WFM - Whole Foods Market

[fareastwarriors]

I worked as a cashier at Whole Foods for 4 years in a NYC suburb back in college. Thanks for bringing back the memories.

 

 

[NomadicRiley]

 

W/r/t your last point; do you shop at whole foods now?  Whole foods customers are highly unlikely to swing by the Kroger because it is closer, in my observation.  They walk by dozens of gristedes and other nice/organic grocers to get to the whole foods in union square and have done so for years.  Also, concerning the differing selections in different markets: that is accurate but one might argue the brand equity is in the store's curation of preferably local, organic foods supplemented by worldwide, vetted suppliers.  So if you visit san diego and want the "good" local stuff you go there just like you do at home in Chicago, despite the vendors being different.  Alternatively, wouldn't the store brand "365 value" provide the consistent labeling you're seeking on many items?  Not saying its a buy here, just that most value investors are probably not the target market.  Disclosure:  I bought this thing back in the depths of financial crisis and sold it way too early, but it took care of all my losses from other investments in short order; so I'm sure I have some personal affinity/biases for the company.  It's a good business (for a retailer) with good management, but I'm not comfortable with the valuation right here, given competitive threats.  Which, btw are TFM and Trader Joes and some of those guys; not Walmart.  People who shop here pay a premium so that they don't have to encounter people of Walmart....ever, imo.

 

Yes - we do shop at Whole Foods.  I'm not arguing that Whole Foods isn't a great company w/ a long and profitable future in front it.  I absolutely believe it has very strong loyal following and will continue to grow and be profitable for many years to come.  I just don't believe it is likely to ever have as strong of a position as Starbucks and the network effect and pricing power they enjoy. 

 

That doesn't mean it can't be a great investment, but my expectations of future growth and profitability are lower than if I believed it could achieve a Starbucks type position.

 

[CorpRaider]

You're probably right.  I've always been a little leery of SBUX's purported sustainable moat, however, since the business went to crap when Shultz tried to retire the first time.

[fareastwarriors]

Whole Foods Bulls See Healthy Bounce From 28-Month Low: Options

 

 

 

http://www.bloomberg.com/news/2014-06-05/whole-foods-bulls-see-healthy-bounce-from-28-month-low-options.html

[TwoCitiesCapital]

http://seekingalpha.com/article/2301695-why-whole-foods-is-cheap-take-advantage-of-mr-markets-panic

 

I agree with many that WF business model isn't exactly comparable to SBUX. What is clear is that it's wildly popular and sells high volumes at current stores despite insane pricing. Clearly their products will be under represented on a value investor board but I do think it's similar to SBUX in that they are able to get people to pay many multiples on price for a product than competitors.

 

Trader Joes may still be a direct competitor but space is clearly large enough for 2.

 

With no debt, relatively high past growth rates (and large growth rates planned for next decade), a slow changing market, a decent cash flow yield for growth company, I don't think 25x is terribly unreasonable - just not cheap. I took a small position today. Will back up the truck if something happens to force it into the low teens on the multiple.

[rogermunibond]

Is the space big enough for five or six?  Sprouts, Fresh Market, and a host of regional operators Mom's Organic, for example.

 

Or are these little guys going to get acquired or quashed by WFM and TJs.

[DTEJD1997]

I was in WFM this weekend in MI.  It was a smaller location.

 

They had TONS of sales on stuff.  I would guess that there were more items on SALE than were regular priced.

 

Their sale prices were OK.  There were some real bargains, but most "sale" prices I would just consider "average".

 

So i wonder if there is competition in MI prompting WFM to run such a huge sale?  I know TJ is big, and I do a ton of shopping there.

 

WFM is nice, very nice, but I refrain from shopping there because TJ has comparable quality for MUCH lower prices...

[TwoCitiesCapital]

I think more users on this forum are likely to be price sensitive but the reality is that every single person has mentioned that WF is packed when they go in. I have never shopped there but the ones I've walked by have always been packed. Clearly there is a large number of people who are underserved by other places and are willing to go to WF who are relatively price insensitive.

 

I don't understand why people pay $5 for coffee at SBUX but they do and it's been a phenomenal investment. The fact is, there is currently a market for higher margin, higher priced goods where stores compete on emotional response  and experience and not on price.

