WFM - Whole Foods Market

[Guest Schwab711]

Start comparing WFM to Wegmans, Publix, and Trader Joe's instead of WMT and see how well the investment thesis holds up.

[rogermunibond]

Kind of hard to compare WFM to privately held companies like the three you name.  Easier to compare with KR, TFM, SFM, etc.

 

I don't think organic produce/meats/shellfish/dairy are necessarily where WFM will have the ability to hold value but definitely in the prepared foods WFM has better quality and selection than the above publically traded companies as well as Wegmans, Publix, and Trader Joes.

[thepupil]

Kind of hard to compare WFM to privately held companies like the three you name.

 

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 

https://www.bamsec.com/companies/81061/publix-super-markets-inc

 

 

[Guest Schwab711]

Kind of hard to compare WFM to privately held companies like the three you name.

 

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 

https://www.bamsec.com/companies/81061/publix-super-markets-inc

 

Thanks Pupil.

 

http://www.otcmarkets.com/stock/PUSH/quote

 

I posted this article by accident but I'll include it. I get the argument made about experience at WFM, but they are competing with Wegmans (and the other 2 I mentioned, which has a pretty wonderful shopping experience). Wegmans has ~$75m sales/store compared to $30m/store at WFM. I don't think anyone is even close by this measure.

 

You think WFM has a moat? People avoid moving to other locations because they won't be near a Wegmans... That's a moat!

 

http://www.cbsnews.com/news/could-this-be-the-best-company-in-the-world/

[thepupil]

these are the first few google results of "whole foods effect on RE prices"...what you say of Wegman's the same can be said of Whole Foods. Proximity to Whole Foods is always a big selling point for real estate. I personally don't know whether or not WFM has a moat.

 

https://urbanful.org/2014/11/03/whole-foods-effect/

http://www.salon.com/2012/05/05/whole_foods_is_coming_time_to_buy/

http://blogs.marketwatch.com/realtimeadvice/2012/03/09/can-whole-foods-boost-home-prices/

http://www.washingtonpost.com/wp-dyn/content/article/2006/07/21/AR2006072101582.html

[krazeenyc]

Kind of hard to compare WFM to privately held companies like the three you name.

 

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 

https://www.bamsec.com/companies/81061/publix-super-markets-inc

 

Thanks Pupil.

 

http://www.otcmarkets.com/stock/PUSH/quote

 

I posted this article by accident but I'll include it. I get the argument made about experience at WFM, but they are competing with Wegmans (and the other 2 I mentioned, which has a pretty wonderful shopping experience). Wegmans has ~$75m sales/store compared to $30m/store at WFM. I don't think anyone is even close by this measure.

 

You think WFM has a moat? People avoid moving to other locations because they won't be near a Wegmans... That's a moat!

 

http://www.cbsnews.com/news/could-this-be-the-best-company-in-the-world/

 

Whole Foods average store size is ~40K sq ft. Wegmans average store size is ~120K sq ft.

[Picasso]

Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

[TwoCitiesCapital]

Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

 

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.

[Picasso]

Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

 

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.

 

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now.  I think it makes sense for WFM to probably engage in some sort of leverage since you are already assuming a stable business with good cash flows with an investment grade balance sheet.

 

Kroger has been a 4 bagger over a few years from combining the operational and financial engineering end of things.  I'm just saying WFM may be stuck with what Wall Street views as a "unoptimized" balance sheet.

[Mephistopheles]

Kind of hard to compare WFM to privately held companies like the three you name.

 

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 

https://www.bamsec.com/companies/81061/publix-super-markets-inc

 

Thanks Pupil.

 

http://www.otcmarkets.com/stock/PUSH/quote

 

I posted this article by accident but I'll include it. I get the argument made about experience at WFM, but they are competing with Wegmans (and the other 2 I mentioned, which has a pretty wonderful shopping experience). Wegmans has ~$75m sales/store compared to $30m/store at WFM. I don't think anyone is even close by this measure.

 

You think WFM has a moat? People avoid moving to other locations because they won't be near a Wegmans... That's a moat!

 

http://www.cbsnews.com/news/could-this-be-the-best-company-in-the-world/

 

Whole Foods average store size is ~40K sq ft. Wegmans average store size is ~120K sq ft.

 

Was just about to post that.

 

Besides, if we assume that WFM serves a different niche than WMT, and that its real competitors are Wegman's, Trader Joes, Fresh Market and the like, then it's entirely possible that there is enough room for all of these companies because the size of the pie is growing. Besides, none of these have a major low cost advantage over the others, unlike Walmart.

 

 

[Mephistopheles]

 

The relevant competition in my mind is Trader Joe's and I believe Trader Joe's to be a very good competitor.  Honestly, I would not even consider an investment in Whole Foods based on my perceived strength of Trader Joe's.   

 

 

Would you mind expanding on this? Are there any numbers regarding this or are you saying it's your gut feeling?

