Stock Watch
Whole Foods: Pricey Produce, Cheap Stock
Shoppers still are willing to pay a premium for this retailer's natural and organic foods, but its shares are in the bargain bin.
By Bob Frick, Senior Editor, Kiplinger's Personal Finance
July 30, 2008
Shares of Whole Foods Market are compelling for several reasons. But the best reason is smoky Andouille pork sausage and all that it represents. This is something I discovered recently while on the way home after picking up one of my kids. My wife called to ask me to buy hot dogs for the grill. At the time, I was equidistant from a Safeway and a Whole Foods Market. I chose the latter.
Now, I've never filled a grocery cart at Whole Foods, but every now and then I'll brave the high prices to get something special. A bar of dark chocolate from Iceland, a case of Honest Tea, or maybe some fresh salsa or guacamole. In this case, it was 100% beef hot dogs for the family, and the Andouille (pronounced ahn-DWEE) sausages for me. I never even knew they existed, but the butcher said that if I liked spicy, I would love the Cajun delicacies. He guar-an-teed it. The hot dogs are made in the store and contain garlic, sage, paprika, allspice ... and probably the best parts of the pig, the remainder of which end up in Safeway hot dogs.
Of course, that's not true, but you feel that way when you shop at a Whole Foods store. And you also feel that the patrons who do fill up their shopping carts would rather send their kids to public schools than give up the tasty, healthy goodness of Whole Foods products.
This is not just my opinion. The facts show that even as the economy sours and Uncle Sam uses bailouts, duct tape and baling wire to hold together the nation's financial system, people continue to buy natural and organic foods at an increasing rate. Consumption of such foods in the U.S. was up 9.2% in a recent 30-day period, compared with the same period a year earlier, according to a report from broker William Blair & Company. The report went on to say that business at Whole Foods in the quarter that ended July 6 was in line with the previous quarter, during which sales at stores open at least 12 months climbed a robust 5.1%.
Yet investors have abandoned shares of Whole Foods faster than grocery shoppers would drop a brick of Velveeta if they could find such a thing in one of the stores (I recommend the Royal Bavarian Brie). From a high of $54 last October, the stock (symbol WFMI) closed July 30 at $22.04.
Whole Foods has moved from a growth and momentum stock into the bargain bin. As that process has continued, investors have clearly overreacted.
This is not to say the stock didn't deserve to come down in price. For starters, investors are fearful. A recent report from Zacks Equity Research, which obviously doesn't get the romance of Whole Foods, says "there are growing fears that the difficult macro environment may force consumers to choose cheaper alternatives to Whole Foods' higher-priced organic products." But again, the numbers don't bear that out.
Then there's the financial factor, which is partly due to indigestion from Whole Foods' acquisition of Wild Oats in 2007. (There's also the flake factor, because at one point Whole Foods' chief executive officer dissed Wild Oats in anonymous Internet bulletin-board posts before making an offer to buy the company last year.) While sales have been climbing in the past two fiscal years and are expected to rise again in fiscal 2008, which ends in September, profits have been falling. Earnings per share dropped from $1.40 in the year that ended September 2006 to $1.31 in fiscal 2007, and they are expected to slide in at $1.16 per share this fiscal year, according to Thomson Financial.
But a big rebound is expected in fiscal 2009, when analysts see Whole Foods earning $1.56 a share. The stock sells at 14 times that estimate (and 19 times fiscal 2008 forecasts). A year ago, when Whole Foods was considered a growth company, the stock traded at roughly 30 times earnings. Imagine what will happen to the stock price when the market realizes its folly and begins considering Whole Foods a growth company again. Zacks gives the stock a six-month target price of $30.
If you don't believe in the once and future king of fancy, healthy food, then Costco Wholesale (COST) is your play. But I'll take Whole Foods and put my faith in those well-heeled consumers who can't live without premium food at premium prices.
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Reader Comments (9)
Posted by: Incog at 07/31/2008 10:08:42 AM
I still think this is a general economy play. If the bears are right, it might be the straw that broke the whole foods consumers back. If not, expect a rebound.
Posted by: bud at 07/31/2008 10:33:39 AM
That stock needs to fall to about 10 bucks before I'd buy it. Still way overpriced. Just like their Mdse.
Posted by: Rural Rancher at 07/31/2008 04:54:10 PM
...I'd rather have a Ribeye over ANY sausage/hotdog any day.
Posted by: Mike at 07/31/2008 07:48:44 PM
If you look a little deeper you'll find that this stock was around $175 per share, they split and never recovered. They started doing real dumb things like donating one days gross nation profit to teaching farmers how to raise thier animals under less stressful conditions. I wouldn't touch these guys with a 10' pole.
Posted by: hank at 08/01/2008 07:18:27 AM
Where have you been? Them there sausages have been around for a decade at least and you can get them at costco for half price.
Posted by: Mitch at 08/01/2008 06:42:35 PM
Whole Foods is the Dasani of martket chains. Extremely high prices for your choice of exotic items ... do I need 17 choices of whole grain breads? Does anyone? This is a store for the wealthy food nuts. That said, it is probably a great buy because the folks that shop there don't care about the cost.
Posted by: Greg at 08/02/2008 08:37:05 PM
Mike, you sound like the typical boorish American. And like them you bent over and spread it for Bush eight years ago, and he still won't let you get up.
Posted by: Joette at 08/03/2008 12:53:19 PM
For a less expensive alternative to healthy food drop by a Trader Joe's. They only problem is that there aren't enough Trader Joe's in So. Arizona.
Posted by: Stephanie Murphy at 08/07/2008 11:25:06 AM
To say that "people who shop at Whole Foods don't care about cost" is an inaccurate stereotype. I am an extremely frugal, coupon-clipping shopper, but I do shop at Whole Foods on occasion. They have certain items that I simply cannot find anywhere else, and their cheese and beer selections are fantastic. I still do the bulk of my grocery shopping at Walmart and standard grocery chains, but there is always a piece of my food budget for Whole Foods. Also, Whole Foods does have their own line of items which are economically priced (they have done this in an effort to lure folks like me to do more "regular shopping" there). In summary, don't write off Whole Foods as a store only for the "foodie-elite". They do appeal to a broad range of shoppers and I agree that the stock has great potential.