A Wild Ride Ahead for Whole Foods

When Whole Foods (Nasdaq: WFMI  ) announced a $565 million deal for Wild Oats (Nasdaq: OATS  ) , few here in Denver were surprised.

How could we be? Boulder-based Wild Oats has been lagging for too long. And when billionaire Ronald Burkle, who built his fortune buying and selling supermarkets, piled into Wild Oats' stock last February, a deal seemed all but inevitable. Now that it's occurred, Burkle stands to collect tens of millions in profits from the sale.

But Whole Foods CEO John Mackey isn't likely to cut and run as Burkle might. Instead, Mackey told analysts that Whole Foods plans to upgrade Wild Oats stores with the goal of boosting sales at certain locations by 50% to 70% within two years. "We plan to put jet propulsion on those stores," Mackey told his audience.

If that sounds like the typical bluster you'd expect from an acquiring CEO, I'm with you. But Mackey isn't your typical executive, and if you follow the numbers, he may have a point. Consider the difference in margins between the two chains.

Whole Foods

Metric

TTM

2005

2004

2003

Gross margin

35.0%

35.1%

34.7%

34.2%

Normalized net margin

3.8%

3.2%

3.5%

3.2%

Source: Capital IQ, a division of Standard & Poor's.

Wild Oats

Metric

TTM

2005

2004

2003

Gross margin

30.0%

29.2%

28.7%

29.9%

Normalized net margin

1.0%

0.5%

(0.4%)

0.5%

Source: Capital IQ.

That's an impressive gulf. But, again, I'm unsurprised. Wild Oats is far more like Safeway (NYSE: SWY  ) or Kroger (NYSE: KR  ) than like Whole Foods, in that it competes on price. That's why I can go there and buy 10 boxes of gluten-free rice milk for our food-allergic boys for $0.99 a pop. Try doing that at Whole Foods.

My guess is that you won't be able to close the gap on those margins, and that presents both an opportunity and a challenge for profit hunter Mackey. If Wild Oats shoppers accept the higher prices that come with shopping at "Whole Paycheck," this deal will be a masterstroke.

But if not ...well, write me when rice milk goes on sale at Kroger.

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Fool contributor Tim Beyers, who is ranked 1,326 out of more than 23,200 in our Motley Fool CAPS investor intelligence database, hopes Whole Foods continues to sell Snickerdoodles. Yummy. Tim didn't own shares in any of the companies mentioned here at the time of publication. All of his portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy is like bran for your portfolio.


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