It’s been a rough year on Wall Street for Whole Foods Market, Inc. (WFM).
Following Wednesday’s earnings flop, WFM stock was tanking by 5% in early Thursday trading. That has Whole Foods shares down more than 40% for the year-to-date, and at its lowest prices since mid-2011.
The question for prospective bargain hunters is: Can WFM stock recover?
‘Tough Quarter’ for Whole Foods Earnings
When your CEO tells CNBC’s Jim Cramer, “It was a tough quarter, we own it,” that’s never a good sign. And he wasn’t kidding. By every measure, Whole Foods earnings were a disaster.
WFM earned just 16 cents per share in its fiscal fourth quarter, down from 35 cents per share a year ago, which was the same EPS number analysts expected this year. While revenues of $3.44 billion were up 6% from a year ago, revenues also fell short of analyst estimates. Same-store sales were down a tick, too.
Yikes.
Increasingly stiff competition in the natural and organic foods markets industry hasn’t helped. America is finally trying to get healthier, and many of the biggest grocery-store chains are changing their product offerings to meet that demand. Costco (COST), Walmart (WMT), Publix, Food Lion, Hannaford and others have all gotten in on the organic foods game. All of them are less expensive than Whole Foods.
A decade ago, WFM was one of the few havens for grocery shoppers seeking healthy, organic produce, meats and fish. Now that the organic foods market has become saturated with grocery chains that have much wider reaches and less sticker shock, Whole Foods has lost its cachet.
For his part, Walter Robb, the WFM executive who conceded it was a “tough quarter,” thinks the worst is behind the company. Business has bounced back nicely in the first five weeks of the current quarter, he insists.
Perhaps he’s right. But are the predictably optimistic words of the company’s CEO reason enough to invest in WFM stock?
Besides, Whole Foods already lowered its 2016 guidance during the same earnings call. It’s expecting earnings growth of between 3% and 5% in fiscal 2016 (which began in October), down from 8% last year. Perhaps the lowered expectations will provide a nice, low bar to clear in future Whole Foods earnings calls, thus luring buyers back.
In the meantime, Whole Foods is trying to buy its way back into investors’ hearts: The company plans to buy back $1.3 billion of WFM stock, or roughly 20% of the shares outstanding, and it raised its quarterly dividend by 4%. That could also attract some short-term WFM stock buyers, as could the relatively low valuation of 17 times forward earnings.
WFM Stock Is Not a Long-Term Buy
If you’re looking for a short-term value play that could fetch a decent return over the next couple months (historically the best time to buy stocks), adding WFM stock to your portfolio might not be the worst idea.
But given the down-trending sales and earnings in an increasingly competitive industry — not to mention the terrible-looking chart — there’s simply no way to have confidence in WFM over the long term.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
