Whole Foods (WFMI) released results and profit fell 13%, again proving like Starbucks’ (SBUX) results, consumers will go for the less expensive option for like items..
Whole Foods reported results for the 12-week second quarter ended April 13, 2008. Sales increased 27.6% to approximately $1.9 billion. Identical same store sales increased 5.1%. Net income was approximately $40.0 million, and diluted earnings per share were $0.29 (vs 32 cents a year earlier). The Company estimates the negative impact on net income from Wild Oats was approximately $8.6 million, or $0.06 per diluted share, in the quarter”
In February I said, “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.”
Since then things for shareholders have deteriorated further. The stocks now trades 30% lower at Oct. 2003 levels as sales growth has slowed. While the company backed its same store sales number of 7.5% to 9.5%, given results to date, one has to think that will turn out to be just way too optimistic.
Like Starbucks, Whole Foods is being hit by a slowing economy and increased competition. Both, unfortunately, are not reacting to it and actually seem to be denying the effect of competitors, preferring instead to focus on macro conditions.
The problem with that is growth for both slowed before macro conditions deteriorated. One can only assume that it was because customers we able to find organic meat, eggs and juices at their local markets and rather than make the trip to pay premium prices, choose “the same for less”.
On the earnings call CEO Mackey said “Results varied based on many factors including differing degrees of cannibalization from new stores, competition, and changes in the economy, making it hard to attribute our performance to one factor over another. We do believe we have experienced a greater amount of cannibalization this year related to the acceleration in our new store openings.”
Now, while all of these are true, pricing is still a huge issue with now more price conscious consumers. Yet, this was not addressed.
It also is a bit bothersome that they still are focusing on “results excluding Wild Oats”. When will this stop? It is yours now and the argument can be made you did not need to buy it, stop telling us that “without it things would be better”. Shouldn’t the argument you be making is that “because of it things are better”? You own it, stop trying to exclude it.
Here is the good news for investors. Unlike Starbucks, Whole Foods seems to be far more forthcoming with investors, even if one could argue with their conclusions. Also, they do have a far more diverse product mix that is not as easily copied like Starbucks.
Are shares a buy now? Not yet. Even now shares still trade at 24 times current years earnings that are falling. If you think the economy will be stagnant for a while (I do) then that number will have to fall, much farther. Another bad quarter ought to lead to full year downward revisions and another buzz cut to the share price. I can envision this thing dropping to a mid teen PE which means a high teen share price.
Then, and only then does it get interesting
Disclosure (“none” means no position):None
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