Whole Foods Market, Inc. (WFM): A Basket of Problems With No Answers

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Whole Foods Market, Inc. (NASDAQ:WFM) is slated to report fiscal first-quarter earnings after the bell on Wednesday, and investors are likely bracing themselves for another quarter’s worth of struggles. Given the fact that WFM stock has regressed back to where it was back in 2011 … I can’t say I blame them for the pessimism.

Whole Foods WFM stock

Even I have to admit that I did not expect the organic offerings of other supermarkets like Kroger Co (NYSE:KR) and even Wal-Mart Stores, Inc. (NYSE:WMT) to result in lost market share for WFM. My theory was that Whole Foods appealed to the upscale shopper who cared about organics, and who had effectively abandoned the typical grocery store for WFM.

I was wrong.

I think what happened was that some of these shoppers realized that, unless they were shopping for something high-end — with all the bells and whistles that accompany Whole Foods and its poultry, seafood, and meat counter — they were satisfied with competitors’ organic offerings.

The fundamentals — and WFM stock — have sunk into decline as a result.

Whole Foods Q1 Earnings Expectations

Earnings are expected to come in at 39 cents per share, a solid 15% decline from 46 cents in the year-ago period. That shows just how bad the bottom-line situation is getting for Whole Foods.

It’s also expected that this will occur on only a 3% increase in revenue, and worse, signs point to negative comps. The company guided comps for the FY17 of between -2% and flat. That’s about the worst news any company can offer, because it not only shows that competition really is affecting sales, but it implies WFM is no longer a “destination” shopping experience.

Meanwhile, FY17 EPS guidance is for $1.42, a 10% YOY decline. Ugh. How disappointing is it when a company like WFM can generate $16 billion in revenues and yet still decline on the bottom line?

We should watch all these numbers carefully, but here are a few thoughts about them.

What to Watch on Wednesday

First, I think it is highly unlikely Whole Foods earnings will beat. I think there’s a greater chance of a miss, simply because WFM stock has no catalyst. It isn’t fighting back against the loss of market share in any meaningful way.

Yes, it does plan to open its “365” store concept more broadly, but right now it only has three stores open with another two dozen on the way.

What we’re seeing — and this is important as far as any company’s long-term potential — is a sudden and unexpected shift in a company’s fortunes. This is when management’s vision matters, and so far, I’m not seeing a vision for the future of Whole Foods.

The upside? WFM has about $730 million in cash on hand, generated about $800 million in free cash flow over the trailing 12 months, and has a billion dollars in easily affordable debt.

Bottom Line on WFM Stock

Whole Foods isn’t going under or going away, but it does need to redefine itself, and position itself for the future.

It has to, because margins are really getting squeezed. FY14 saw gross margins of 35.5% decline to 34.4%. Operating metrics were worse — 6.58% operating margins in FY14 declined to 5.45%. Net margins are really in trouble, with FY14 dealing 4.08% vs. FY16’s 3.22%.

The difficulty here is that there is no obvious direction for management to go in.

With some companies, there are obvious choices. Starbucks Corporation (NASDAQ:SBUX) not only took its concept in the obvious direction of selling coffee in grocery stores, coffee-making tools in its stores and eventually offering different drinks, but it went into less-obvious directions. Boxed foods, breakfast offerings, and pastries — even ice cream — is something that shows the company has vision.

With a grocery store, well, if there was anything obvious, then the legacy grocery stores would have already been doing it.

That’s the challenge for Whole Food stock.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/whole-foods-market-inc-wfm-q1-earnings/.

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