WFM - Whole Foods Market

[Pauly]

...

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.

 

...

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.

 

+1

There are a lot of intangibles to WFM that make it a stronger brand than a lot of people realize. Their stores are very intelligently laid out and are always in tip top condition; there isn't produce strewn all over the floor or palettes of soda sitting forgotten in the aisles. The employees, for the most part, seem to actually enjoy working there, and WF's sense of style and design is second to none in the grocery store space. This all adds up to a very pleasant atmosphere for the customer which in turn makes it an enjoyable place to spend time and money.

 

How many Whole Foods customers would give up this experience in order to save a few % on their bill?

 

I agree there's room for competition, but competing strictly on price and quantity of organic items isn't going to be enough. The trust that WF has built with their customers is a very real asset and will be very hard to replicate. I wouldn't bet against them.

 

 

 

[TwoCitiesCapital]

I'm surprised that there is even any debate about this. Let's consider some fact.

 

Net Margin x Asset Turnover = unlevered profit

 

Generally, you can increase margin and reduce turnover or reduce margin to increase turnover. You'll work these back and forth to find the optimum levels to achieve the greatest profit. It's very, very hard to increase margin and increase turnover. It's even harder to do this in an environment where your competitors are lowering their margins. Somehow, this is exactly what Whole Foods has done in the last 5 years. It is nearly impossible to concoct a scenario where WF could be growing revenues, margins, turnover, and profits in an environment where it is losing customers to competitors. This narrative was never supported by any figures outside of a fluctuating net margin from quarter to quarter. Even these fluctuations were met with increases in turnover and drove profits higher so it was clearly not bad for the business and clearly wasn't driven by competitive pressures. It was WF optimizing their profits.

 

We can debate what WF does to achieve a brand value and premium - but you can't debate that it has one or that it's competitors are doing anything to it at the current time.

 

Once you realizee that it clearly has premium brand pricing power and that the competition is currently failing to put a dent it then you can focus on all of the upside potential available to you from the current prices. When a I purchased a few months back, it was growing at 10% a year, had no debt, had a wise capital allocation policy funding dividends and buybacks (after the 40% drop), and only traded at 15x cash flow. This was a no brainer. Quite literally the easiest investment decision I've ever made. I'm not going to get rich quickly off of this one but I don't have any issues envisioning a reasonable scenario where it's returning 12-15% a year.

[TwoCitiesCapital]

http://finance.yahoo.com/news/whole-foods-sales-accelerate-shares-215045652.html

 

WFM beats on earnings. Accelerating SSS, expansion of 9-10% planned for this year, and higher profits. At this point in time, WFM will probably pull in somewhere between 1-1.2B in FCF on a market cap of $19B. Currently trades ~50% off of it's lows last year. Congrats to all who purchased. Let ride this for awhile.

[thepupil]

this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

[berkshire101]

this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

 

My experience with retailers is that you have to be the lowest cost producer to have any kind of long-term competitive advantage.  In the end, you're just selling a commodity.  I haven't seen any indication that that's WFM's focus.  They're looking to provide this healthy customer experience.  Which is good and all.  But when you have WMT and COST making organic a larger portion of their sales, and at cheaper prices, how will WFM compete long-term? 

 

WFM was one of the first to move into that organic space, and it was a niche market for a while.  But now, it's a much larger market with lower cost producers moving in.

 

Maybe that's the concern with WFM?  How will they compete on price against WMT and COST? 

[kab60]

(Other than the excessive stock compensation) what's the reason for the big discrepancy between cashflows and net earnings? It seems like depreciation is around 50 pct. higher than investments. Anything to be worried about or just an agressive depreciation schedule? It seems cheap on a FCF basis if you believe the story.

[kab60]

this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

 

My experience with retailers is that you have to be the lowest cost producer to have any kind of long-term competitive advantage.  In the end, you're just selling a commodity.  I haven't seen any indication that that's WFM's focus.  They're looking to provide this healthy customer experience.  Which is good and all.  But when you have WMT and COST making organic a larger portion of their sales, and at cheaper prices, how will WFM compete long-term? 

