Tuesday, July 29, 1997

Wild Oats Markets, Inc.
(Nasdaq: OATS)
Phone: 303-440-5220
http://www.wildoats.com
Price (7/29/97): $28

HOW DID IT DOUBLE?

Catching the natural foods wave, Wild Oats Markets came public in October of 1996 at $25 a share. However, the IPO must have tasted like tofu to many investors, and the stock drifted down. In mid-January news that the CEO had resigned and an analyst report warning of increasing competition in the industry sent the stock precipitously lower to $12 7/8.

A little more than a week later, investors received a dose of ginko biloba in the form of the 4th quarter earnings report when the company reported a doubling of sales and earnings of $0.06 versus a prior year loss of $0.11. This earnings report was followed by an exceptional first quarter with earnings rising 267% over the prior year. The second quarter report was released on July 24, and the strong earnings continue. A hot industry and torrid earnings growth set up this double.

BUSINESS DESCRIPTION

Wild Oats Markets is the #2 natural foods retailer in the U.S. behind Whole Foods Markets (Nasdaq: WFMI). The stores are located primarily in the Western U.S., but are also located in Missouri, Kansas and Florida. The company has grown both by acquisitions and by building new stores. Currently there are 47 Wild Oats Markets with at least 5 more on the way. The company operates under the Wild Oats, Alfalfa's, Caper's and Oasis names.

These stores average 5000 square feet and contain natural foods, organic produce, vitamins, a massage therapist, and a very educational shopping environment. The stores are also active in the community, participating in and sponsoring a number of good causes. I must say that I am quite impressed with our local Wild Oats and so is my wife, who continues to shop there and pay premium rates for produce and the like. The pricing is significantly higher than conventional grocery stores.

FINANCIAL FACTS

Income Statement

      12-month sales: $270 million
      12-month income: $3.5 million*
      12-month EPS: $0.50*
      Profit Margin: 1.3%
      Market Cap: $197.1 million
      (*Excludes non-recurring charges)

      Balance Sheet
      Cash: $7 million
      Current Assets: $27 million
      Current Liabilities: $26 million
      Long-term Debt: N/A

      Ratios
      Price-to-earnings: 56
      Price-to-sales: 0.73

HOW COULD YOU HAVE FOUND THIS DOUBLE?

The fourth quarter earnings report made the Investor's Business Daily list of stocks with big increases in earnings. The over 100% increase in sales also could have caught an investor's attention. For those Fools living near a Wild Oats Market, a visit to the store might well have prompted interest.

Concomitant with the rise in Wild Oats, Whole Foods Markets has also doubled, so a look at the hot sector might have prompted an investor to take a close look at the stock.

A look at the January 31 issue of Zack's showed the stock sitting at $13 3/4 with earnings estimates of $1.24 per share for the following year and an estimated 30% annualized long-term growth rate. This gives a YPEG valuation of $37, well more than double the stock price at that time.

WHERE TO FROM HERE?

This stock has had quite a run. Even so, last week a PaineWebber analyst put out a "buy" recommendation on the stock. Since January, earnings estimates for the next fiscal year have been raised a bit to $1.31 per share. The current YPEG valuation is just over $39 a share. So although another double doesn't look probable, there is still a decent chance of further upside.

But wait! This is a tough business. Margins are typically razor thin, in the 1.5% range for grocers. A price/sales ratio (PSR) of 0.73, while lower than the market average, is a bit rich for this industry. Both Safeway and Whole Foods Markets have current PSRs around 0.6. The benchmark for the overall grocery store business is a PSR of 0.32. The long-term growth estimates of 30% per year for Wild Oats exceed the natural foods business growth rate of 22% and Whole Foods estimated growth rate of 24%. Are analysts overly optimistic?

On top of these valuation questions, Whole Foods has announced plans for a 36,000 square foot store right in the heart of Wild Oats country, Boulder, Colorado. The spectre of head-to-head competition with the #1 natural foods chain has to invite pressure on margins. An investor with an interest in natural foods would do well to look at both Whole Foods and Wild Oats before putting down any hard-earned green.

-Mark Weaver, MD (MWEAV@aol.com)

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