Whole Foods Market (WFM) was once a darling of Wall Street, with lots of growth every year. But when growth stalled starting late in 2013, many investors bailed: WFM stock lost more than half of its value in a bit more than two years.
But WFM stock is probably worth looking at again. Whole Foods stock hit a 52-week low of $28.73 on Nov. 5, and several attempts to push the shares below that level since have failed.
WFM closed Thursday at $29.96, down 2 cents. Not a bad performance when the Dow Jones industrials fell 1.4% and the Nasdaq Composite Index dropped 1.7%.
If you’re interested in Whole Foods stock, don’t get your hopes up for making a quick buck on the stock. Whole Foods faces some stiff challenges and problems, which means WFM is only for patient investors.
WFM Stock Gives Back to Shareholders
Early this week, investors cheered when WFM sold $1 billion in 10-year senior notes with a 5.2% coupon rate. The company has negotiated a $500 million credit facility and could add another $350 million in short-term borrowings.
The point of these moves is to buy back shares and return capital to shareholders. The company announced a new $1 billion share repurchase program in November, with the majority of the buys coming in the first half of the 2016 fiscal year, which will end in September.
WFM also is boosting its quarterly dividend from 13 cents to 13.5 cents.
WFM stock was one of the great stocks of the last 20 years or so year, rising 2,970% from its January 1992 IPO price of $2.125 (split-adjusted) to a 2013 peak of $65.24. And then the bottom fell out.
Still, Whole Foods isn’t going away. Revenue in fiscal 2015 topped $15 billion. It operates 433 stores in the United States, Canada and the U.K. Sales per square foot were around $970 in the 2015 fiscal year — more than 55% higher than at the typical supermarket.
Challenges for Whole Foods Stock
The young, affluent core audience want higher quality food — especially produce, meat, poultry and seafood — and has willingly paid up for it. (Whole Foods was glad to charge for the quality, earning the nickname “Whole Paycheck” in the process.)
In addition, the core customers buy a lot of prepared food. A third of sales come from WFM’s café operations and foods prepared at the stores.
The problem was that Whole Foods couldn’t keep growing at the fantastic rates that had enchanted investors for so long. Same-store sales growth, a key retail metric, slumped from an average of 7.8% between 2010 and 2013 to -0.2% in the fourth quarter of fiscal 2015.
That metric was still falling in early November; it’s expected to fall some more in the 2016 fiscal year.
A big problem was that a number of new WFM stores were cannibalizing sales from nearby WFM stores. A bigger problem: National competitors, especially Kroger (KR), were trying to lure Whole Foods shoppers away with more natural-foods offering and higher-end meats and produce.
(There’s an argument that Walmart’s (WMT) supermarket business was hurting Whole Foods, but I don’t buy it. Whole Foods has always traded on its snob appeal.)
So what else can WFM do earn investors’ trust again?
Can Whole Foods Turn Things Around?
Along with the stock buyback, Whole Foods has announced a series of initiatives to right the company, including:
- Cost cutting. WFM wants to reduce operating expenses by $300 million a year by FY 2017. It has already cut 2,000 jobs (although it still has 91,000 employees).
- Price cutting. Where appropriate is the critical question. “We’re going to be competitive on price where we need to be,” Whole Foods CEO John Mackey said on November’s earnings call. But not always.
- Improving its “value proposition.” Basically, WFM is making the case that you can’t buy some products anywhere else. That means more aggressive promotions, including on price.
- Innovating faster. Whole Foods is investing in online shopping and other technologies to speed up checkouts. It’s also looking at delivery. And it plans to open three 365 by Whole Foods stores, which will be smaller than the typical Whole Foods store.
- Scaling back growth plans. The company had intended to add as many as 46 stores in fiscal 2016. Now the expectation is for 30 new stores, down from 38 in fiscal 2015.
If all these initiatives work, the expectation is that same-store growth will pick up, along with earnings. WMF stock should pick up, too.
Analysts see overall sales growing 4.2% in fiscal 2016 and 6.9% in fiscal 2017. Earnings are expected to rise modestly to $1.55 a share in Fiscal year 2016 from $1.48 in 2015 and then reach $1.65 in 2017. Assuming a P/E multiple of 20, WFM stock could trade up to $33.
Bottom Line on WFM Stock
The only question is whether WFM can execute the plan. And, right now, there’s a fair amount of skepticism. Standard & Poor’s rated the $1-billion bond issue BBB- (just above junk) with a negative outlook.
It’s entirely possible that Wall Street won’t get the results it wants, and investors will start to bail on Whole Foods stock.
What to do? Deutsche Bank analyst Karen Short and CNBC’s Jim Cramer have suggested WFM could be bought out. It generates enough cash flow (more than a $1 billion a year in cash from operations) to support a buyout.
The biggest holders — Vanguard, Sands Capital and Goldman Sachs own 40% of the stock — might find a privately held Whole Foods makes more sense.
Either way, the WFM stock price and a 1.9% dividend yield suggest some investors already think the journey might be worth taking.
As of this writing, Charley Blaine did not hold a position in any of the aforementioned securities.
