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Thanks for Nothing, Wild Oats

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Can someone pass an antacid? Or whatever its herbal equivalent might be? It seems like Whole Foods Market (Nasdaq: WFMI  ) has quite a case of indigestion from its acquisition of Wild Oats Market, and the tough economic times aren't helping it go down any easier.

A quarter for strong stomachs
Fourth-quarter net income at Whole Foods dropped 96% to $1.5 million, or $0.01 per share. (Note that the same quarter last year included an extra week.) That might make shareholders queasy, considering that adjusted total revenue actually increased by 13% to $1.8 billion. Comps rose by a mere 0.4%, compared to the healthy year-ago 8.2% increase.

A litany of charges hit profitability:

  • $0.05 per share related to idle Wild Oats properties.
  • $0.02 per share for 13 lease terminations of Whole Foods stores in development.
  • $0.01 per share in asset impairments at two Wild Oats locations.
  • $0.04 per share in tax charges related to taxes on the repatriation of $60 million in cash from the company's Canadian subsidiary, whatever the heck that means.

Relocation, store closure, and lease termination costs skyrocketed 482% to $27.2 million. Interest expense doubled to $8.3 million.

However, bear in mind that comparing the GAAP net income on a year-over-year basis is confusing and fairly meaningless. This quarter included all those unusual one-time charges, which magnified the profit drop. If you make an attempt to strip out the impact of the extra week in the quarter last year, and then back out the one-time, non-cash charges this quarter, the net income drop (by my estimated calculations down 42%) looks slightly less pronounced.

I don't know whether you've started hating Wild Oats yet, but if you haven't, I have a few more reasons. How about the $15 million to $20 million Whole Foods expects to spend in 2009 defending itself against the Federal Trade Commission's continued witch hunt? And then there's the impact Wild Oats made on Whole Foods' balance sheet, which leads us to ...

A different kind of green
Whole Foods got an infusion of capital from Green Equity Investors V, an affiliate of Leonard Green & Partners. LG&P has invested in such retail notables as Petco, Rite-Aid (NYSE: RAD  ) , Neiman-Marcus, Sports Authority, and The Container Store.

Whole Foods will receive $425 million from the sale of preferred stock. That investment -- which will give Leonard Green a 17% stake in Whole Foods, if the shares convert to common stock -- will pay an 8% dividend. (In its defense, Whole Foods isn't exactly alone in getting a capital infusion. Look at Warren Buffett's similar deals with Goldman Sachs (NYSE: GS  ) and General Electric (NYSE: GE  ) several months ago.)

Whole Foods plans to use the money to pay down its total debt of $929 million, much of which it took on to buy Wild Oats. In addition, the company has also drawn $195 million on its $350 million credit line. Although it paid down $32 million during the quarter, it plans to pay off the credit line in full when it gets LG&P's money. Whole Foods also mentioned that it's in compliance with all its debt covenants. (Well, phew.)

Debt can be a useful tool, but these days it's also more dangerous than ever. I'm glad to see Whole Foods trying to pay down some of that debt, and able to raise the capital to do so, given the credit markets' precarious situation. With many retailers in potential need of credit, and not much spare cash floating around for the taking, we may have to kiss some retailers goodbye.

Why, why, why?
The bad economy makes it tempting to wish that Whole Foods had never even imagined taking over Wild Oats. When the acquisition news first broke, I thought it would be no magic bullet; now it's starting to feel like a regular, non-magical, incredibly painful sort of bullet. The buyout has mucked up Whole Foods' balance sheet and spurred a dogged and bizarre antitrust crusade by the FTC, which seems to be ignoring the many mainstream retailers like Wal-Mart (NYSE: WMT  ) , Safeway (NYSE: SWY  ) , and Kroger (NYSE: KR  ) that have also muscled into the organic-goods business. If anything, the current hard times make the FTC's position look more ridiculous than ever. Then again, that position always seemed like it came from outer space, so I doubt the agency will back off now.

Given all my (regrettable) gloating when I'm right about a stock, I feel compelled to admit when I've made a bad call as well. I've been wrong about Whole Foods for a while now, and as a shareholder, I feel the pain, too.

That said …
I stand by my belief in this retailer's unique brand, its high-quality merchandise, its outstanding mission (treating employees and communities well), and its smart management. And gosh, if it was half price over the summer, it's even cheaper now, at about 13 times this year’s earnings. I mean, come on -- trading at a lower multiple than Wal-Mart, which has a P/E of 16? That's just nuts.

For all of Whole Foods' current digestive woes -- thanks ever so much, Wild Oats! -- future investors may regret not seeking out the company now, when it's down in the doldrums and cheaper than (organic, free-range) dirt.

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

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

Read/Post Comments (7) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 07, 2008, at 12:23 AM, roam92 wrote:

    That's pretty nervy to blame Wild Oats. What or who forced Whole Foods to buy them? Nothing, and nobody.

    The blame belongs at the feet of WFMI managment, nowhere else. As a longtime patron of both stores, I was stunned when I heard the news. I never imagined Whole Foods would, could or should buy the clearly-second-tier Wild Oats.

