Would It Make Sense to Take Whole Foods Market, Inc. Private?

It appears to be time to let someone else to steer the Whole Foods cart .

For the longest time, Whole Foods (WFM) was a Wall Street darling. The company braved the Great Recession, dealt with a ridiculous antitrust case, and emerged stronger than ever.

Four years ago, I made it a cornerstone of my retirement portfolio. It was a solid move... for a while. Starting in November 2008, Whole Foods' stock returned an astounding 900% over a five-year time frame.

But then, cracks started to emerge. First, the price advantage the company once enjoyed disappeared rather quickly. That was followed by a slow collapse of the most important metric for grocers: comparable store sales.

At the time, I wrote a passionate defense of the company, arguing that the shopping experience at the Whole Foods -- combined with the power of its brand -- would eventually make it a long-term winner.

That may still be the case, but it is becoming abundantly clear that Whole Foods' brand isn't as strong as I previously thought. Most notably, Kroger (KR -0.53%) and its many brands of stores are taking a considerable bite out of Whole Foods' growth. Kroger's gains seem to be at least tangentially related to Whole Foods' losses.

In fact, although there's no definitive source for total numbers, it appears that Costco (COST 0.17%) is now the country's No. 1 seller of organic goods, followed by Whole Foods -- with Kroger in a very close third place.

Time to go private
Last month, Jim Cramer publicly opined that it might be time to take Whole Foods private. Since then, some media outlets have echoed these sentiments.

While there's a lot that has happened to discourage public investors, there's still a ton to love about Whole Foods. Many might look at the stock's price-to-free-cash-flow (P/FCF) ratio of 43 and argue that no one in their right mind would try and take the company private for that amount.

But unlike many other companies, Whole Foods breaks out its capital expenditures into two categories: property and equipment expenditures, and development costs of new locations. While the former represents the type of spending that's likely to continue for as long as the company exists, the latter will eventually slow as Whole Foods saturates its markets.

If we look at Whole Foods' P/FCF and subtract out the development costs for new locations, we see a grocer that has produced $765 million in free cash flow over the past year, and sells for just 14 times that amount. That's not a bad deal at all.

Further, the Whole Foods has demonstrated that -- after establishing itself -- each additional store adds free cash flow.

Source: SEC filings.

While store locations open for at least two years increased 24% during this time frame, the adjusted free cash flow grew by 65%. Of course, some of this has to do with rising demand for Whole Foods' fare as the country came out of the Great Recession. But the trend clearly shows that each additional store is providing ample cash flow once established.

In addition to this trend, Whole Foods averages about $970 per square foot in sales -- the highest among publicly traded grocers.

What the future could look like for the company
Whole Foods has been forced to reevaluate its strategy in the face of pressure from Wall Street. Investors have gotten used to high comps and the valuations that accompany them. And that's fair.

But in order for the company to fulfill its true mission of serving all stakeholders -- shareholders, employees, customers, and the Earth -- I think it needs to be taken private.

As Asit Sharma pointed out earlier this week, Whole Foods is sending mixed messages to the market. It is taking on roughly $1 billion in cheap debt in order to finance stock repurchases. While that makes sense over the short term -- the money is cheap and it will immediately boost earnings per share -- it seems that a better long-term move would be to use that money to ramp up its expansion efforts, especially the new 365 store format.

You often end up deserving the investors that you get. For the longest time, Whole Foods has remained squarely focused on the long term. Its recent moves seem to signal a slight shift toward the short term, but the company's long-term health -- and the interests of all of its stakeholders -- may be better served by the company being taken private.