to wonder what investors are thinking.

Well, things are currently worse than at that time and investors are still paying 30 times this year's earnings that, far from only increasing the 9% anticipated in May of 2007, are now declining.

In 2008 Whole Foods will most likely finish its second consecutive year of declining results. In the recent earnings call CEO John Mackey took time out from pumping his stock on Yahoo (YHOO) message boards to affirm that even with the estimated impact of the Wild Oats acquisition excluded, adjusted net income was $51 million and adjusted diluted earnings per share was $0.36 vs. 38 last year.

Read the conference call. I haven't come across a call in a long time that went so far to avoid the word "earnings". Mackey focused extensively on sales. They even went as far to create a new metric to measure earnings, EBITANCE or earnings before interest, taxes and non-cash expenses.

Here is the thing. It really does not matter what you want to try to do to slice earnings, the only thing that matters is what drops to the bottom line. Unfortunately, even if we subtract the cost of the Wild Oats merger, that number is falling.

The stock now sits just above its 52 week low and is still trading at an excessive premium to earnings. With organic food being found at about every grocer including club stores like Costco (COST), BJ's (BJ) and Wal-Mart's (WMT) Sam's Club, a pinched consumer is far less likely to visit Mackey's locations.

The stock is down about 10% from my initial post and I cannot see any reason to think there is any upside in shares anytime soon.

Disclosure: Long Wal-Mart.

Comments

[User 156414]

Interesting take!
But wrong, you are missing the most important element for making money.Yes earnings have slowed down, yes they made a horrible mistake paying the huge dividend, but this is a very high quality company with very high barriers to entry,
almost as high as a tech stock like intel.On the surface it seems like a simple business.well its not,
to create a culture such as we have here at wfmi,takes tremendous amount of effort.
You are looking at $60 stock with in 18 to 24 months.In this tough real estate enviornment it is much
easier to acquire new properties, thats HUGE!!!
Good luck!!

[Blantonw1]

The analysis put forth by Todd is quite flawed.

In fact, Todd's basic premise is wrong. Todd states "Here is the thing. It really does not matter what you want to try to do to slice earnings, the only thing that matters is what drops to the bottom line."

Sorry Todd but the only thing that matters is cash flow NOT GAAP accounting EPS.

In the case of Whole Foods, the reported GAAP accounting EPS is heavily depressed by non-cash charges stemming from the accelerated roll out of new stores. The company showed EBITANCE so true investors could understand the operating cash generating capacity of the business. I will grant you that the measure of EBITANCE is probably irrelevant to those all-knowing day traders.

So let's take a look -- EBITANCE/share increased 15.5% to $1.19 vs. $1.03 in the year ago period -- not too bad and very good considering the company is also making accelerated cash investments in the new stores, which puts further temporary pressure on the reported results. So the stock is not "trading at an excessive premium to earnings" as you assert. In fact, the most recent issue of Fortune shows that the company is valued at just 12x the cash generated by existing stores.

More importantly, looking forward (which you should do) the new stores will steadily scale in each future period, generating increasing cash flow for investors. So the results are only going to get better.

Now let's touch on the second leg of your bearish view, which reflects a fundamental misunderstanding of the company. You write -- "With organic food being found at about every grocer including club stores like Costco (COST), BJ's (BJ) and Wal-Mart's (WMT) Sam's Club, a pinched consumer is far less likely to visit Mackey's locations." Without getting into my personal view of how out of touch with reality this statement is, I'll just rely on the facts. During the Whole Foods FY1Q08 ending 1/20/08, the company's comp store sales averaged 9.3%. Comp store sales continued to average roughly 9.0% during the first four weeks of the company's FY2Q08. These results are far higher than those reported by COST, BJ, and WMT. These results show your comments to be wrong. Whole Foods is not losing business to discount retailers trying to pass off fake organic food and despite the slowing economy, Whole Foods continues to see an increase in the number of customers shopping at its stores.

[User 158223]

Just bought a 1000 shares it looks like this company is going to make a good run and consolidate the Market!

[johnnygeneric]

I dumped this stock back when I read they caved in to PETA on the chickens it was selling.

I used to LOVE Whole Foods and shopped frequently. Not anymore. And I certainly wouldn't own their stock no matter how high it got.