 

WFM was one of the first to move into that organic space, and it was a niche market for a while.  But now, it's a much larger market with lower cost producers moving in.

 

Maybe that's the concern with WFM?  How will they compete on price against WMT and COST?

Maybe they don't have to compete head to head on price with WMT and Costco? Isn't that the bull thesis? Most of the people I know who buy Organic wouldn't want to do in Wal-Mart because they associate it with a lot of stuff that they don't like whereas WMT har a different story to tell; a nice story so you might actually wanna stay for an expensive coffee (I figure it's somewhat pricey, haven't been there).

[TwoCitiesCapital]

this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

 

My experience with retailers is that you have to be the lowest cost producer to have any kind of long-term competitive advantage.  In the end, you're just selling a commodity.  I haven't seen any indication that that's WFM's focus.  They're looking to provide this healthy customer experience.  Which is good and all.  But when you have WMT and COST making organic a larger portion of their sales, and at cheaper prices, how will WFM compete long-term? 

 

WFM was one of the first to move into that organic space, and it was a niche market for a while.  But now, it's a much larger market with lower cost producers moving in.

 

Maybe that's the concern with WFM?  How will they compete on price against WMT and COST?

 

Tell that to people who shop at Starbucks. We live in a society and a culture that has enough participants who care about responsible sourcing, employee welfare, quality of products, etc. that they're happy to pay a premium. This is why a large number of WFM shoppers won't be caught dead in a WMT. WMT doesn't appeal to their values.

 

McDs coffee has consistently scored just as well, if not better, than some of Starbucks coffee - yet people will still pay 5x as much for SBUX? A similar argument could be made for the massive value premium Keurig gets for selling it's convenience of a single serve at home. People care about things beyond price and WFM caters to that and has been very successful over the past decade doing just that.

 

WFM isn't in the business of competing with Walmart. There is some competitive overlap, but they're not direct competitors and they won't be unless if WMT finds some way to make up the massive trust deficit. It's focus on "low prices" seems like it will prevent that from happening. WMT is the McD/Dunkin/home brew version of the organic food market. WFM is the SBUX. There's room for both.

 

(Other than the excessive stock compensation) what's the reason for the big discrepancy between cashflows and net earnings? It seems like depreciation is around 50 pct. higher than investments. Anything to be worried about or just an agressive depreciation schedule? It seems cheap on a FCF basis if you believe the story.

 

Whole foods has been extending their store print by about 10% a year. This results in massively high depreciation costs as it's a relatively new business with relatively new buildings/investments. Also, if you look at their CapEx, a large % of it is growth CapEx which will continue to hit depreciation in years to come. If you look at the FCF of the business (Operating Cash Flow less Maintenance CapEx), you get a very different picture than from the P/E.

 

[Jurgis]

WFM isn't in the business of competing with Walmart.

 

That's probably true. The concern would be competition with someone like Wegmans and maybe Trader Joe's (though TJ does not cover everything WF/supermarkets cover).

 

Anecdotally, we don't shop at Walmart because of historic reasons perhaps. We buy most groceries at Stop&Shop, which is generic grocery supermarket, nothing to write home about, because it is closest to our place and takes least time to get to.

 

When we drive farther, we go to Trader Joe's, we go to new Wegmans that opened last year, we go to HMart (Korean supermarket), and Russian store. We went to WFM couple times, we like Wegmans more.

Edit: out of the above in terms of crowds, TJs doing great, HMart doing great partially because of being Asian specialty supermarket. I think it's early to tell how Wegmans will do when novelty wears off.

 

But then we are usually not trendsetters or trendfollowers, so things we like don't necessarily do well (apart from TJs which did great so far, but not investable).

 

Edit2: If WFM was close, we probably would go there (more?), but even now we go farther to Wegmans/TJs than the distance to WFM, so it's not purely distance.

[scorpioncapital]

Whole Foods - good for - speciality items you'd pay more for anyway like foreign imports. - the food buffett. Although I have seen companies like Loblaws start to do the exact same thing.

