Half Price at Whole Foods

I've already received one irate email from a reader pointing out how wrong I've been about Whole Foods Market (Nasdaq: WFMI  ) , and I'm sure more are waiting. Maybe I'm just a long-term investor run amok, but right now, I think it's a real dirt cheap value stock.

True, Whole Foods' third-quarter tidings were rough. Net income fell 30.9% to $33.9 million, as the company admitted that the economic slowdown is having an effect on its business (like so many others). Sales increased a solid 21.6% to $1.8 billion, and same-store sales increased 2.6%, with identical store sales up 1.6%.

In more seemingly nauseating news, Whole Foods said it will ditch its dividend and slow down spending and store growth in the short term. But hey -- most dividend payers are mature companies with their best growth behind them, although they may be cash cows. Whole Foods decided to share its success with shareholders through a cash dividend early in its growth cycle. The dividend should go in tough times.

Meanwhile, Whole Foods is still digesting Wild Oats, and stepping up expansion in a consumer recession doesn't sound like common sense to me. So I'd say these moves are prudent, given the current economic climate.

As for the FTC's continued thesis that the Wild Oats deal creates a monopoly in organic grocers, it's pretty clear that Whole Foods still faces robust competition from the likes of Safeway (NYSE: SWY  ) , Kroger (NYSE: KR  ) , Trader Joe's, and Wal-Mart (NYSE: WMT  ) .

Whole Foods is trading at price-to-earnings multiples unheard of for this grocer. For example, it's trading around 17 times trailing earnings, a far cry from its multiples in headier times. Oddly enough, Wal-Mart also trades around 19 times earnings now. Peek at Wal-Mart's five-year chart, and you'll see the stock experienced a couple years of pain while value types extolled its cheap virtues. The megaretailer's shares are just now returning to their 2004 levels. Guess which company I think has the better long-term growth outlook and tradition of innovation?

Whole Foods shares have fallen nearly 50% over the last year, so yes, I recognize I've been "wrong" over the last several years. I wish I'd waited to suggest the stock at far less premium prices, especially in these recent rocky times. Still, I continue to believe in this company's growth story for the very long term. The current climate simply underlines how difficult it can be to be a true long-term buy and hold investor, riding out short-term troubles.

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Whole Foods Market is a Motley Fool Stock Advisor recommendation. Wal-Mart Stores is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (33)

Comments from our Foolish Readers

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  • Report this Comment On August 06, 2008, at 4:07 PM, dgrizz wrote:

    The question that remains is whether this is management that deserves our confidence. If Mackey were no longer the right one to lead WFMI, can he block the board's effort to oust him?

  • Report this Comment On August 06, 2008, at 4:25 PM, scott0807 wrote:

    circling the wagons and pulling in the troops is exactly what mr. mackey should be doing in response to these trying times. he is showing true leadership in cutting growth plans and scuttling the dividend. the take home lessons for me are 1) wfmi is not recession resistant and 2) mr mackey will ignore his own ego and make the tough calls to remain solvent. good show! scott (no position in wfmi...yet)

  • Report this Comment On August 06, 2008, at 4:34 PM, Strnj1 wrote:

    In Defense of the pick...

    Good company? Buy and hold.

    Half price? Double down.

  • Report this Comment On August 06, 2008, at 5:02 PM, Ellisee wrote:

    The Dividend was a joke, the stock was always diluted by more than the dividend payout, every quarter.

    the real question is whether management is interested in creating a shareholder friendly system that actually builds wealth rather than destroys it.

    Mackey's stake has dwindled along with other long term shareholders, so perhaps he'll wake up and smell the capitalist coffee.

    Watch his paycheck, when he cut his wage to one dollar, he still issued himself mass options, and of course, the "rob peter to pay paul" dividend where they issue shares to employees and management gave him in the neighborhood of 800,000 per year.

    If he gives himself another salary or more options, he isn't serious about building shareholder value.

    Great company in many ways, management has EVA blinders on and needs to stop issuing shares, Period.

    THey actually report income from the excercise of options as if it is something to brag about.

    Love the stores, should have sold all the stock when I sold 3/4ths two years ago

  • Report this Comment On August 06, 2008, at 5:48 PM, robertf36009 wrote:

    VFMI still has some downside left I like it at $15.

  • Report this Comment On August 07, 2008, at 9:13 AM, weiwentg wrote:

    I disagree with Alyce's contention that Whole Foods is a compelling value right now. There are too many uncertainties given the state of the economy. We're seeing even Whole Foods' core consumers cut down on spending, which didn't happen in the last recession (which was more narrowly focused). I'd hold off on buying the shares for now. In fact, seeing better and more certain investment opportunities elsewhere, I sold mine yesterday.

    However, I do agree with Whole Foods' decision to cut the dividend, and disagree with the contention that the dividend was diluting shareholders in the past. The company was doing well, and they didn't need all their cash.

  • Report this Comment On August 07, 2008, at 11:06 AM, Ellisee wrote:

    if you pay a 1% dividend and dilute existing shareholders by 2%, your dividend forces existing shareholders to pay taxes while decreasing your stake in the company.

    Insiders who issue themselves stock in this process need not worry because their stake is increasing more than the total dilution. Outside shareholders are fleeced.

    Rob Peter to pay Paul, get it?

    Dividends don't dilute shareholders, Dilution dilutes shareholders. COmpanies that dilute by more than their payout are running a Ponzi Scheme.

    There is nothing of substance to disagree with.

  • Report this Comment On August 08, 2008, at 3:12 AM, myositis wrote:

    With historical ROA <10% (currently <6%), growth is a bad idea. The more it grows, the more money shareholders lose. In order to support the growth, the company has to issue more debt and stocks. The increased debt/equity ratio causes more risk and the diluted shares lowers shareholders' value. If the company doesn't grow, but focuses on improving its margin, that's a good sign. In that case, with a discount rate of 10~12% for this company, I demand a P/E less than 10, and some margin of safety. Otherwise I'd rather buy bond. The current P/E of 16 is apparently too expensive, especially for a company that does not show any moat in its business (trader joe's is a strong competitor).

  • Report this Comment On August 08, 2008, at 1:33 PM, matcha695 wrote:

    WFMI has been a slowly sinking ship for the last few years for very good reasons. Rather than growing at a consistent pace it has tried to do it in big chunks. It has a CEO who has such poor leadership skills that he has antagonized the FTC as well as many consumers who wish WFMI to fail because of Mackey's hubris. Mackey's rahodeb incident and his poor handling of that transgression are an example of how he does not see himself as working for the shareholders. Further, WFMI's has long tried to create the image of being upscale to now find that hurting it. It was very slow to respond to signals of a slowing economy and of the slow but inevitable developing trend of a shift to savings in US. WFMI lacks the leadership vision and management skills to adjust to the new economic realities.

  • Report this Comment On August 11, 2008, at 7:01 PM, robinjoe wrote:

    I think Whole Foods is a poor choice in hard times. People are not going to shop at the most expensive grocer on the planet if money is tight. Trader Joe's tapes into the same niche but sells it's goods at a reasonable price. Plus as the article states everyone is making organic foods available.

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