Several of the moves that Whole Foods Market, Inc. (NASDAQ:WFM) announced yesterday definitely make the stock more attractive. Meanwhile, as I wrote in a previous column that was published before activist investor Jana Capital disclosed a stake in the grocery chain and pushed it to consider strategic alternatives, Whole Foods is definitely a potential takeover target.
Furthermore, the company’s financial performance actually hasn’t been that bad, and WFM announced a few shareholder-friendly steps yesterday. As a result of all of these factors, WFM stock is attractive for longer-term investors.
Whole Foods added considerable talent to its board yesterday. One new member of the board, Sharon McCollam, is the former CFO of Best Buy Co Inc (NYSE:BBY) and participated in that company’s turnaround and successful positioning against Amazon.com, Inc. (NASDAQ:AMZN).
Another is Ron Shaich, the founder and CEO of Panera Bread Co (NASDAQ:PNRA). Shaich obviously helped successfully position Panera as a restaurant chain that serves fresher, healthier food than its competitors.
The new board members’ experience with highly successful positioning is very pertinent for WFM because the company has a positioning problem. Specifically, it must tackle the question of how it can successfully position itself as a better alternative than the many other supermarket chains i.e. Kroger Co (NYSE:KR), Wal-Mart Stores Inc (NYSE:WMT) and Sprouts Farmers Market Inc(NASDAQ:SFM) that have entered the organic food business and often have cheaper prices than Whole Foods.
Given their experience with successful positioning projects, there’s a fair-to-good chance that McCollum and Shaich will be able to contribute some good answers to that question.
Meanwhile, Whole Foods isn’t exactly dead in the water. Although it has struggled to grow and its comp sales have contracted amid the increased competition, it still expects to earn at least $1.30 per share this year, and it predicts that its revenue will increase at least 1% in fiscal 2017,although it said that its comparable sales could drop as much as 2.5%.
Moreover, the company’s decision to cut costs by $300 million, raise its dividend by 29% and authorize a $1.25 billion share repurchase program will undoubtedly please investors. Also, Whole Foods announced that it would implement an affinity i.e. loyalty program, which worked pretty well for a number of large consumer food companies , including Starbucks Corporation (NASDAQ:SBUX) and Shaich’s Panera.
Although Whole Foods may have trouble meeting its ambitious fiscal 2018 and fiscal 2020 financial targets, it remains profitable and continues to have a large customer base (it says 30 million different people visited its stores last year). Consequently, WFM stock could very well become a takeover target for another large grocery chain, a large food maker (as discussed in my previous column), or even a private equity firm.
If Whole Foods’ initiatives do enable it to achieve its ambitious fiscal 2018 and fiscal 2020 financial targets, WFM stock will almost certainly rise significantly from current levels. If the goals are not achieved, Jana Capital and/or the new board members will undoubtedly step in with their own ideas.
Throughout all of this time, the shareholder-friendly steps that Whole Foods is taking, along with the possibility of the company being sold, will prevent WFM stock from falling significantly below current levels. So there’s no doubt that it gives investors “multiple ways to win with limited share downside risk.” as Wells Fargo analyst Zachary Fadem wrote yesterday in a note to investors, according to The Fly.
In other words, the risk/reward ratio of WFM stock is quite attractive at current levels. Longer-term investors should buy the shares, which in all likelihood will either be boosted by a turnaround of the company or a takeover deal.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
