Whole Foods' Warning About 2010

Posted by: Ben Steverman on November 5, 2009

Shares of Whole Foods Market (WFMI) took a nosedive on Nov. 5, dropping 15.5% to 27.10.

What scared Whole Foods shareholders should concern all investors, especially those in consumer-focused stocks: The outlook for next year.

Like many other retailers, Whole Foods gets praised for navigating through the recession relatively well. Investors worried about Whole Foods’ sales trends and debt load dumped shares in 2008, and shares fell to as low as $7. Since the beginning of 2009, however, Whole Foods’ stock is up 187%.

Announced the evening of Nov. 4, last quarter’s results didn’t contradict the thesis that the food retailer’s business has stabilized. In fact, fourth-quarter earnings of 23 cents per share beat Wall Street expectations by 2 cents.

Sales trends weren’t bad. Chairman and chief executive John Mackey told analysts: “We believe our sales have stabilized and officially turned the corner.”

After five quarters of declines, comparable store sales figures rose 1.6%. Total sales for the quarter rose 2.3% to $1.8 billion.

With results that good, why are investors bailing on the stock? One problem, which I noted back in August, is the high expectations built into Whole Foods’ stock price. Because it is a growing firm, investors are willing to pay far more for Whole Foods than other grocery chains. Before earnings were released, on Oct. 30, J.P. Morgan (JPM) analyst Charles Grom noted that Whole Foods traded at 27.6 times his 2010 earnings prediction. Rival supermarket chain Kroger (KR), meanwhile, trades at a price-to-earnings ratio of 11.2. That “seems a bit excessive,” he wrote.

But even if you believe Whole Foods deserves a premium stock valuation, you should be worried that 2010 sales and profits will disappoint. And that’s the warning investors received from Mackey.

Mackey said he sees “no anticipated positive change in the economy over the short-term.” Whole Foods, like many other retailers, has already slashed its expenses, and further cuts will be harder to find. “We will have difficult expense comparisons due to the cost savings realized in 2009,” Mackey said.

Credit Suisse (CS) analyst Edward J. Kelly noted:

The company is making progress in addressing some of its issues (slowing growth, downsizing its stores, exiting bad leases in development, and cutting its bloated expense structure), [but] this catalyst seems to be more than price in [its stock.]

The recession forced Whole Foods — and many other companies — to become more efficient and make tough choices. However, investors already have reaped most of the benefit of these changes.

In 2010, investors will need robust consumer spending to drive results. And, with the job market weak, that might be too much to hope for.

Reader Comments

Jerry Strongheart

November 5, 2009 7:38 PM

We are in for a sunami in natural foods, organic will keep growing as more and more will listen to Hipocraties...."make food your medicine, make medicine your food" Localizing food will keep rising even though the Dept. of Agriculture is working for the big Unnatural Corperations like Monsanto....." If god don't grow it don't eat it" and many people look to Big Agra as a part of the Anti-Christic------
From the heart

Phil

November 5, 2009 11:23 PM

They don't call it Whole Paycheck without a reason. Dump Whole Paycheck and buy Kroger. It's a 125 year old company with a solid track record.

Nails

November 6, 2009 12:16 PM

A tough economy may not fit the bloated expenses, as Ed Kelly puts it. However, I think another push would be for whole foods to offer in-store coupons which currently do not exist either through mailers or manufacturers. Also whole foods ad campaigns should continue whole food education, positive impact for eating whole, weight loss and energy, as well as improved motor and mental function. But don't have a tree-hugger approach, this turns people off. One of Whole Foods competitors here in austin, called HEB does this outstanding job of selling in-store ingrediants, like sauces and meat. The recipes are offered as well as free samples. HEB executes well in two other areas whole foods doesn't wine sells and meat. Whole foods has a poor meat counter and should certainly consider this as an area for stimulation. As a new customer to whole foods, I am fighting against processed and preservative packeged food. But I still linger between HEB for some items and have begun to hit a brick wall because of boring meals. Whole foods should consider doing the meal ideas to encourage existing and new customers for substitutes for the meat loaf, mexican, burger, and spaghetti diets we grew up on. I have a bland diet with existing whole foods items, help me spice it up! These are solid oppty for growth that exist within current customers and new alike at existing stores. We can call this organic growth! Good luck whole foods, your in a great position at $27/share. make your shareholder proud!

Jed

November 10, 2009 10:32 PM

It's not Whole Paycheck anymore, that's for sure. I work at a Whole Foods in the western US and frequently get customers telling me how surprised they are that our prices are so competitive with Kroger brands.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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