 

High end Androids have the same, if not better tech specs, than Apple iPhones, yet Apple still sells phones in droves based on a good product that is marketed very well. Trader Joe's may be cheaper but WF still sells food at high enough volumes and prices to generate double digit ROE without leverage. Also, TJ isn't publicly traded so it likely has less access to capital which can be a disadvantage to growth and soft markets.

 

I don't know how big the market is or how many businesses it can support, but I think 2 or 3 is a fair bet given what we see in other industries. The smaller players will fail or eventually be consolidated.

 

Periodot's blog on this also does a pretty good job explaining why the PE isn't nearly as high as it seems.

[DTEJD1997]

I think more users on this forum are likely to be price sensitive but the reality is that every single person has mentioned that WF is packed when they go in. I have never shopped there but the ones I've walked by have always been packed. Clearly there is a large number of people who are underserved by other places and are willing to go to WF who are relatively price insensitive.

 

Saturday afternoon did not have WFM packed.  They were doing business, not busy, but perhaps "active".  TJ on the other hand is usually very busy, approaching "packed" status.

 

Maybe people in Michigan are just more price sensitive...

[ragnarisapirate]

I was in WFM this weekend in MI.  It was a smaller location.

 

They had TONS of sales on stuff.  I would guess that there were more items on SALE than were regular priced.

 

Their sale prices were OK.  There were some real bargains, but most "sale" prices I would just consider "average".

 

So i wonder if there is competition in MI prompting WFM to run such a huge sale?  I know TJ is big, and I do a ton of shopping there.

 

WFM is nice, very nice, but I refrain from shopping there because TJ has comparable quality for MUCH lower prices...

 

Maybe sale prices are their "regular" prices, or rather, what they want to sell items for, and the normal prices are just a way to juice margins?

[valueyoda]

I still believe that both Whole Foods Market and Trader's Joe have 1-2 decades of expansion ahead without compromising their respective highly successful strategies. Whole Foods starts to become attractive at $38 after the recent sell off as a GARP stock. Remember that Wal Mart was never cheap during the 1980s and 1990s when it was rapidly expanding.

[Pauly]

I haven't looked too closely, but does WFM break out the numbers for their own "365" branded items in their reports? I visit WF quite often and they're adding more and more 365 lines seemingly every week ; cereals, pasta sauce, diapers, olive oil etc. etc. I would imagine that the margins on these are more favorable..?

 

In Vancouver we don't have Sprouts, Fresh Market or Trader Joe's so I can't comment on those, but WF does very, very well here. Always busy, and the prices aren't too out of line with the other organic grocer alternatives. In fact WF is often the cheapest option. Plus, WF has a quality standard that other places can't seem to match. You rarely find rotten fruit or vegetables sitting out, or dairy that's just about out of date.

 

[DanielGMask]

I don't think the incognita is about sustainability of the business model or the presence of a moat, since I think both variables are present. The real issue is what value to assign the company and if that number corresponds or not to current market valuation.

 

I've been reading this thread and seems that lots of people is comparing Trader Joes to WFM and I don't think that comparison is entirely accurate. Both companies serve a real need but to a different customer; Trader Joe's stores are smaller, carry a smaller number of SKUs and focuses on local suppliers, they serve what I consider to be a hardcore organic consumer, which by the way looks like a good business model, but not exactly the same business model of WFM.

 

I think that WFM has more growth potential and much more general consumer penetration, but anyway, we are talking about WFM and we should focus on value and future growth.

[ScottHall]

http://seekingalpha.com/article/2301695-why-whole-foods-is-cheap-take-advantage-of-mr-markets-panic

 

I agree with many that WF business model isn't exactly comparable to SBUX. What is clear is that it's wildly popular and sells high volumes at current stores despite insane pricing. Clearly their products will be under represented on a value investor board but I do think it's similar to SBUX in that they are able to get people to pay many multiples on price for a product than competitors.

 

Trader Joes may still be a direct competitor but space is clearly large enough for 2.

 

With no debt, relatively high past growth rates (and large growth rates planned for next decade), a slow changing market, a decent cash flow yield for growth company, I don't think 25x is terribly unreasonable - just not cheap. I took a small position today. Will back up the truck if something happens to force it into the low teens on the multiple.

 

The author apparently didn't include growth capex in his DCF model, despite giving them credit for 14% growth in FCF. He is double counting the cash required to open those stores by not including growth capex, so his model isn't sensible.