[bizaro86]

 

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now. 

 

 

Do you have any examples of this you could share? That sounds like exactly the sort of thing I'd like to buy.

 

I agree stable businesses should use leverage, but if they have a good FCF yield and ROE without it, that's better in some ways, as the upside of some sort of leveraged recap is still on the table.

[thepupil]

Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

 

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.

 

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now.  I think it makes sense for WFM to probably engage in some sort of leverage since you are already assuming a stable business with good cash flows with an investment grade balance sheet.

 

Kroger has been a 4 bagger over a few years from combining the operational and financial engineering end of things.  I'm just saying WFM may be stuck with what Wall Street views as a "unoptimized" balance sheet.

 

agree completely, and I alluded to that earlier. I want to pay a lower price for WFM because I don't see the business hippies that run the show here all of the sudden borrowing $2 or $3B and tendering for a big chunk of the company. That option of a forced re-rating from a levered recap is worth less with WFM's management.

 

I think the company may be vulnerable to an activist to do just this.

[Picasso]

 

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now. 

 

 

Do you have any examples of this you could share? That sounds like exactly the sort of thing I'd like to buy.

 

I agree stable businesses should use leverage, but if they have a good FCF yield and ROE without it, that's better in some ways, as the upside of some sort of leveraged recap is still on the table.

 

Not to derail the topic, but EXPD comes to mind.  Lowest multiple in years, cash makes up a massive percentage of the balance sheet, they don't really need the cash, and they have no debt.  ValueAct took a small position in them last year and sold out fairly quickly.  I think they might have had a difficult time convincing them to lower their cost of capital.

 

There are other examples but look what Einhorn did with Apple a few years ago.  It was considered criminal to keep 20% of the market cap in cash with no debt when they could easily issue AA bonds.  WFM is probably A+ rated which is still well below their current cost of capital.

 

I think the downside to these unlevered stocks is a potential takeout of a long-term compounder.  You can easily lose ownership of something to get a short-term bid by private equity or the major shareholders.

[EricSchleien]

Don't even compare Fresh Market to Whole Foods!

 

There's a WF coming to Bedford, NH right by their Fresh Market. Wouldn't surprise me if they put it out of business.

[TwoCitiesCapital]

Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

 

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.

 

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now.  I think it makes sense for WFM to probably engage in some sort of leverage since you are already assuming a stable business with good cash flows with an investment grade balance sheet.

 

Kroger has been a 4 bagger over a few years from combining the operational and financial engineering end of things.  I'm just saying WFM may be stuck with what Wall Street views as a "unoptimized" balance sheet.

 

I would totally be ok with this - a small buyback program going on every year, plus the ability to reinvest dividends at a reasonable multiple, plus the financial flexibility to whether or storm or acquire a rival when the opportunity arises = long-term compounding ability.

[Jurgis]

I don't think organic produce/meats/shellfish/dairy are necessarily where WFM will have the ability to hold value but definitely in the prepared foods WFM has better quality and selection than the above publically traded companies as well as Wegmans, Publix, and Trader Joes.

 

Anecdotally: not really. We prefer Wegmans.

[Guest Schwab711]

This made the front-page of Reddit yesterday.

 

http://www.usatoday.com/story/money/2015/08/05/whole-foods-oops-asparagus-water-mistake/31152405/

 

Obviously a mistake by the company concerned with your health :) Notice it's "water" and not "spring water". That is literally tap water with some asparagus in a jar.

[JayGatsby]

This piqued my attention: http://www.nytimes.com/2015/11/03/business/wall-st-sours-on-whole-foods.html

 

I think the core Whole Foods business is phenomenal, which is why I started looking into it when I saw the headline. My biggest problem with it now is I think management is listening to the wall street analysts and losing focus on what they're good at. I'd always assumed that from a profit perspective they were really more of a restaurant than a grocery store. I don't have one close now (they're building a "flagship" across the street currently), but what I noticed about the one in my old neighborhood was the average cart (often basket) wasn't very big or very full. It seemed like a lot of people were going there because they needed food now. In fact, some people skipped the basket all together and used a bowl instead. If you wanted to you could also shop for groceries, but that wasn't really the point. The margins whole foods earned were above average, but the customers were happy because it was cheaper and healthier than other dining alternatives. 

 

Then wall street came along and told them they were going to lose market share to grocery stores. Rather than stay the course and keep building restaurants that happened to look like grocery stores they shifted course and decided to get into the low margin grocery business via their new 365 Markets. So now, rather than focus their capital on high ROE restaurants where they're the category leader in a category with almost no one else, they're diverting it to low ROE grocery stores (using 100% equity) in a hypercompetitive segment where they're really just trying to be almost as good as trader joes.

 

Still seems like a reasonable value for the price (4 year low), but far from a slam dunk. I guess they view their operating leases as debt which is why they maintain such a conservative balance sheet.

