The “Super Brand” Pantsed Again

By Travis Johnson, Stock Gumshoe, August 2, 2008

Whole Foods Market, which has been pushed by the Motley Fool Stock Advisor as their favorite pick, and as the “New American Super Brand” for as long as I can remember (when I wrote about this ad over a year ago the first instance of it I could find was from December 2006, when the shares were close to $50, but I think it was around before that — they’re “credited” with a loss of about 50% on the Gumshoe spreadsheet).

Now we’re looking at what seems to be a ridiculous time machine move from the courts — going back and saying they didn’t properly understand the anticompetitive impact of the Wild Oats acquisition, now that the merger is many months old and Whole Foods is already losing plenty of money trying to integrate all those small and unsuccessful Wild Oats stores. As long as every grocery store stocks natural foods and Whole Foods isn’t accused of playing hardball with suppliers (“Keep your organic tomatoes out of Safeway or you’re dead to me, hear?”) the way Wal Mart seems to, I don’t much care about their ability to dominate the “if you have to ask how much it costs, you can’t afford it” grocery niche. There’s a fun, snarky article from Alyce Lomax at the Motley Fool on this if you care for some more sarcasm.

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If you had told me 18 months ago that Starbucks and Whole Foods would be trading at PE multiples very close to the market average, I’d have called you crazy. Whole Foods has even gotten to the point that we might have to start thinking about the value of their real estate, even though sales growth remains well into the double digits (they’re still valued more richly than most grocery store chains, but they are trading at only 2X book value — though a quarter of that book value is goodwill from Wild Oats and other transactions).

Just goes to show you how much can change — with great valuations comes great responsibility to keep the growth going, and if you can’t the punishment can be fierce, indeed. One hates to be overly committed to companies that sell aspirational products to the middle class when the economy stinks — but then again, that’s the only opportunity that one ever gets to buy companies with this kind of growth at ...

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