Whole Foods is a sexy stock that became less sexy last year and will continue to. I will tell you why:
1. Whole Foods is consumed by two people.
First, by the same people who between 2003 and 2007 borrowed almost 80% of price to buy a McMansion, took extra equity out of their suddenly inflated home to go on shopping sprees at Best Buy ( see how I feel about them even after their recent declines ), Pottery Barn, Home Depot, bought H2 Hummers's for their dangerous trips to (coincidentally) Whole Foods and the other aforementioned stores, basically consumed their way into debt. They They go there mostly because it is somewhat chic, they like saying "organic", and they like the higher quality food. It will not be that difficult for them to go to the Kroger or Stop-and-Shop during the weeks to save a few dimes and only travel to Whole Foods when Todd and Melinda come over for dinner, Desperate Housewives, Grey's Anatomy, and some some great Pinot.
Grocery stores can not be so easily branded because most products have perfect substitutes. That is why their margins are terrible. Whole Foods is a luxury good but eating is not a luxury. When people realize that they can save $60 a week by avoiding this place at all costs they will because WFMI's pricing power is not as good as one would think.
The other people who eat there are your free-minded Vegan types. These people have had a hard time affording this food since Todd and Melinda started shopping there and driving up prices. They have instead gone to upstart competitors or local farms as Whole Foods has "gone corporate". They are much more stable consumers of this type of product (luxury grocery) because they have to, and will help drive down prices and hurt margins - as they are primarily concerned with price.
2. Competition
Trader Joes, nuff said.
3. Valuation
Right now Whole Foods is trading at 33x next year's earnigns and 28x 2008 mean estimates with a 19% estimated growth rate. By comparison, Safeway trades at 19x and 17x with and 11% growth rate. Kroger is about the same. Not cheap by any means.
Also, that 19% growth (currently some models value Google w/ the same) will not keep up. Grocery is not a high growth industry. I believe growth in Whole Foods and the industry in General was due greatly to the Real Estate boom. Upper Middle class communities needed Upper Middle Class Groceries and WFMI built them. In general as people bought new houses grocery stores sprouted up to feed these people. Try more like 10% growth at best which means WFMI should be about a Safeway at 19x earnings or approximately $28/ share.
2. Competition
Whole Foods has been under pressure from Trader Joe's and other
$47.79 (04/25/07)