    I was also against the merger and wrote the FTC accordingly. It certainly has reduced competition and choice in my neighborhood - incontrovertably so since the Oats store was shut down!

    Now I think the FTC is on a hopeless crusade - you can't put the genie back in the bottle... But as for you, and for Mackey, you can own up to your mistakes in owning/endorsing/running a company that made such an egregious misstep, one that has been its undoing. The blame belongs nowhere else.

  • Report this Comment On November 07, 2008, at 12:11 PM, floyd3370 wrote:

    I think you'd better take a long, hard look at this stock. Given the economy, and the price of food at these organic supermarkets, floor traffic has slowed by almost 1/4th, and that cannot possibly be good. I don't shop at these stores, as it increases one's grocery bill significantly. If others want to buy their food there, more power to ya. But, I don't see any hope for sustainability in this market for a long, long time because people are cutting back their spending.

  • Report this Comment On November 08, 2008, at 4:03 PM, bisnettrj2 wrote:

    The last Stock Advisor newsletter had a section about 'Biggest Investing Mistakes'. Some of those mistakes were letting go of multi-baggers after a small profit. But others were in holding onto a stock long after it proved to be a loser. I think this may prove to be one of those stocks that was held onto too long. I believe that the disposition of the US consumer going forward will be more conservative, more conscious of its spending. And for many, that will mean giving up a desire for 'organic free range humanely euthanized and appropriately eulogized domestic wild fowl' and instead opting for value bags of frozen chicken-like material from the big box store. Just my two cents.

  • Report this Comment On November 10, 2008, at 6:07 PM, JMNYC wrote:

    When I first bought this stock I went along with the Motley Fool concept of buy what you know.

    I knew this:

    1) I called the store "Whole Paycheck" when I lived in SF and Chicago

    2) I knew that in NYC the experience is better at a Whole Foods and the price isn't that much more expensive than many of the regular grocery stores

    3) I knew that the Whole Foods brand had some great deals (and still does)

    4) I knew that I wanted to know my meat was once treated like a living being not a product

    Now, I'm on the fence about the stock but I still believe these things about Whole Foods so where does that leave me?

    I believe that I'm in the same position now that my friends were in when we were in college and they would buy organic food at the health food store rather than at the grocery store. I had more food but they had better food. They certainly weren't starving though and we were all most certainly not well off.

    I also believe that we and other industrialized countries will have to accept that organic farming is the future of factory farming because we have depleted the soil to such an extent that it can't produce much on it's own anymore (in some cases). So that means that these types of products will have to become more mainstream.

    But I'm also freaked out that my drip investment has turned into an amazing loss of cash. What do I do? Pull my money out - money that according to Motley Fool (I think) you shouldn' t have in the market unless you can afford to lose it? Leave it in because it's lost and there's no use crying over spilt milk? I guess since I'm not starving and I can pay my bills at the moment I will leave it in because that is what is meant by long term investment - you weather the ups and downs. Maybe I'm gonna be ok with this stock but maybe I've just lost a bunch of hard earned cash.

  • Report this Comment On November 14, 2008, at 12:42 PM, PeterVanKan wrote:

    I've noticed that many people that don't shop at WF think that those that do shop there, do so to feel good about themselves.

    That may be true for some for a limited period of time. Mostly however, shopping at WF is a matter of wanting to feel good. Period.

    Will some customers stop shopping at WF ? No doubt. WIll they be many ? I don't think so, unless the economy gets to depression levels.

    Disclosure: I own WF and wish I didn't.


  • Report this Comment On December 26, 2008, at 10:29 PM, louisryoshin wrote:

    Our community in east central florida also suffered from a Whole Foods closing of a 6-7 year long profitable Wild Oats becauser the WF managemant wanted a $1 million per month store and was building a large one from scratch 2 hrs west of us.

    This closing has created physical and cultural as well as community hardship in an area of a many hundreda of thousands of people and many thousands who were loyal customers who depended on noin pesticide and much higher levels of nutrition than suipermarkets can provide.

    Scientific research shows that organically grown produce provides 3,7, 20 and even 100 times the vitamin and mineral value of non organically grown and also provides a wide range of nutrients that non organic does not provide. it therefore creatd improved health conditions in the body including the eradication of some diseases, and i can personally vouch for the increased energy and healthm and reduction of my ailments, with eating Organic raw fresh produce versus the non fresh kind.

    My personal calculations of similar non organic produce in supermarkets such as parsley to parsley and collard greens to collard greens shows a tyoically 2 or 3 to one price difference and sometimes though, the organic is less expensive by 50-100%. And for that you get an average 600-2000% increase in food value.

    For understanding the value of soil to food and food to human, see the book The Empty Harvest by Bernard Jensen (along with a soil biologist whose name I forget).