 

 

[Mephistopheles]

Skimmed through the annual report tonight. I love what I see so far: strong cash flow generation, solid balance sheet, great margins, above average growth industry, quality management, and all for a wonderful price. But can it last? SSS have slowed down in the last couple of years. Here are the figures:

 

2000: 9%

2001: 9%

2002: 10%

2003: 9%

2004: 15%

2005: 13%

2006: 11%

2007: 7%

2008: 5%

2009: -3%

2010: 7%

2011: 9%

2012: 9%

2013: 7%

2014: 4%

1Q15: 4.5%

2Q15: 3.6%

 

Obviously competition has heated up with Trader Joes, Kroger, Fresh Market, and the big boxes like Costco and Wal-Mart. Costco is apparently the biggest seller of organic products now. Though, I do feel shopping experience is an important aspect of this business and that Whole Foods operates in a different niche than WMT/COST (just a feeling, nothing more).

 

I'm intrigued for now, but need to dig in a bit deeper. But the price is enticing. And I'm sure they're buying back hand over fist. Last summer they bought back 2.6 million shares at depressed prices a bit above this level, so the management seems like they are great capital allocators. Current market cap is $12.7 billion and they should bring in close to $1 billion this year in free cash flow ex. growth capex.

 

The question is - does the shopping experience play a vital role in this business? If so, we have a great company at a great price with great management.

[Guest Schwab711]

They sell groceries and compete with Walmart. I'm shocked they've done what they've done.

[loganc]

They sell groceries and compete with Walmart. I'm shocked they've done what they've done.

 

I am sympathetic with this sentiment, but I don't think Whole Foods is competing for the same demographic.  For example, I am in Nashville, TN and I live in a fairly urban setting (by Nashville standards).  The Whole Foods is geographically much closer to the high  income population than Walmart.  I am very hard pressed to believe that the population that lives near Whole Foods and relatively far from a Walmart even considers Walmart as a viable option for grocery shopping.       

 

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.   

 

Edit: I think one should also consider the difficulty of this business.  Imagine the complexity of inventory management for a grocery chain.  It seems to me like a very, very tough business.

[thepupil]

I think the idea of whole foods competing with Walmart is laughable. they compete with nicer traditional grocers and the growing smaller specialty ones (as well as local butchers, fishmongers, bakeries, and restaurants and farmers markets)

 

No one who shops at whole foods shops at Walmart. Call me a snob, but I havent even been to Walmart in 3+years and I've never considered purchasing food from there. Despite it being the largest food retailer, I've never heard of anyone who buys their food there (probably because I don't live in a retail desert and mostly run in urban and affluent circles highly unlikely have a convenient Walmart to go to much less shop there)

 

Whole foods is a spectacular tenant because they drive traffic of high $ customers and they've built out the best real estate footprint because of that.

 

The debate here is whether the nice traditional grocers which have far lower margins can finally catch up to whole foods (wegmans, some nicer safeways, public greenwise, some krogers, Costco should probably be included) or if the rapidly growing small guys like sprouts and TFM and TJ's will cause death by a thousand cuts. In my anecdotal experience, nothing beats whole foods on quality and wfm offers good value relative to the specialty ones (fresh market is actually more $ and lacks the whole hippie organic credibility).

 

I actually think one can shop at whole foods on a budget if you utilize the 365 branded stuff (which is awesome and another reason why wfm has higher margins, lots of private label) and avoid the prepared foods (which are spectacular and another reason whole foods has higher margins).

 

Some of wfm' margin advantage is definitely sustainable in that they sell a different mix of private label, prepared foods, perishables, and seafood (their seafood is expensive but the only option for me at least, they're the only ones who have enough turnover for everything to be fresh and delicious).

 

 

I live alone and my weekly bill (prepare most meals) is like $30-$40 plus proteins and alcohol. It's virtually the same at the nice traditional grocer nearby (Harris teeter)

 

Walmart / food lion / aldi aren't competing for whole foods $; that's a whole different customer.

