A few months ago, I dug into Crocs’ (Nasdaq: CROX ) Form 10-Q filed with the Securities & Exchange Commission. In the process, I unearthed some things I thought it would be good for investors to at least be aware of, if not worried about. (It turns out Crocs completely wrecked.) In a similar vein, I decided to look through Whole Foods Market's (Nasdaq: WFMI ) Form 10-K annual filing to get a handle on what has changed for the company, given its difficulties in the last year. There are certainly some elements that shareholders and people considering the stock right now should be fully aware of.
Picking through the risk
When looking at SEC filings, it can be very useful to look for what has changed year over year. Even though much of what you find in SEC filings is standard legalese, mining for new verbiage can be very enlightening. One of my favorite places to start is the “Risk Factors” section.
Comparing this year's 10-K versus last year's, Whole Foods has now added language about the risk of its "significant indebtedness." This is part of the reason I recently got frustrated about Whole Foods' acquisition of Wild Oats. The acquisition has had a very adverse impact on Whole Foods' balance sheet. Check out how interest expenses have burgeoned: In fiscal year 2008, interest expense was $36.4 million, while in the two previous years, it was $4.2 million and a mere $32,000, respectively.
There's also new language about possible impairment charges -- related to $659.6 million in goodwill and $1.9 billion in long-lived assets -- due to future economic factors.
Here's some disclosure that I'm sure is standard for companies these days: Capital may not be available for those that need it, although Whole Foods was recently able to obtain some from Leonard Green & Partners to the tune of $425 million.
In a total geek moment, I was fascinated by the rather stark language in the newly added section: "The capital markets are currently experiencing a period of dislocation and instability." Boy, I'm kind of missing the halcyon days when Whole Foods' risks were a little more run-of-the-mill and expected, like "Perishable Foods Product Losses Could Materially Impact Our Results." Sheesh.
A costly proceeding
Unfortunately, another downside to the Wild Oats acquisition has been the Federal Trade Commission's wacko witch hunt. Frankly, if the government can even consider saving competitively challenged companies like General Motors (NYSE: GM ) and Ford (NYSE: F ) -- not to mention the financial companies that got us into our economic mess -- I don't see why a government agency insists on pursuing an antitrust case against a company that has plenty of competition.
Trader Joe's, Wal-Mart (NYSE: WMT ) , Kroger (NYSE: KR ) , Safeway (NYSE: SWY ) , smaller regional grocers, and independents are among Whole Foods' many competitors. (And of course, nobody's holding a gun to anybody's head and demanding they buy organic to begin with.)
At any rate, the situation with the FTC garnered a long section that I can't really give a quick synopsis of, although it did outline about 10 rather daunting ways the FTC could make Whole Foods’ life miserable if it prevails. In some pretty standard language for such situations, the company disclosed that the outcome could have a material adverse effect on its financial condition or results of operations (which, of course, goes without saying).
In addition, Whole Foods added some language about risks pertaining to acquisitions in general -- for example, saying that costs associated with integrating such operations may be greater than anticipated and may distract from day-to-day business more than expected, or that they may adversely effect business, results of operations, financial conditions, and cash flows.
Risk and reward
Much of the legalese in SEC filings -- especially risk factors -- simply offers full disclosure of events that are possible and may come to pass, and of course every company has risks. Meanwhile, most of what we can glean from Whole Foods' filing is information we were already aware of. However, I'm a firm believer that investors should keep their eyes wide open to all scenarios and pay close attention to these disclosures and how they evolve or change.
I can't deny that Whole Foods has become a much riskier investment than it was just a year ago. I have often said that in the current economic climate, investors should try to focus on strong companies that have a lot of cash and little debt. Unfortunately, Whole Foods is no longer that kind of dream investment. Of course, there is the argument that debt concerns -- the addition of risk, really -- have helped drive the stock down to dirt cheap levels.
Whole Foods, which is a Motley Fool Stock Advisor recommendation, is trading at just 13 times earnings, just for starters; this stock traditionally traded at nosebleed multiples, although the boom-boom economy helped it drum up the kind of growth that creates a premium stock price. Still, it's an innovative company with plenty of room for growth, so I'd argue hope is not lost for patient investors.
I also feel Whole Foods is a well-managed company and certainly not a fad. I still fully believe in the competitive advantage in its mission, too, including its stellar treatment of employees, the quality of its merchandise, and its innovative initiatives into areas like micro-finance, environmental consciousness, and animal welfare.
I'm holding on to Whole Foods; it has traditionally been one of the stocks that I have always intended to hold for years, maybe even decades, and I respect its business. However, to be forewarned is to be forearmed -- and accountable. I think shareholders should always take it into account when a stock has become a whole lot riskier.