Weighing Earnings & FTC Review At Whole Foods (WFMI, OATS, KR, SWY)

Whole Foods Market Inc. (NASDAQ:NASDAQ) has much more than just earnings to deal with this week.  The company is expected to report earnings and revenues on Tuesday at $0.33 EPS and $1.54 Billion, according to First Call.  The company is also meeting the FTC over the challenge of its acquisition of Wild Oats (NASDAQ:OATS).  That two day hearing starts tomorrow and we’ll likely have the earnings before we have a clear decision that further blocks or unblocks the $18.50 per share buyout of Wild Oats.

There is another key issue.  We haven’t really heard a peep out of the company in roughly two weeks, and we have ourselves called for at least a partial or temporary resignation or withdrawal of Chairman & CEO John Mackey.  The issue is that he doesn’t really need to leave entirely.  He can maintain his Chairman position as the company’s founder, but this will signal he is at least willing to let the company have a more removed face to deal with regulators over the deal and to deal with the SEC inquiries over the "RAHODEB" message board posts.  After all, he even went on a massive rant and tirade on the Whole Foods Blogs.  What Mackey did was foolish and dumb, but the truth is that the business cycle has changed (thanks to many of his efforts) and the company may need a less-eccentric leader to help it fend off competition from lower-price competitors that sell the same products.

Whole Foods on a results basis is in somewhat of a Catch-22.  Very few are expecting great upside or great guidance.  After all, Kroger (NYSE:KR) and Safeway (NYSE:SWY) are able to offer many of the same exact goods now and for prices at much lower levels.  Don’t take this too much against the company, because the truth is that the company will continue to be profitable and it has already established itself as THE premium brand for healthy and organic foods out of any nationwide chain grocer. 

Regardless of what traditional grocery stores do, its status will remain as the leader and the premium brand.  It boils down to what premium Wall Street is willing to accept, and right now Whole Foods still has roughly a 50% premium to the earnings multiples of Kroger and Safeway.  That may act as a ceiling while either the "E catches up to the P" or while the street determines a fair ‘multiple premium’ for the stock. 

Lastly, the short selling has increased from 19.1+ million in June up to more than 24.4 million shares in July.  That can’t be a surprise considering the latest shenanigans out of Mackey.  But that could also create a major wave of short covering if the company can convey that things are going to be better than OK.  Wild Oats still trades at more than a $3.00 discount to its $18.50 per share buyout price, and Whole Foods is only about 3% above its most recent 52-week lows.

Jon C. Ogg
July 30, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.