 

I want this stock to be a little cheaper. I think it's pretty cheap now but only if there is reasonable prospect of utilizing the balance sheet a little more to accelerate stock repurchases. I don't think john Mackey and his band of under compensated business hippies are going to wake up tommorow and say "hey let's do a levered recap" which makes me want to pay a little less for the stock.

[Palantir]

I just like shopping at WF, maybe it is the ambience or it is because I only buy select items there but I'd rather buy food there than at my local grocery.

[oddballstocks]

They sell groceries and compete with Walmart. I'm shocked they've done what they've done.

 

Hmmm..have you ever been to either?  It's like saying Starbucks competes with the DMV because the DMV serves watered down black liquid called 'coffee'.

 

Having shopped at both places I can tell you that the Walmart crowd would never go to Whole Foods and vice versa.  At the local Walmart the parking lot is filled with Ford F-250 trucks that are lifted with giant tail pipes, lots of blue collar rah rah America types.  The Whole Foods is in a very upscale part of town with a parking lot filled with Prius', Volvo, BMW and Mercedes cars.  Whole Foods captures consumers who are not price conscious about their food.

 

We have friends who shop there almost exclusively.  They are well aware that you can purchase similar items at Aldi cheaper, but that's not the point, they like the experience and feel that anything from Whole Foods is automatically healthier.

 

I'll add that Whole Foods has an excellent craft beer selection.  Their bar proves my post, all drafts are priced a buck or two higher than other local places, yet when I go the bar is filled and people are buying.  Why aren't they going down the street to Poor Richard's Pour House to buy their beer cheaper for a few bucks?

 

To say Walmart competes with Whole Foods is like saying Porsche or Mercedes are competing against the Ford Econoline van.

[TwoCitiesCapital]

If competition was really an issue, their margins would be cratering since they're consistently multiples above their so-called "competitors." There is no evidence in the numbers that "increased competition" is hurting WFM other than the declining trend in SSS. I am more inclined to believe the decline in SSS mirrors the slow recovery of the economy and not so much the success of competitors. It's not like mass of upper class people shopping at WFM gets larger every year. This can be helped, in part, by international expansion.

 

Trader Joe's is a much better comparison; however, even TJs isn't serving the exact same market. WFM is planning on starting a new store initiative with smaller stores and lower cost goods. So far, details have been few, but if they're smaller stores selling private label brands, then WFM will be taking TJ head-on in capturing a younger, less affluent market with high quality goods.

 

I don't see why there isn't enough room for 2 large players in this kind of landscape for the foreseeable future. It's not like the grocery industry has to consolidate to a single player for their to be profit....

[Palantir]

But why is WFM starting a lower price point competitor if their core business is so strong?

[thepupil]

But why is WFM starting a lower price point competitor if their core business is so strong?

 

I think they are running out of areas to expand the full-format stores which likely require a critical mass of high income households in a certain area. One of my bigger areas of concern is if this company knows when to stop growing. Should ROIC fall because new stores are more marginal, will they switch to running the company for cash and focus on capital return. We're probably not at that point yet (there's only one store in Alabama right now for example, but they are building a few more), but we will get there. The annual letters and comp are focused on ROIC and free cash flow so it's not like they totally disregard this stuff. Also the stock comp is a little high and becomes more burdensome as growth slows and company matures.

[TwoCitiesCapital]

But why is WFM starting a lower price point competitor if their core business is so strong?

 

This is the real question. I'm confused by the new store model as well. It's not like WFM can blindly ignore that there are competitors with lower prices, but their margins have been maintained and every quarter they experience revenue and profit growth all while SSS have remained positive. My only guess is that it's one of two things:

 

1) Whole Foods really wants to appeal to a younger generation who simply can't afford to shop there. Think college students and young professionals just a few years out of school.

 

2) Price competition is starting to hurt, but hasn't creeped into any of the numbers other than SSS and I'm totally wrong about it being the economy to blame.