[Ross812]

I looked into Whole Foods quite a bit over the last couple of days. I like grocery businesses due to their inherent 3% organic growth following population growth. Organics should outpace the 3%. I am having a hard time seeing WFM's advantage over their competitors. I need to dig in some more and see if their scale and increasing size will allow them to negotiate better prices with organic suppliers. Organic suppliers are selling to a large swath of grocers as organics increase in popularity and I'm not sure having a greater store count really helps in sourcing produce when much of the produce is sourced locally. Their house brand has the potential of allowing them to expand margins/sell at a discount, but their house brands still do not compete with Trader Jo's. I would also argue that Trader Jo's competes directly with WFM on dry goods and a few niche items. I know quite a few couples who shop at both; buying produce at WFM and dry goods and staples at TJ's. For what it's worth, I asked someone stocking shelves at WFM if he thought the TJ's opening across the street hurt them (TJ's opened about six  months prior). He said they were still really really busy except for their cheese. At any rate, I think WFM is still a little pricey for a grocer that will have a terminal PE around 12-14x; i'll be a little more interested at a PE of 20-22 ($30-$33). 

[DanielGMask]

Just posted on Twitter by @LaMonicaBuzz: Please please please let this be true. $WFM up 5%. @Benzinga & @Briefingcom both cite chatter that @Carl_C_Icahn may be interested in stock.

[TwoCitiesCapital]

http://www.twocitiescapital.com/blog/whole-foods-market-wfm

 

Made a blog write up on WFM. Seems to me that the margin concerns were overblown since the past 9 months have actually had better results than last year. We'll see if that continues next quarter. Seems that reduced margins resulted in higher turnover which actually resulted in a positive addition to ROA and ROE. It's all explained in the post

 

Overall, seems like a decent bet at a reasonable price as previously mentioned. Would love to see them do a debt financed repurchase and spend another $1.5B or so even if Icahn isn't involved. They have the ability to service a billion in debt easily and it would go a long way into juicing future returns.

 

6.8% cash yield and 10% expected growth for years to come. Responsible capital allocation policies to augment returns. Best margin profile in the business - what's not to like?

[TwoCitiesCapital]

Great earnings. Congrats to all.I think this will be a compounder.

[Guest Schwab711]

How is this any different than any other grocery retailer? You are buying future earnings, not past results. I feel like as they grow and WMT/Wegmans/Publix/ect expand organic offerings, margins will tank. Also, as organic grows in popularity won't margins shift from retailers to farmers? Demand increasing faster than supply in my opinion. What is the thesis for such high margins from a grocer? Upscale, loyal customer base?

[TwoCitiesCapital]

How is this any different than any other grocery retailer? You are buying future earnings, not past results. I feel like as they grow and WMT/Wegmans/Publix/ect expand organic offerings, margins will tank. Also, as organic grows in popularity won't margins shift from retailers to farmers? Demand increasing faster than supply in my opinion. What is the thesis for such high margins from a grocer? Upscale, loyal customer base?

 

This has been the argument for the last year and why the stock was down to $38 from $65. Unfortunately, that narrative hasn't been supported by the numbers.

 

People who shop at WF don't shop at Wal-Mart. More of a matter of principle than it is the availability of organic food.

WF's direct competitors haven't been able to maintain anywhere near the same margins or returns and have resorted to higher leverage to reward shareholders. It's clear from their consistent margins despite the entrance of new competitors that WF has a franchise.

 

At $38 it was only trading at 15x cash flow with 10-12% annual growth likely to be regularly occurring in the near term and flexibility to repurchase a ton of shares.

 

If you ask yourself why people shop at WF and not Walmart, why not ask why people buy Coffee from Starbucks instead of McDonald's.

[rogermunibond]

I think that's too dichotomized a view on consumer behavior.  I've shopped at both Walmart and WF/Wegmans.  Bought coffee at McD and Starbucks too.

 

Some of the produce and meats at Walmart can be quite good.  Same can be said for Aldi, to be perfectly frank.

 

If you allow yourself to be segmentized by marketers/retailers than be prepared at times to pay for the privilege.

 

[TwoCitiesCapital]

I think that's too dichotomized a view on consumer behavior.  I've shopped at both Walmart and WF/Wegmans.  Bought coffee at McD and Starbucks too.

