Whole Foods Market (NASDAQ: WFM) recently released updated information about the new concept stores it has been hinting at since early this year. On June 11 Whole Foods formally released the concept store name, 365 by Whole Foods Market, as well as details about how the stores are meant to appeal to a cost conscious and more technology focused group of consumers. The company has been ramping up new store development over the last few years, and this new store concept could be the start to an exciting new growth phase for this stock. 

However, there might be one issue confronting this expansion plan: Whole Foods free cash flow (FCF) looks to be going the wrong way. With each new store requiring about a $3 million investment in pre-opening costs, not having enough free cash flow to fund this extra development could prevent the company from building new stores fast enough to improve earnings significantly.

Whole Foods free cash flow has been strong in recent years and because WFM is strict about not taking on debt strong FCF has been an important factor in their expansion plans. So should decreasing cash flow and a high price tag for each new store dissuade investors from getting excited about this new store concept? 

Free cash flow might be going the wrong way
Free cash flow is essentially the amount of cash that can be taken out of the firm without significantly changing operations. The most basic way to calculate this is to take a company's cash from operations, and subtract changes in working capital and any capital expenditures (CAPEX). The resulting "free" cash can be used for expansion, dividends, paying off debt, etc.

On Whole Foods 2014 10K, the company reports on the last 3 fiscal years of its FCF, which it defines as net cash provided by operating activities, minus CAPEX. The company also gives an overview of where that CAPEX has gone to (development of new stores).   

(in millions $)




Cash from operations




Number of new stores

 25  32  38

Development of new locations




Other property/equipment costs




Free Cash Flow




As of September 29th, 2014 (the end of fiscal year 2014), Whole Foods had $190 million in cash and equivalents, $553 million in short term investments, totaling $743 million in total liquidity. This is nearly 30% lower than it was at the same point a year ago at just over a billion in liquidity. 

Why this matters in the short term
Same store sales growth is declining meaning that currently same store operations are failing to replenish cash as fast as CAPEX for building new stores is taking it.

Whole Foods has guided for about 38 to 42 new stores in 2015 which will lead to around 450 total. Clearly the company is increasing its pace of building new stores and has said that it plans to reach the 500 store miles stone in 2017, and eventually envisions 1,200 locations in the U.S.  

At $3 million a pop, new stores in 2015 are going to cost around $120 million. Unless same store sales growth starts to increase again (it was at it's lowest point 2014 at just 4.3% increase over 2013 compared to as high as 8% in years past) , the level of FCF could continue falling in the short term sparking worry over the company's ability continue its aggressive expansion plan and roll out its new store concept in a meaningful way. 

But might turn around in the long term 
Even though this expansion is expensive, the company does likely have the cash to fund it without breaking themselves. Remember that FCF usually goes to servicing debt and paying dividends, two things Whole Foods doesn't do. 

So yes, declining FCF is something to keep an eye on. However, the company does have enough to pay for the development now, and the growth strategy will likely start to pay off in coming years as the multitude of new stores makes up for the lowered same stores sales growth as older stores level out.

WFM stock has taken a small beating over the last few months, now down about 20% since April. At those high levels in April WFM looked overpriced. Now that the stock is valued at a much more attractive 24 times price to earnings following this recent drop and this could be a great entry point if Whole Foods really can make it's expansion plan work. 

There's certainly going to be a lot of headwinds to that expansion, like competition from lower cost grocers, but for now FCF doesn't look to be too much of a threat.