After reading about Whole Foods (WFMI) recent quarter, I revisited a post I did on the subject last May.
In it I said “Here is an equation that does not work for me. Paying 32 times earnings for a company who, if it hits the high end of analyst estimates, will grow 9.4% this year and maybe 17% next. When you consider this company has missed the last three quarters estimates, and four of the past 6, one has to wonder what investors are thinking.”
Well, things are currently worse than at that time and investors are still paying 30 times this years earnings that, far from only increasing the 9% anticipated in May of 2007 are now declining.
Whole Foods in 2008 will most likely finish its second consecutive year of declining results. In the recent earnings call CEO John Mackey took time out from pumping his stock on Yahoo (YHOO) message boards to affirm that even with the estimated impact of the Wild Oats acquisition excluded, adjusted net income was $51 million and adjusted diluted earnings per share was $0.36 vs. 38 last year.
Read the conference call. I haven’t seen a call in a long time that went so far to avoid the word “earnings”. Macke focused extensively on sales. They even went as far to create a new metric to measure earnings, EBITANCE or earnings before interest, taxes and non-cash expenses.
Here is the thing. It really does not matter what you want to try to do to slice earnings, the only thing that matters is what drops to the bottom line. Unfortunately, even if we subtract the cost of the wild Oats merger, that number is falling.
The stock now sits just above its 52 week low and is still trading at an excessive premium to earnings. With organic food being found at about every grocer including club stores like Costco (COST), BJ’s (BJ) and Wal-Mart’s (WMT) Sam’s Club, a pinched consumer is far less likely to visit Macke’s locations.
The stock is down about 10% from my initial post and I cannot see any reason to think there is any upside in shares anytime soon.
Disclosure (“none” means no position): Long Wal-Mart, None
