Whole Foods: Complicated Earnings Report Doesn't Help Slowing Growth

Whole Foods Market, Inc. (WFMI-NASDAQ) is trading lower by more than 4% in after-hours trading down to $43.83.  This earnings release is one of the more complicated earnings releases that this company has made and I have been reviewing this one for at least 9 years.  The 52-week lows on this one are $42.13, and those lows are actually the lows for more than 2-years. 

Based on the earnings release and lack of any set and formal guidance, we’ll hold off until the conference call clears this issue up.  Longer term, the Company’s goal is to reach $12 billion in sales in fiscal year 2010.  It is also working with the FTC to close its proposed Wild oats merger.

Competition: What is genuinely happening here is fairly easy to see and fairly easy to break-down as to why the stock is remaining weak.  The company’s competitive advantage to traditional grocery stores is shrinking.  Kroger (KR-NYSE) has made many many inroads into organic and higher-end groceries, and most Whole Foods stores are now to the point that a larger portion of the items are conventionally grown rather than being "organic only."  That isn’t a bad thing because it has widened out the customer base.  If you go compare the 2-year chart sine Whole Foods peaked, you will easily see this even if you avoid both stores.   Even Wal-Mart (WMT-NYSE) has made some entrance into organic food sales, although it is hard to imagine people trading in Whole Foods for Wal-Mart.  That’s even more true if you count that Wal-Mart cheated on some organic markings (said they were errors).  Other grocery stores are on the same bandwagon, so the company is under fire.

Multiples: The earnings multiple of Whole Foods is coming down, and that needs to compress some more.  The honest truth is that Whole Foods should ALWAYS command a higher earnings multiple to basic grovery store chains.  It has higher-end customers, it has premium stores, and it has premium products.  But the degree to which people are willing to pay a higher multiple is still coming in.  This may be one of the last quarters that the company trades with a P/E ratio north of 30, yet Kroger (KR) and Safeway (SWY-NYSE) trade with P/E ratios under 20.  Where the discrepancy comes down to is the part hard to figure out.  If grocers are going to maintain 18-ish multiples, then maybe Whole Foods can command a 25% or 30% premium on that multiple.  But more than a 60% multiple premium today is probably not as realistic for a company that is maturing.

I think Whole Foods is still by far the best shopping experience for food out there compared to any pure-play grocery store.  That’s why the company will demand a premium multiple.  But the multiple premium is still compressing abd looks like it needs to compress further.

Jon C. Ogg
May 9, 2007

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