By David Nelson, CFA
After the bell today Whole Foods (WFM) is scheduled to report earnings with a conference call at 5 P.M. Whole Foods (WFM) is a wonderful company but no longer deserves the super high multiple it’s enjoyed over the last decade. Regardless, of today’s release, I believe over time the earnings multiple for the company needs to come in.
Even outstanding high growth retailers like Michael Kors (KORS), which recently blew out numbers, trade at a significant discount to Whole Foods (WFM).
They have great products and is an industry leader. However, today there is serious competition; not just from other health food centric markets like Trader Joes but more traditional retailers. Stop & shop and others have added excellent health food sections.
Two years ago when I went into Stop n Shop, the health food section was a small corner of the store that could service one or two people at a time. Today, there are several aisles dedicated to the latest trends in health food. I go there for the Gluten Free products which are one of the hottest trends in the industry and haven’t been disappointed.
Trading at about 30x calendar estimates I suspect the markets will slowly bring (WFM’s) PE down to 25x.
Let’s make a quick comparison. Whole Food’s (WFM) top line is growing at about 14% while Michael Kors (KORS) has top and bottom line growth of 26% and 23% respectively, yet trades at 25x forward estimates.
Healthy food is certainly an industry with a secular tailwind and deserves a growth multiple to go along with it. However, competition is dramatically increasing as food retailers get it. They are finally starting to understand the changing dynamics within their own community as an increasing number of their customers seek out a healthier lifestyle.
Some analysts are calling for caution. Cantor Fitzgerald analyst Ajay Jain points out in a recent note, “We think Whole Foods may be dealing with a triple threat of issues in the near term: i) Declining comps; ii) decreased productivity from new stores; and iii) higher pre-opening expenses from newer stores based on increased square footage.”
A lot of investors and analysts have abandoned (WFM) so the bar is probably set low. I have no idea if they are going to beat or miss today’s consensus. A positive surprise would certainly be met with higher share prices as shorts cover and others go long. However, unless there is some major change in guidance and they are going to roll out significantly more stores than previously announced, I think any rally should be sold into. The stock is already trading where it should be toward year’s end.
Funds managed by David Nelson are neither long or short WFM