 

Either way, it's not the death of WFM and I am sure that the management will be up to the challenge. I'll wait until the results are in the numbers to determine if the new store concept is a good idea or proof of their decline.

[berkshire101]

Anyone else looking at COST and their growing selection of organic products?  The customer base is relatively the same, more towards the middle to higher income bracket. 

[Guest Schwab711]

All the responses about WMT are missing my point. It doesn't matter if they are better/different than WMT specifically, they sell groceries. Can a business that relies on selling groceries really be great? The point is, there  is tons of competition for grocery stores aimed at every demo of customers (Wegmans, TJs, WMT, COST, TGT, Publix, and the list goes on). Wegmans is expanding south, Publix is expanding north. As they converge, WFM is going to be very pressured, in my opinion. I'm not saying WFM is going to disappear by any stretch on the imagination. I'm just pointing out that they sell groceries and it's up there with the worst possible businesses to be in.

 

Also, how long will organics hold their premium pricing once more studies are released? A bet on premium pricing for organics assumes these studies will show the health benefits of what is only perceived at the moment. The benefits provided to employees is also extremely generous relative to every other grocery store. How long can they keep their Ford-like operating structure (when Henry Ford overpaid employees so they could buy his products)?

 

It's also pointless discussing grocery stocks when we all know Wegmans is biding their time before further expansion/dominance. They are just preparing communities for the empty store fronts in the wake of their dominance everywhere they go. :) (sarcasm but not at all homerism)

[Mephistopheles]

Shopper experience matters. Similar to how you can charge more for a sweater at Banana than at Gap for a one of the same quality.  Wmt may sell the same food but doesn't necessarily mean they will attract the same customers or get the same price.

 

 

[TwoCitiesCapital]

All the responses about WMT are missing my point. It doesn't matter if they are better/different than WMT specifically, they sell groceries. Can a business that relies on selling groceries really be great? The point is, there  is tons of competition for grocery stores aimed at every demo of customers (Wegmans, TJs, WMT, COST, TGT, Publix, and the list goes on). Wegmans is expanding south, Publix is expanding north. As they converge, WFM is going to be very pressured, in my opinion. I'm not saying WFM is going to disappear by any stretch on the imagination. I'm just pointing out that they sell groceries and it's up there with the worst possible businesses to be in.

 

Also, how long will organics hold their premium pricing once more studies are released? A bet on premium pricing for organics assumes these studies will show the health benefits of what is only perceived at the moment. The benefits provided to employees is also extremely generous relative to every other grocery store. How long can they keep their Ford-like operating structure (when Henry Ford overpaid employees so they could buy his products)?

 

It's also pointless discussing grocery stocks when we all know Wegmans is biding their time before further expansion/dominance. They are just preparing communities for the empty store fronts in the wake of their dominance everywhere they go. :) (sarcasm but not at all homerism)

 

Most of the people that I know that buy Whole Foods' products don't do so because of it's "health benefits". They do it because they have particularly strong feelings about animals should be raised/slaughtered or because they don't want there to be the possibility of harmful chemicals on/in the food they eat or because they believe that farmhands should be paid a reasonable wage, etc. Most people I know who shop at WFM do so because they know the products are sourced responsibly and they are willing to pay more for that ideal.

 

This is WFM competitive advantage - only time will tell if consumer sentiment towards this will change, but it won't be because Walmart now offers organic produce at 1/2 the cost.

[DCG]

The prepared food, salad bar, and bakery sections are an advantage they have over many other stores (especially places like Walmart). Whole Foods has a different customer than Walmart, so that's not a good comparison. That's like saying people won't buy iPhones because there are cheaper phones available.

 

 

I don't own any WFM, but it's on my watch list. I like the stores, although don;t shop there super often, as I usually get about 6 things; the bill comes to $100 - and then I get in the car and ask 'what did I just buy?'. They do have a good amount of food & that is tough to find elsewhere, and do a great job getting you buy thing you weren't planning on buying.

 

 

I don't think the stock is that cheap at its current price though.