 

Some of the produce and meats at Walmart can be quite good.  Same can be said for Aldi, to be perfectly frank.

 

If you allow yourself to be segmentized by marketers/retailers than be prepared at times to pay for the privilege.

 

Clearly that was an exaggerated generalization but it's not far from the truth for most WF shoppers. I'm the same as you and it's why I missed the boat on Apple and Starbucks. I prefer value for my dollar and I want the best alternative that I can get for the least amount of money.

 

I know people who stop at Starbucks and pay $5 for a coffee every morning. They're willing to pay more and wait in line for this privilege as opposed to going across the street to the McD and getting it much cheaper and just as fast (if not faster).  People literally wait in line overnight to buy the newest iPhone at a premium when several high end Android phones are arguably better in specs, are seeing greater innovation in usability and experience, and cheaper in price (and no wait!).

 

I don't know why this. Just an observation that I've made and I think you're getting a reasonable price point to see if it plays out again. WFMs ROA and ROE have stayed remakably consistent, leverage is low, expected growth reasonable and are metrics are significantly better than peers - until these begin a permanent decline I think all the talk of cocompetition and collapsing margin is hogwash.

 

I'm not making a prediction here. Merely observing that the numbers haven't supported the short narrative for a year now and we're 40% lower for some reason.

[CorpRaider]

They are going to start opening breweries in their stores?

 

I think there's a good deal of sustainable value in their "curator of food" role.  If you want, sustainable, organic, local, PC, whatever...you can just let them handle it for you.  There might be organic stuff at walmart but it's probably trucked in from chile or wherever is cheapest and you just know their suppliers and employees don't really give a crap.  Also, the service is good and they pay a living wage, about which apparently the gen y and millennial crowd give a crap.  It's like the Starbucks of food.  I don't shop there or anywhere much, but I can see why you would.

[GregS]

I think both types of consumers exist - those that wouldn't touch Wal-Mart and those who will get their natural foods for the lowest price.  Whole Foods built their business on the back of the former and I don't believe they are really threatened by Wal-Mart moving into the space.  There's more to the business than just slapping "natural" or "organic" on the label and I doubt Wal-Mart will get that or even care to.  Wal-Mart will capture customers who are very price conscious but want to buy something a little bit better for their families.  But even as these customers improve their buying a bit, they are not really all that discerning.  People who care about sustainability or read every ingredient on the label have stopped shopping at Wal-Mart long ago if they ever did.  The beauty of Whole Foods is that you can just shop there without having to do all the extra work involved in healthy and sustainable eating (which, if you've ever tried, is really a lot of work).  That will be true as long as customers trust the brand ("Values Matter").  There's also a cultural and signaling issue that goes beyond just eating organic, not to mention Whole Foods offers a lot more in their store than just meats, produce and packaged foods.

 

Those that should be concerned about Wal-Mart are the Safeways and Krogers who can't compete with Whole Foods on brand image and overall quality and are now stuck with a unionized workforce competing with Wal-Mart on price.  I don't know about Kroger but Safeway has had a robust organic offering for years and are about to see direct competition at lower prices.  Good luck.

 

More concerning for Whole Foods is the direct competition from the Sprouts, Fresh Market, Trader Joe's and the like.  I think there is room for more competitors in the space as the market grows, however, just because the market has been proven doesn't mean the others can jump in and take share.  In my region, Sacramento, we saw Fresh Market come in to lots of fanfare then close down shortly thereafter.  Whole Foods is still thriving here.  I think the trust built up with customers makes shopping at Whole Foods a one-decision shopping experience for consumers who would otherwise spend time reading labels throughout the aisle and wondering where their fish came from.

 

Bottom line though was the 10 year test:  I asked myself, is Whole Foods going to be around in 10 years and will it still be a strong brand?  My response was a very strong yes.

[stevevri]

...

They are going to start opening breweries in their stores?

...

 

Beyond the Brewery which is fascinating. There's a lot of interesting things in Whole Foods Stores.

New beautiful location has a full restaurant/bar http://www.desertsun.com/story/news/2014/09/23/whole-foods-palm-desert-sneak-peek/16099547/

 

The one over near me just put in a smoker and is smoking ribs, and brisket now too. Fremont,CA one has a beer garden. San Jose one a rooftop beer garden. There are some very innovative elements to this company. They get that you have to create excitement for the customer.