Newsletters are notorious for re-using the same ad copy for years and years and years, and the Motley Fool is no different — when they get a marketing pitch that really works, they keep trotting it out again, and again, and again. I’ve mentioned this before, particularly with their “Next Berkshire Hathaway” pick that gets sent to me every couple months, and has been for several years.
And now, it’s happening again — with a stock that has demonstrably underperformed since they first started calling it the “New American Super Brand.”
We are just about at the one year anniversary of me writing about Whole Foods in this space, and it’s down about 30% since the Gardners first sent out emails “teasing” us with this stock (which was in December of 2006, a few months before StockGumshoe.com began publishing).
So what has changed? Is the “New American Super Brand” any better or worse than it was a year ago?
Well, they’ve taken over Wild Oats, in a bitterly disputed acquisition that included a somewhat heated antitrust review.
In related news, they’ve been embarrassed by the antics of their antidisestablishmentarian CEO, who posted comments about his own company and Wild Oats on investing message boards (sadly, he never visited the Stock Gumshoe Forum — as far as I know).
And their numbers have seemingly crested a little bit — sales are still growing mightily, though with large numbers come smaller percentage gains, but the performance of the company seemed to fall off somewhat. Return on Equity and Return on Assets both dropped off a little, and, perhaps more importantly, the operating margin was lower (4.5%) than it has been in ten years.
The good news? Cost of Goods sold hasn’t changed significantly, so they’re still making a nice markup on their fancy comestibles (as should be clear to anyone visiting a Whole Foods).
The problem appears to be elsewhere, with rising costs perhaps related to new store openings, expansion, or the acquisition of Wild Oats. And maybe to a slightly slower turnover of inventory, though that wasn’t a dramatic change and appears to be a pretty volatile number within its narrow range of 2.5-3x — it happened that 2007 was at the bottom of the range, but that has happened before and who knows if that’s going to continue. We can only predict the past, I’m afraid.
And, if you don’t believe that regular supermarkets can compete with Whole Foods on the “experience” and the level of natural and organic products, WFMI now enjoys a nationwide monopoly.
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If you do believe that the regular supermarkets are going to compete aggressively with Whole Foods, of that they can possibly do so with any success — things get tougher. My personal assessment is that all the major supermarkets have dramatically lower average markups than does Whole Foods, so it’s a certainty that they lust for the Whole Foods customer and products — the only question is whether they can do so effectively.
My guess is that some will and some won’t — if I were Whole Foods I’d be a little bit worried about competing with Wegmans and Harris Teeter, a little less worried about competing with Wal-Mart (even with their organic line of produce), Safeway or Kroger. There’s also the little upstart Trader Joe’s, which many folks love, but it’s still tiny and it’s really up in the air what impact that might have on WFMI over the long run (and no, Trader Joe’s is not publicly traded).
So, WFMI showed a decrease in earnings and in earnings per share, it underperformed analysts’ earnings estimates significantly in each of the last two quarters, it significantly upped its debt levels, and it is digesting a complicated merger that involves figuring out what to do with a bunch of Wild Oats markets that are smaller, differently organized, and very differently sited than their core Whole Foods markets.
Yet it’s still priced as a growth company with a trailing PE of 28, much more expensive than the market as a whole (forward PE is also high at 18, though not as much higher than average … assuming you trust the analyst estimates).
But it’s also at a multi-year low, is expanding significantly and arguably has lots more room for expansion, it remains a unique grocery store with a unique selling proposition, and it still has good operating margins and very good sales growth approaching 20% a year — which is pretty remarkable for a large company.
So … “leading company in a brief slump,” or “fast growth poster child that’s falling on hard times?”
To me, WFMI is getting more attractive and the time to buy it, if you’re interested, might be when pessimism about the consumer peaks and difficulties with the acquisition surface.
The trick, of course, is how to tell when that’s happening. I doubt we’re there yet with a forward PE of 18, but you never know.
What do you think?