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.