Whole Foods Shocks No One

Whole Foods Market (Nasdaq: WFMI  ) impressed few investors with its most recent quarterly results. Are the upscale grocery chain's best days behind it?

Fourth-quarter net income soared to $36.4 million, or $0.20 per share, from the year-ago $1.5 million, or $0.01 per share. Sales increased 2.3% year over year to $1.8 billion, but comparable-store sales decreased 0.9%.

CEO and founder John Mackey proclaimed that sales have stabilized and officially turned the corner. Corner-turning sounds nice, and the profit looked good, but some investors weren't pleased. Granted, a mere 2.3% increase in sales is nothing like the kind of quarterly revenue growth Whole Foods used to generate -- in the range of 20% as late as last year.

The company's results leave this Fool a full plate of food for thought. Whole Foods has been trying to offer value meals -- a potentially chilling prospect for margins, albeit a necessary one as consumers pinch pennies. Price wars in books and toys this quarter have been well-publicized, but the conflict rages in groceries, too. Whole Foods has to compete numerous rivals also trying to lure customer traffic, including Wal-Mart (NYSE: WMT  ) , Safeway (NYSE: SWY  ) , Kroger (NYSE: KR  ) , and Costco (Nasdaq: COST  ) . And investors should take note when higher-end retailers like Whole Foods must start rolling out discounts; that move signals eroding margins.

While decent, Whole Foods' outlook for 2010 didn't impress Wall Street. The company projected that per-share earnings will jump 23%-29%, while the Street expected a 31% gain. Investor Leonard Green & Partners also announced that it will convert its preferred shares into common shares, resulting in about 21% more shares outstanding.

Whole Foods has long been one of my favorite companies, but I can't deny that the stock looks pricey. It's trading at 23 times forward earnings -- considerable cabbage for a grocer, even a fancy one. Wal-Mart's trading at 13 times forward earnings, while Costco's at 19, suggesting that Whole Foods' shares have a comparatively impressive performance baked in. And while I do believe in Whole Foods' long-term growth prospects, the company will still face an uphill climb in this soured economy.

Should Fools grab shares of Whole Foods right now, or wait for a more palatable price? Do you even think Whole Foods' upscale image is still relevant in the "new normal" economy? Have all those angry people now forgotten about John Mackey's controversial health-care views? Let us know in the comment boxes below.

Whole Foods and Costco are Motley Fool Stock Advisor selections. Costco and Wal-Mart are Inside Value recommendations. The Fool owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

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


Read/Post Comments (9) | Recommend This Article (16)

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, 2009, at 3:01 AM, djkumquat wrote:

    of the three, i prefer costco. lots of room to grow, nice dividend, and should do well in a down economy. or a good one, too.

  • Report this Comment On November 07, 2009, at 3:06 AM, djkumquat wrote:

    and yes, i've invested in costco.

  • Report this Comment On November 07, 2009, at 6:36 AM, daytraderwoman wrote:

    Good thing Mackey sold 15 million dollars worth of stock a few months ago. Now he can buy some stock back on the cheap. Nice how a CEO can be in the drivers seat with stock movements. I guess those union customers are scaling back their purchases and shopping the Walmarts, etc since there jobs are disappearing.

  • Report this Comment On November 07, 2009, at 10:52 AM, djkumquat wrote:

    maybe he needed to buy a house?

  • Report this Comment On November 09, 2009, at 8:03 AM, guiganol wrote:

    Over 36,000 members on the Facebook boycott group and the fact that Mackey has to post video "news" from a Libertarian agency on his blog http://www2.wholefoodsmarket.com/blogs/jmackey/ gives me cause for concern. I'm surprised no one brought up the issue during the earnings report. If it's not a problem, why the blog post?

    Doesn't matter whether you agree with him or not, whatever happened to the golden rule: "the customer is always right". And even if they're not, keep it to yourself until you're in the backroom.

    Lower margins and even a fewer percent of customers is a bad combination. This stock may bounce back in Q4 2010, but your money won't be doing anything in WFMI for still quite some time.

  • Report this Comment On November 09, 2009, at 11:42 AM, Elwyn2024 wrote:

    Several years ago I purchased WFMI in the $60s when Ms. Lomax recommended it as her Mother's Day Pick. Doing so ruined both my mother's and my financial status and my mother's health from worrying. Ever had your mom call you and cry because she can't pay her bills? So I wouldn't trust Ms. Lomax's take on WFMI or any other stock for that matter.

  • Report this Comment On November 13, 2009, at 4:10 PM, prettybones wrote:

    Elwyn2024, I have to wonder why you would take ANYONE'S "take on" a stock to the point where you would invest so much of your available cash that there was the potential for financial ruin if it took a dive. Making sensible decisions about how much money is prudent to invest in any stock is ultimately your responsibility, no one else's. Hope things got better for you and your mother.

  • Report this Comment On November 17, 2009, at 2:54 PM, zonadude wrote:

    Whole Foods offers weekend classes on how to buy groceries on a budget...... which I see as an ominous sign for the high-end retailer of food staples (which is, by the way, what Whole Foods is).

    With so much room for lower priced competitors, such as Trader Joe's and Sunflower Markets, I can't imagine buying into a big growth story for WFMI anytime soon. Even specialty consumers need to know that they are getting a good value, and I don't believe that Whole Foods consistently offers it on items available elsewhere (see wine and cheese, for instance). So in the consumer marketplace, it would make plenty of sense for the company to erode its margins just to remain competitive.

    Such a strategy would not be investor-friendly, but then I remember a time that WFMI's unpredictable CEO was quite outspoken for prioritizing things other than shareholder returns. It seems that his cavalier attitude helped him grow the company within a loyal consumer base at the time, and thus provide great returns for investors; whereas it now threatens Whole Foods' ascension into a more dynamic mainstream.

  • Report this Comment On November 17, 2009, at 2:55 PM, zonadude wrote:

    Whole Foods offers weekend classes on how to buy groceries on a budget...... which I see as an ominous sign for the high-end retailer of food staples (which is, by the way, what Whole Foods is).

    With so much room for lower priced competitors, such as Trader Joe's and Sunflower Markets, I can't imagine buying into a big growth story for WFMI anytime soon. Even specialty consumers need to know that they are getting a good value, and I don't believe that Whole Foods consistently offers it on items available elsewhere (see wine and cheese, for instance). So in the consumer marketplace, it would make plenty of sense for the company to erode its margins just to remain competitive.

    Such a strategy would not be investor-friendly, but then I remember a time that WFMI's unpredictable CEO was quite outspoken for prioritizing things other than shareholder returns. It seems that his cavalier attitude helped him grow the company within a loyal consumer base at the time, and thus provide great returns for investors; whereas it now threatens Whole Foods' ascension into a more dynamic mainstream.

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