Whole Foods Market, Inc. (WFM) Stock Has Only One Chance At Survival

Grocery store mergers and acquisitions appear to be heating up. So much so that even large chains such as Kroger Co (NYSE:KR), which is experiencing slower growth these days, are on the prowl for possible candidates. Whole Foods Market, Inc. (NASDAQ:WFM) could be one such target.

Whole Foods Market, Inc. (WFM) Stock Has Only One Chance At Survival

First, Apollo Global Management LLC (NYSE:APO) acquired North Carolina-based Fresh Market in late April for $1.4 billion. Then, Canadian private equity firm Onex Corporation (OTCMKTS:ONEXF) announced in October that it was paying $1.4 billion for Save-A-Lot, the discount chain of Supervalu Inc. (NYSE:SVU). The grocery story M&A movement is not likely to end anytime soon.

Although Kroger is said to be looking for smaller targets such as Ingles Markets, Incorporated (NASDAQ:IMKTA) that are in need of better management, there’s no doubt that Whole Foods could benefit from the recent uptick in M&A activity that’s expected to continue into 2017 and beyond.

WFM stock is down 12% year-to-date through Nov. 4 and 21.7% on an annualized basis over the last three years. Whether it’s KR or Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) or some other private equity firm, M&A could be the savior of Whole Foods stock.

Here’s why.

Here’s What Whole Foods Stock Needs to Thrive

Last week, WFM delivered fourth-quarter results that included a 2.6% decrease in comparable store sales. Worse still, its comps for the entire fiscal 2016 were off 2.5%, higher than the analysts’ estimate of a 2% decline and its first yearly decline since 2009.

Things are so bleak for Whole Foods stock that at the same time it announced earnings it also let investors know that co-CEO Walter Robb would be stepping down from that role at the end of 2016 and CFO Glenda Flanagan would do the same in September 2017.

Co-founder and co-CEO John Mackey will become the sole CEO of WFM starting in January. Although this arrangement never made sense to me, it’s probably the least of Whole Foods’ concerns.

The biggest concern for WFM stock?

Well, other than shrinking operating margins, I’d have to say that coming up with a sustainable plan that can get it past its reputation as an overpriced grocery store is its most important task in the next 12 to 24 months. Its continued expansion of 365 by Whole Foods Market, its value format, should help although it’s still in the learning phase with just three locations open and 19 signed leases.

At the end of the day, while its business isn’t hitting it out of the park, WFM is making progress on its strategic initiatives started in 2015.

Especially important to the future success of Whole Foods stock is the amount of business it generates from its own store brand, prepared foods and bakery. In fiscal 2016, it generated $5 billion in revenue from this area or about one-third of the annual total. The higher that number, the better off financially it will be.

So, back to the idea of WFM getting bought out.

Bottom Line on WFM Stock

In this heated M&A environment, it’s entirely possible that someone would take a run at Whole Foods. With WFM stock trading at its lowest level since January 2011 and its current valuation making a prospective deal a lot less expensive — Whole Foods’ market cap at its height in October 2013 was $21.5 billion compared to $9 billion today — and a lot easier to finance.

While it’s unlikely that Mackey would be interested in selling at this point in the company’s move to turn things around, one can’t help but think the prospects of a hostile bid from the likes of KR is far more likely today than it would have been in 2013, despite the Cincinnati grocer’s plate being full with its $800 million purchase of Roundy’s.

According to Brian Yarbrough, a retail analyst at Edward Jones & Co., “[A]t this point in the game, you either need to be an acquirer or there’s the potential you get acquired … That’s where we are in the cycle.”

Yes, the KR rumors in early October were unfounded, but from an acquisition standpoint, Whole Foods is never going to be more attractive than it is now.

Speculators place your bets.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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