Whole Foods Market (WFMI)

High inflation, a weakening employment market, falling home prices and reduced credit all bode ill for Whole Foods. Although many previously assumed that higher income consumers were immune to a slowdown in spending, WFMI's FY 2008 results have so far proven otherwise. Once high-flying CEO John Mackey reported that "Today's economic environment is the most challenging I have experienced in my 30 years in retail."

"Assuming no dramatic change in economic trends, we are planning for total sales growth in fiscal 2009 of 6% to 10%. We expect comparable store sales growth of 1% to 5% and identical store sales growth of zero to 4%." Whole Foods CEO John Mackey. These conditional predictions are useless.

Just two years ago organic foods and grocery items were not widely available, leaving Whole Foods as the only real option. Since then offerings at all food retailers have exploded. For instance, when my boys were born years ago we had to go to Whole Foods to get the "Earths Best" baby food. When my daughter was born 18 months ago, I could get it anywhere. I no longer needed to make the trip to Whole Foods for it. The same goes for potatoes, tomatoes, and tons of other items.

It isn't that the economy is the main driver changing consumer behavior, it is the fact that Mackey is no longer operating in a market of one, but thousands. Consumers have a plethora of choices and given the choice of the same potato at $2 vs $.75, the cheaper option always wins.

Whole Foods' double digit growth in comp store sales is not sustainable long-term. This can have a significant impact on the stock price as retail stock prices tend to move in line with the rise or fall in comp store sales.

In fact, Whole Foods Markets Inc. (WFMI) shares dropped 14% in May 2008, when the high-end food retailer reported that same-store sales open for a year or more only increased 6.7%. The once-popular food chain has been hard hit as consumers seek out bargains to make the weak dollar stretch farther.

Whole Foods may be finding Wild Oats difficult to swallow. Since completing its $565 million acquisition of the company at the end of 2007, the company has consistently reported special charges related to the closing and remodeling of Wild Oats stores. Additionally, the reinstatement of the antitrust case against Whole Foods over the acquisition could lead to a mandated separation of the two companies, with potential costs in the hundreds of millions of dollars.

Whole Foods will not be able to maintain its high prices and comfortable margins. The company faces increasing competition from Wal-Mart and traditional retailers who are retooling their stores to offer organic food, and this will put pressure on prices.

Has Whole Foods dropped enough to get interesting? Probably not yet. With a trailing price-earnings multiple still almost 20% higher than the S & P 500, average eps estimates hover around $.33 per share for the June 2008 quarter, $1.17 for the full year 2008, reflecting little or no growth from 2007. With higher fuel costs cutting into consumers' budgets, shoppers may feel pricey organic produce is a luxury, not a necessity.

Stocks fell by almost 4% on Friday, April 3 2009 when Jefferies announced that it was downgrading Whole Foods' rating from "buy" to "hold", noting a consistent decline in comparable sales. Jefferies also put the company's ability to lower its lease expenses into question.

The productivity of employees was low (USD 137,537 per employee) in 2006 as compared to the industry average (USD 309,186).