3 Reasons to Sell Whole Foods Market, Inc. (WFM) Stock

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Whole Foods Market, Inc. (WFM) stock has been nearly halved in the past 52 weeks, including a 12% loss so far in the new year. Its more recent troubles have weighed on the long-term worth of Whole Foods stock, putting shares up just 10% over the past five years.

whole foods stock earnings wfm stockWith Whole Foods stock sitting near multiyear lows — even after a post-earnings bump — investors are right to see the fork in the road — is now a good time to actually buy WFM on a massive dip, or is there further decline on the horizon?

Here are three reasons why investors should pass on buying Whole Foods stock right now.

Whole Foods’ First-Mover Advantage Is Gone

Whole Foods is a natural and organic grocer whose first-mover advantage — which propelled it for more than two decades — has essentially been eroded. The company’s history dates back to 1980 when the concept of organic and natural food was in its infancy. And while Whole Foods once was a very niche player that dominated the space, WFM now faces competition from traditional grocers that sell similar organic and natural products — at lower prices.

A report by Business Insider compared a basket of 31 items at a Whole Foods store in Virginia to an identical basket at a nearby Kroger (KR) store. The publication concluded that the basket was roughly $60 more expensive at Whole Foods when compared to Kroger.

Meanwhile, Wal-Mart Stores, Inc. (WMT) has ambitious plans for the organic and natural space. For instance, Walmart made a 2014 acquisition of Wild Oats and immediately announced it would sell more than 100 Wild Oats organic products at more than 4,000 stores in the U.S. at cheaper prices that Whole Foods could not match. Wild Oats, like WFM, has also been a pioneer in the organic space as its history dates back to 1987.

Including Wild Oats, Whole Foods’ portfolio of organic products stands at more than 1,600.

Costco Wholesale Corporation (COST) didn’t just jump into the organic and natural category — as of last year, Costco was the top seller of organic food in the U.S. in 2015.

And worse: It’s not just that companies like Walmart and Costco are doing it at great scale. The perception that WFM even offers better organic fare is fading. Analysts at BMO Capital Markets conducted a study with a demographic sample that is representative of Whole Foods’ client base. The analysts found that only 24% of respondents believe Whole Foods’ organic products are definitely better than those found at other conventional grocers.

WFM CEO: Results Are “Highly Dependent” On Comps

Contained within Whole Foods’ Q2 earnings report in May 2015 was management guidance for full-year fiscal 2015 revenue growth of 9%, driven by low- to mid-single-digit same-store sales.

Comps rose 3.6% in the second quarter, followed by a 2.2% rise in the third quarter and a 0.2% decline in the fourth quarter. WFM also missed its 9% sales growth objective for the full fiscal year 2015 by 1 percentage point on 2.5% full-year comps.

During Whole Foods’ Q4 earnings report on Nov. 4, 2015, co-CEO and Director John Mackey said, “Our results are highly dependent on comps, which have been particularly difficult to predict in this competitive landscape.”

Mackey also added during Whole Foods earnings conference call that the lower end of management’s sales outlook of just 3% to 5% sales growth in fiscal 2016 “reflects the possibility that comps could get marginally worse before they get better.”

Whole Foods stock is stuck in a catch 22: Management can turn incrementally promotional in pricing at the expense of gross margin pressure or maintain higher margins at the expense of comps.

Whole Foods Stock Is Still Expensive

Analysts expect Whole Foods earnings for fiscal 2017 to come to $1.62 per share, and at current prices, WFM stock is trading at 19 times those estimates. Meanwhile, Kroger trades at roughly 17 times analysts’ expectations of a $2.23 profit in its next fiscal year.

That would be fine if Whole Foods were actually growing its earnings faster than Kroger, but those estimates imply 5.2% profit growth for WFM and 8.8% profit growth for KR.

Whole Foods stock also is expensive compared to its direct organic and natural grocer peers; for instance, The Fresh Market Inc (TFM) is trading at 12 times expected 2017 earnings of $1.56 per share.

Bottom Line

WFM stock was trading higher immediately following WFM’s earnings report on Feb. 10 after the company presented investors with top- and bottom-line beats.

However, taking a closer look at some of the details, there’s still room for worry.

First, comps were problematic once again, declining 1.8% (despite an 8% square footage growth) against a 4.7% increase in the same quarter a year ago. Looking forward, management guided full-year sales growth of 3% to 5% for fiscal 2016 on expectations that comps would range between flat and shrinking by 2%. And WFM’s second quarter is off to a slow start, too, as management disclosed that comps were lower by 1.6% for the first three weeks of the quarter.

And again, be reminded that Whole Foods’ results are “highly dependent” on comps. That’s management’s own words.

The other side of the sword was ugly too. WFM reported an 83-basis-point reduction in gross margins thanks to increased cost of goods.

WFM also reported an 86 basis point reduction in its gross margins due to the company’s efforts to improve the value proposition it offers.

Co-CEO Walter Robb was asked during the post-earnings conference call to summarize the competitive landscape “regarding promotions or price investments”:

His answer? “There’s lots of them and everybody’s active right now.”

That doesn’t bode well for anyone holding Whole Foods stock.

As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/sell-whole-foods-stock-wfm/.

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