Why go to Whole Foods? (WFMI)

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 two quarters estimates, and three of the past 5, one has to wonder what investors are thinking.

The company? Whole Foods

Two years ago if I wanted organic foods, I had two choices, Whole Foods (WFMI) 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 I wouldn’t and not many other people are 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 shares now enjoy.

In an effort to jump start sales in February they 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, 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 3 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.   

I hold no position in any company listed above:

Todd Sullivan