Whole Foods Market (Nasdaq: WFMI ) shareholders can breathe a sigh of relief: One of the market's biggest soap operas of the summer has now ended, with the FTC's attempt to block its acquisition of Wild Oats (Nasdaq: OATS ) behind us as a failed effort. Let's not kid ourselves, though: Now that the acquisition's rolling, the retailer's got its work cut out for it.
Motley Fool Stock Advisor recommendation Whole Foods has been purchasing the shares of Wild Oats in its $565 million acquisition this week. It's also taking on Wild Oats' debt as well as adding debt of its own to help finance the deal, having obtained a five-year $700 million senior term loan agreement as well as a new $250 million revolving credit facility. This is not exactly the balance sheet situation Whole Foods' shareholders are historically accustomed to.
Whole Foods has been clear that this deal does not add up to instant gratification (no merger or acquisition really does, of course, although stocks often reflect optimistic sentiment in the short term). The company said in its press announcement that it takes about two years to digest acquisitions, and many of us who have followed Whole Foods closely know that Wild Oats will be a big bite to swallow, organic as it may be.
The deal, if successfully executed, will certainly allow Whole Foods to grow fast over the next few years, faster than it could have on its own -- but that's not to say it will be smooth sailing. In the long run it's heartening to think that being able to quickly enter new markets and eliminate overlap in a few others will make it far easier for Whole Foods to take on formidable rivals like Safeway (NYSE: SWY ) , Kroger (NYSE: KR ) , Wal-Mart (NYSE: WMT ) , and the small but scrappy Trader Joe's.
Meanwhile, Whole Foods made some interesting announcements today. It said it will keep the Wild Oats stores and concepts intact in Wild Oats' hometown of Boulder, Colo. It also will test a Whole Foods Market Express, a store that will offer value-priced, on-the-go foods, which is located close to the University of Colorado -- another interesting strategic element. Also interesting, Whole Foods said it will permanently lower prices at all Wild Oats in the Rocky Mountain region. (One might wonder if that's a dig at the FTC.)
Earlier this year, Whole Foods admitted 2007 would be a transitional year; it wasn't kidding. A store completely dedicated to value is a bit of an alien concept to the retailer. The company has done a good job of mixing low-priced private label goods with high-margin gourmet products, but this is delving into a new mind-set. Then again, given Whole Foods' traditional savvy, one imagines it can pull this off with a heaping helping of class, and I'm sure we're all looking forward to seeing how the experiment pans out.
As a Whole Foods shareholder, I believe the future is bright for the retailer, but a dose of caution is in order now as the company works its way through a large acquisition and does some strategic tinkering to fend off major competition. I've long been a Whole Foods bull (and I still am), but when the stock soared last February on news of the acquisition, it presented a good example of the short-term sentiment truly Foolish investors ought to avoid. Developments like this one test us as true long-term investors: We must do our best to gauge how growth will pan out years from now, and not only concentrate on our stocks' performance tomorrow, next month, or next year.
Get caught up on Whole Foods in 2007:
- I mocked the FTC's stance on Whole Foods and Wild Oats when I asked if Whole Foods was building an evil empire.
- I wasn't too pleased with John Mackey's anonymous discussion board postings.
- Flash back to February's announcement of the planned acquisition.