[WideMoat]

I'm working in this one right now.  The only observation I would make based on your commentary is that the low margin business can have a reasonable ROIC--if it is well managed.  Trader Joe's serves as evidence, though they have very high inventory turns in their most successful stores.

 

As an aside, their naming and marketing choices thusfar have not been overwhelming (365?).  Perhaps their execution can rise above humble beginnings, but mark me skeptical.

[DCG]

Interesting way to look at it Jay.

[TwoCitiesCapital]

This piqued my attention: http://www.nytimes.com/2015/11/03/business/wall-st-sours-on-whole-foods.html

 

I think the core Whole Foods business is phenomenal, which is why I started looking into it when I saw the headline. My biggest problem with it now is I think management is listening to the wall street analysts and losing focus on what they're good at. I'd always assumed that from a profit perspective they were really more of a restaurant than a grocery store. I don't have one close now (they're building a "flagship" across the street currently), but what I noticed about the one in my old neighborhood was the average cart (often basket) wasn't very big or very full. It seemed like a lot of people were going there because they needed food now. In fact, some people skipped the basket all together and used a bowl instead. If you wanted to you could also shop for groceries, but that wasn't really the point. The margins whole foods earned were above average, but the customers were happy because it was cheaper and healthier than other dining alternatives. 

 

Then wall street came along and told them they were going to lose market share to grocery stores. Rather than stay the course and keep building restaurants that happened to look like grocery stores they shifted course and decided to get into the low margin grocery business via their new 365 Markets. So now, rather than focus their capital on high ROE restaurants where they're the category leader in a category with almost no one else, they're diverting it to low ROE grocery stores (using 100% equity) in a hypercompetitive segment where they're really just trying to be almost as good as trader joes.

 

Still seems like a reasonable value for the price (4 year low), but far from a slam dunk. I guess they view their operating leases as debt which is why they maintain such a conservative balance sheet.

 

I've been buying here. The recent drop in margins over the last few quarters was accompanied by increased turnover which generated a higher contribution to ROE. I am ok with falling margins if that's what it gets you. I'm not going to speculate about the success of the 365 stores. Management feels like they see a niche that can be filled and are working to fill it. If it's a success, shareholders will be happy. If it's not a success, I trust that management will shut it down and stick with what the know before blowing too much cash. I just hope they report the breakout the results for the main grocery stores and the new, smaller, cheaper ones so that shareholders can keep them accountable to that.

 

As for the price, you're paying about around 9-10x FCF less maintenance CapEx without paying for any of the future growth. The industry is expected to continue to grow massively as it's still only a small part of the grocery business and millenials attitudes towards fair wages, ethical and organic sourcing, etc. doesn't appear to be a fad that they'll fall out of overnight. Even without industry growth, current sq. footage growth is currently 10% each year with the potential for international expansion (have no idea how well that would work, just throwing it out there as a possibility).

 

I think at this price you get modest returns if 365 is a bust and growth stops OR you get a multi-year compounder. I'm obviously hoping for the later, but I don't think you'll be disappointed by a lack of execution at prices under $40.

[DCG]

How many stores have they added the Watering Hole bar section to?

 

 

It seems like adding a growler-filling section to stores would be a good idea.

[JayGatsby]

I think at this price you get modest returns if 365 is a bust and growth stops OR you get a multi-year compounder. I'm obviously hoping for the later, but I don't think you'll be disappointed by a lack of execution at prices under $40.

You're probably right. I get really nervous though when I see management shift direction, particularly when I think they're being led to water by wall street analysts and the new strategy doesn't make intuitive sense to me. Too often you see the core business suffer as a result. Take Green Mountain Coffee as an example. They had a great business selling overpriced single-serve coffee pods that generally tastes mediocre. They were a coffee company that sold electronics. Then they took coffee out of their name and decided they were an electronics company that sold coffee and any food/beverage that would fit in a small plastic cup. They lost their luster with consumers, volumes have declined and stock is down ~50% since they announced the name change. Whole Foods is running ~10% EBITDA margins today so a small change either direction can have a pretty huge impact on cash flow. Coming out publicly and saying Store A is overpriced, but Store B isn't seems like a pretty dangerous experiment.

 

Sidebar, this is all hearsay but I've heard that from a profit perspective Trader Joes is actually more of a liquor store than a grocery store. I heard the reason the reason they don't sell through instacart is that customers on instacart tend to only buy what they need and Trader Joes doesn't make much margin on that. In Colorado companies are  only allowed one liquor license for the whole state. Traders Joes expansion there has been slower than you'd otherwise probably expect and some people say that when you strip the alcohol sales out the returns just aren't that great. Can't confirm any of that as fact, only what I've heard

[ccplz]

http://brattlestreetcapital.blogspot.ca/2014/11/whole-foods-rock-and-hard-place.html

 

http://brattlestreetcapital.blogspot.ca/2014/11/whole-foods-redux.html

 

Interesting thoughts on WFM from last year. I think it's still relevant today.