24/7 Wall St.

Calling for a CEO to leave a company or to be fired is not an easy task, and many market pundits demand a management change far too soon and far too frequently.  After reviewing all the data, one final outcome is becoming more and more clear: John Mackey of Whole Foods (NASDAQ:WFMI)needs to step down.  If he doesn’t resign completely, he needs to at least turn over his CEO badge pending the SEC investigation and internal review.  This would allow him to remain as non-executive Chairman, would allow him to remain somewhat in control, and would send a better message to shareholders.

First and foremost, this anonymous message board posting issue is not the sole reason.  But it certainly is the final reason.  ‘Rahodeb’ was his online alias, but it might as well have ‘toidiel’ and there is the full 1394 or however many posts it really was.  When this story first broke last week Mackey’s position as an ‘effective leader’ was questionable.  Now it is probably set.  Online stock message boards are no place for officers of public companies to make anonymous commentary, particularly when criticizing competitors or trying to pump their own public company.

Last week we noted that the SEC was going to be looking into thisalmost immediately, and that has come about.  It would be easy to saythat Mackey could wait and see what the SEC does, but the thought of apublic company CEO making online message board posts anonymously makesone question more than just the results of an SEC determination orinternal investigation.  The SEC could pen a formal policy against thispractice of anonymous web posting by public company officers, even ifthey end up effectively ‘no-billing’ Mackey because precedent islacking.  This is potentially a Reg. FD violation of the strangestkind, and this ‘could’ open the company up to legal suits from moreangles than may be covered by the company’s insurance.  If you were aninsurer, would you tell a corporate officer that they are on their ownbecause of this type of action?  I have asked an attorney about thisand he thinks that may not be the case, but it could certainly be aninstance where an insurer decided to test the limits of backing awayfrom a claim or at least try to file for an exclusion.

Wild Oats’ (NASDAQ:OATS) board of directors could theoretically takethe option of not only telling Whole Foods to go away if it chooses todo so, it may even have the option of suing Whole Foods for cashdamages.  The comapny may not do anything, that’s for them to decide.How do you think Mackey will like hearing this question over and over:"Sir, could you please read this post again to the jury?"  If youreview some of the postings he made speaking about them "going to gobankrupt" then it is a real possibility that Wild Oats will be able toget real and punitive damage awards from Whole Foods.  Mackey’s blogposts and message posts were long enough and frequent enough that itwas almost a part-time job for him.

Let’s pretend that ‘Rahodeb’ never existed.  If Mackey would have justused his real name this would only be tallied as a ‘strange method ofpromotion and ataacking competitors,’ but in a world of full disclosurehe stuck with an alias.  We probably wouldn’t be calling for Mackey tostep down entirely, but it doesn’t take a rocket scientist to realizethat an eclectic CEO that has had little to no supervision from theboard of directors is the best guy to run the show when your company isunder fire from the industry.  This might not be the case everywhere,but in major cities you no longer HAVE to go to Whole Foods if you areorganic and health oriented.  Kroger (NYSE:KR) has started to reallypick up its organics and ‘whole food’ initiatives, and will probablyonly continue.  Do you think the prices are just a tad better there orat other food stores for the exact same item?  Nope, not even close.Whole Foods is still going to make money and their stores will still bepacked, particularly now that it actually has somewhat of a statussymbol brand name.  Business Week has said this may have damaged the brand identity that the high-end depends upon.

Even before this last situation came up, the shares had slid nearly 50%from the highs over the last two-years.  That is because as the companygrew, it became easier for competitors to sell the same exact productsfor less and they were able to spruce up their images simultaneously.Shares of Kroger have risen nearly 50% in the same period.  Whole Foodsis still going to make money and that is not under question, but theirmargins could be at risk for the long-term.   Whole Foods no longer hasa 40+ P/E ratio, but at this stage in their cycle it might not deservemore than a 50% premium to its pure-play grocery competitors.  We neverexpected any defection of "Whole Foods customers" to leave just becauseWal-Mart has dipped its toe in the organic food pool, but what doesthat probably do to relative pricing power.  It’s hard to say who wouldbe an ideal CEO for the company in a more and more competitiveenvironment, but after a certain point in a business cycle it is rarelythe founder of the company.

24/7 Wall St. does not take calling for a CEO as a light matter.  We donot look at slight underperformance or just for a near-term stock popas good enough reasons to call for a change.  But this company is nowin a new stage of its cycle in an industry that has caught up to it.The company needs a ‘less eclectic leader’ and needs a board with a bitmore power over its officers.   Even if Mackey somehow manages to hangon, the damage has been done and he has likely shot his credibility.At a bare minimum this is going to create new "anonymous public companyofficer posting guidelines" by the SEC, and this will become ethicalcase study material for universities and law schools around thecountry.

Mackey’s issuance of statement claiming he had fun making these postsmay even be used against him ahead.  This is also going to be a testover what defines "free speech" like someone yelling "fire" in atheater.  The truth is that Mackey did a great thing socially when hefounded whole foods and really ramped up consumer awareness on thequality of food.  I still shop there and the Mackey gaff won’t keep mefrom shopping there, even if I don’t use them exclusively.  But thatdoesn’t mean he is aligned with the best interest of shareholders if hetries to stay too much longer.  Sorry Mr. Mackey, but the company andshareholders will be far better if you step down (at least partially) sooner rather thanlater. 

There will be an earnings webcast on July 31,and if Mackey is going to step down (even if it is temporarily pendingthe investigation and review) it would seem logical that he does itbefore that date.  Also, here is the FTC hearing update site from Whole Foods that could get additional data.

Here was the original list of CEO’s we issued throughout December 2006, and 5 of these 10 corporate leaders have left or have announced they’d be stepping down.  As a reminder, not all of these are calls to be fired as some are more strategic change recommendations.

Jon C. Ogg
July 18, 2007

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