When he was interviewed by The New Yorker back in 2010, Whole Foods Market, Inc. (NASDAQ:WFM) co-founder John Mackey said his greatest fear was that others would copy his format and drive his stock down.
The point was lost amid controversies over his libertarian political views, which seemed to offer a mild contempt for his target customers, but his fear of competition turns out to be the key point investors need to keep in mind when they consider the stock today.
It took about a year for the posse to gear up after Mackey’s piece was printed, but since March 2011 WFM stock has executed a complete round-trip, and today it’s worth about the same as it was back then.
Whole Foods isn’t that unique anymore.
New Competition
Companies such as Sprouts Farmers Markets Inc (NASDAQ:SFM) have copied the Whole Foods format of offering premium-priced organic and freshly-prepared food. Larger companies such as Kroger Co (NYSE:KR) have expanded stores into offering more fresh produce, prepared foods and even coffee shops in larger stores.
Private companies such as HEB Grocery Company, LP in San Antonio, based near Whole Foods’ Austin home, have copied its stores wholesale. Ethnic markets such as H Mart, one-off global markets and expanding entrepreneurs that also sell wholesale to restaurants, are also threatening Whole Foods’ niche.
Whole Foods just isn’t that special any more.
WFM Is Fighting Back
Whole Foods has done two things in an attempt to differentiate itself.
In high-end neighborhoods like Bryant Park in Brooklyn, it has added even higher-end food and services such as produce butchering, so customers can buy, for example, grapefruit and have it cut in the store.
In more middle-class settings, WFM is trying a concept called 365, offering limited selections with lower prices. But, competitors are on to it. A new 365 store that’s opening in Decatur, GA has a Sprouts opening right across the street.
Whole Foods is holding on to its status as a “large cap” stock, but just barely, with a market cap just below $10 billion at its recent price of about $30 per share. But, its effort to become a dividend stock has fizzled, with 14 cents per share yielding just 1.8%, and its price-to-earnings ratio of 20 is above that of the market.
Top-line growth, meanwhile, has just about stopped. Its fiscal 2016 revenue of $15.724 billion is only slightly better than 2015’s $15.389 billion. Year-to-year profit actually fell, from $536 million to $507 million, but earnings per share rose to $1.55 from $1.49 as the company bought back shares of WFM stock, reducing share count about 10%.
What Else Can Mackey Do?
Co-founder Mackey has been back in sole charge of his creation since November, but his kingdom is now troubled.
Whole Foods had to close three regional kitchens for prepared food after listeria was found in one. The company brought in a veteran of Wal-Mart Stores Inc (NYSE:WMT) Sam’s Club unit, Sonya Gafsi Oblisk, to head marketing, and hired MediaCom for media planning after a thorough review.
But, it’s now easy to dump on the stock, as InvestorPlace‘s own Lawrence Meyers did recently. Our James Brumley thinks it must be in survival mode now and Will Ashworth calls it only a contrarian’s dream.
One thing WFM could still do is take out Sprouts, which is in even worse shape than Whole Foods, but whose stores might do better under Mackey’s umbrella. The purchase of The Fresh Market by private equity firm Apollo Global Management LLC (NYSE:APO), a publicly-traded private equity firm, might offer an opportunity for a deal.
Mackey, in short, may be able to pull a few rabbits out of his hat, but Whole Foods is currently an over-priced stock in an overcrowded niche.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he did not hold a position in any of the aforementioned securities.
