Whole Foods (WFM) delivered pretty solid earnings on Wednesday. Investors seemed to hate the news, however, taking WFM stock down 12% in after-hours trading.
Were Whole Foods earnings so bad? What’s really going on with WFM, and how do you play WFM stock?
Let’s take a closer look at the recent report to find out.
Q2 revenues were up 10% to a record $3.6 billion. EBITDA came in at $355 million. EPS increased a very impressive 14% to 44 cents per share. Meanwhile, WFM generated $322 million in cash from operations, and devoted $206 million of it to capex. That left WFM stock with $116 million in free cash flow. Same-store sales were up 3.6%.
WFM stock also threw $47 million at shareholders in the form of a dividend, another $47 million in stock repurchases, and now has $1.8 billion in current assets, with only $60 million in capital lease obligations and $69 million in other long-term liabilities.
If I was a shareholder, and I saw these WFM earnings, I’d be pretty darn happy. So why is the market whacking WFM stock?
WFM Struggling Strategically
First, sales came in $60 million below estimates, which, personally, I don’t see that as a big deal. Second, comps weren’t as high as investors were hoping for, suggesting that competition from other outlets are having an impact. I never really bought into the idea of competition from places like Walmart (WMT) because the average WFM shopper wouldn’t be caught dead in a Walmart.
However, it’s possible that shoppers in the lower-end of the high-income bracket have decided to migrate to regular grocery stores that carry organics. That would account for some leakage.
WFM is also launching a new initiative — a lower-cost chain that CEO John Mackey hopes will cater to younger consumers with a “modern, streamlined design, innovative technology and a curated selection.”
Maybe that’s spooking the market. The first thing that crosses my mind is “cannibalization of existing stores”, although Mackey says that won’t happen. I think the strategy here is for WFM to hold onto the high-income organics shopper as its core base that it will try and grow, but siphon back those who may have migrated to grocery stores.
Whether or not WFM will appeal to younger consumers remains to be seen. All the younger people I know despise the WFM brand. But I do think WFM stock is going through growing pains, similar to what Starbucks (SBUX) experienced some time ago. It needs a strategic pivot or two.
Bottom Line on WFM Stock
So how to play WFM stock? I told you a long time ago when the stock was around $70 to get out. I told you to buy back in when it fell below $40. I didn’t tell you to sell in the mid-$50 range — when I sold my position — but I would have, if my editors asked me to write anything.
So here we are with WFM stock in the low-$40s. I suggest you buy back into WFM stock below $40 and add on every $3 or $4 drop. WFM stock will come back, and it remains a long-term hold. So I would sell up to half of your shares when the stock rebounds into the high $40s or higher. That way you enjoy both trading gains and long-term gains.
Lawrence Meyers does not own shares of any company mentioned, but intends to buy WFM stock below $40. Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
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