    Now, while Whole Foods stores do have what we could call exhorbitant prices, the Wild Oats stores I have been to in rich Santa Monica, CA and in middle class and upper middle class Brevard Country, Space Coast, Florida, showed they were lower, and for the quality and size of the bunches of greens, on a par wiith a lot from the local and large Santa Monica not for profit Food Coop, 3 miles away, but less in a number of areas, and mostly higher than the Cape Canaveral Cocoa beach Food Coop in Florida, 30 miles away. And Organically grown produce is often less expensive - or slightly more expensive in the local smaller health food store, but in Los Anegels, is its also less expensive at the large open air Farmer's Street Markets each week,

    Finally, the Organic foods concept at Walmart leaves a lot to be desired. A can of organic peas versus the non organic is not the same as having a wide selection of pesticide free green leafy and other vegetables and fresh fruits, which is, to the as yet uninformed, the major reason why people shop at Health Food Markets - (versus vitamin bottle selling chains like Vitamin Shoppe and GNC - which are Ok - don't get me wrong 0 but they are not the same kind of store at all.)

    Our local walmarts still sell the same producem dairy and butcher non organic products. So they are not in competition with the health FOOD stores. same with the large Publix chain here in Florida - definitely some fresh Organic fruits (Thank You - store produce managers) and some greens - and those at somewhat high prices - but nothing like the Wild oats we lost.

    And neither Walmart, Publix, or Whole Foods offer a fresh vegetable juice and smoothie bar - where for years i got a mixture of organic greens and nursed myself back to health drinking 1-2 quarts a day right there in the store, along with 2-4 ounces of wheatgrass juice.

    I saw dozens of people come into Wild Oats for M-F lunch, order a sandwich of wholesome bread with no preservatives along with non hormone chicken or turkey and cheeze, and have an ounce of wheatgrass juice or a green and carrot juice or smoothie of organic fruit to go.

    You get to see the same people week after week and exchange healthy food and supplement tips. Nice networking. Nice family time - I'd see Moms, dads and both bring in their todlers and babies in baskets, and others their high school and college kids. It was always a safer environment I thought than a big supermarket.

    And the food tastes a lot better than the non organic I am now forced to get.


    Killed by Whole Foods.

  • Report this Comment On December 26, 2008, at 11:14 PM, louisryoshin wrote:

    PS It meant to say the organic juices and so forth, killed by Whole Foods - rather than my name - it was a misplaced line.

    Also, in my upscale area, there is a super walmart, a large publix grocery about 1/4 mile from eachother, and another large chain supermarket about 2-3 miles down the same road. On the next major crossroads north - a Publix and a superwalmart are one mile apart.

    There are ACE hardwares, Home Depots, Lowes, CVS and walgreens, and a host of smaller stores including local and GNC chain vitamin stores, Dollar Stores, and discount clothing stores. On both roads within 3 miles from each other.

    Some of the new stores and food markets are more beautiful and have lots more organic and other selections than the basic Walmart that is often less expensive.

    So while, yes, Walmart is very disruptive to some areas, and does indeed close small businesses, in this soace coast breveard county Florida area, it has not stopped other stores from operating and expanding their number of stores. The stores are catching up to the increase in population in the last 5-6 years.

    HOWEVER - the closing of our successful and highly popular Wild Oats after WF bought them and closed them for corporate goal reasons rather than profitabilty reasons, we no longer had a large health food supermarket for 2 hrs at 65 mph. We have one mid size health food store left that sells organic green fresh produce and fruits, less than 1/3 the size of the Wild Oats with a 4 seat juice and soup bar versus the huge deli, salad bar and juice bar. And another health food local chain put in produce at one of their stores, at a cost higher than Wild Oats had - and it is 8 miles into another area of the county. So we have two. In Cape Canaveral is a produce selling Food Coop 30 miles away.. Wild Oats was our major place.

    A monopoly was created and in the worst case of a monopoly practice, they used their market power to remove the use of their kind of products and services from an upper middle and middle class well established populace.

    In fact, the opening of the Wild Oats itself, with its deli, and other services, was a major contributing factor in the closing of three other health food store priduce areas and the closing including the entire community run health food store with the lowest prices in town, a store that had been in existance for 10 years.

    But Wild Oats never went away. Many of the same people who worked for other health food stores with produce, groceries and juice bar ended working at Wild Oats and became their department masupervisors and even the entire Store manager.

    They provided lots of good organic produce and other prepared and non prepared foods and a cafe to eat the food in, just like the health food store that closed and even better than some others still open. So while it cost a little more for some of the foods than some of the other markets, it still remained and was an enjoyabkle and popular, and necessary part of the health oriented community.

    And in case people don't know it, this used to be the Surfing Capital of the eastern US Coast. Kelly Slater, multiple time World Champion surfer is from Brevard County.

    So please don't put out erroneous material just from reading a Whole Foods publicity handout phrased to support their policy - foisted on unkknowledgeable investors and unknowledgeable regulators.

    Part of our multi-decade heritage was arbitrarily removed becasue Whole Foods was allowed to purchase Wild Oats and then close our store when it was already profitable ongoing and the community wanted it.


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