WFM - Whole Foods Market

[GregS]

Jay, I think you are thinking about this the right way.  I jumped into WFM about a year ago because of the strong brand, maintenance FCF and strong balance sheet, and ended up selling after a bounce in same store sales faded.  Note that comps were basically flat during the last two weeks of the last quarter when the NY weights and measures issue came out, and who knows how far that carried through.  I round-tripped the stock and sold for a small loss.

 

Whether management is listening to Wall Street or otherwise, it is clear to me they are abandoning their core strategy going forward in response to stiff competition.  They are basically adopting the business model of TJ's, Sprouts and others of small format grocery stores.  They can have good ROIC as others pointed out, and management noted these stores use less labor and can be built upon existing distribution.  But Whole Foods was a differentiated concept in large part because of the prepared foods and restaurant-style offerings, and now they will just be another natural foods store.  They will compete in large part on price, which is a major shift in strategy.  Why abandon your core concept?

 

I see two possibilities:  1. management is just screwing up here, and this will be a New Coke-style flop, or 2. as many critics have alleged for awhile, full scale Whole Foods markets have more or less reached capacity and there is no significant store growth possible, while competition will eat away at existing stores.  Given the new stores in Detroit and inner-city Chicago, and declining SSS, the latter is a distinct possibility.  If this is true, it basically means Whole Foods' moat in its brand and store concept is illusory.

 

Either way, I'm pessimistic on the new stores but will watch to see if I can be proven wrong.  I haven't seen enough to make me want to take a bet on management at this point.

[TwoCitiesCapital]

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.

 

Thanks for sharing. His concerns about brand dilution and lower margins mirror my own, but I also see how the management has executed in the past and trust them while trying new things.

[Guest Schwab711]

COST is now the largest organic food retailer in the US. I think the top-4 is COST, WFM, WMT/Kroger (not sure who is #3 and who is #4).

 

Costco alone grew their organic food revenue by ~33% ($1b) in the past 12 months. I'm impressed that Whole Food's has the margins they do, all things considered.

 

http://www.businessinsider.com/costco-becomes-top-seller-of-organic-food-2015-6

http://www.fool.com/investing/general/2015/06/07/which-retailer-is-the-leading-organic-food-seller.aspx

[DCG]

As has been mentioned in this thread, I think their prepared food selection is their advantage over other grocery stores (and places like Costco). They also do carry a lot of brands that aren't carried elsewhere.

[fareastwarriors]

Whole Foods dives after results; announces $1B buyback

 

http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html

[TwoCitiesCapital]

Whole Foods dives after results; announces $1B buyback

 

http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html

 

It doesn't seem like the results were a disaster, though I know everyone is watching comps/SSS.

 

Revenues are up and cannibalization of old store sales is to be expected as they open new stores nearby. This will especially be the case with the 365 stores. As long as total revenues are growing and SSS aren't absolutely collapsing, then I think we're ok here. I do take a small issue with the company's forecast of 1200 large stores remaining the same in spite of the launch of 365 - surely they see that if you're building a smaller store to attract an overlapping customer base that they'll need fewer big box stores. I'm sure this won't be an issue until we get closer to that 1200 store count, but hopefully they'll revise those figures if the 365 concept is successful to prevent overbuilding.

 

Gross margins came down slight q-o-q from 35.6% to 34.5% while turnover remained constant (but was up y-o-y). This is one quarter and that's a 1% drop in margins when everyone is calling for the end of WFM and it's stock has tanked 20% over this quarter and much more from it's peak. Total revenues continue to grow, SSS/Comps aren't cratering, margins are being relatively well maintained for how much talk "increasing competition" is getting, and earnings continue to grow. I think the fear-mongering is a little overdone, but someone please feel free to correct me.

 

Rough estimates of FCF came in a little low for my estimates at ~$800M. I'm using OpeX less maintenance CapEx. This is about 4% lower than last year while I was expecting modest growth putting the total figure close to $900M. It turns out my estimates of maintenance CapEx were a little low previously so I'm glad they're explicitly breaking this out now and that explains some of the divergence in my estimates. On a per share basis, FCF is flat from last year.

 

If FCF remains flat and that they borrow the entire $1 billion for the share repurchase (they won't), you'll get a a company with a $9.5B market cap and a 10.5B enterprise value doing ~$800 million in FCF with no expected growth despite spending nearly $500M in new store expansion each year. I'm ok with that.

 

They repurchased 3.5% over the past fiscal year and will be repurchasing an additional 10%+ over the course of the next 6 months (at these prices). This will be the first time they take on debt and it will be a conservative amount. I'm quite happy with a large buyback at these prices and that it doesn't come at the expense of their expansion.

[Sionnach]

can someone explain what the competitive advantage is here? its appears to be a the highest-price seller. I would think you have to argue the "starbucks effect" in order to suggest a competitive advantage, but I could be wrong.

 

Also- could someone also explain the economics behind why grocery stores tend to be regional? Why are there regional but not national scale advantages? thanks.

 

 

[Cunninghamew]

As has been mentioned in this thread, I think their prepared food selection is their advantage over other grocery stores (and places like Costco). They also do carry a lot of brands that aren't carried elsewhere.

 

I noticed prep food was about 20% of sales. Does anyone know the profit contribution? or have a ball-park guess?

 

I looked at Sprout and Fresh Mkt 10k and they don't provide a similar break-out or I missed it

[Cunninghamew]

can someone explain what the competitive advantage is here? its appears to be a the highest-price seller. I would think you have to argue the "starbucks effect" in order to suggest a competitive advantage, but I could be wrong.

 

Also- could someone also explain the economics behind why grocery stores tend to be regional? Why are there regional but not national scale advantages? thanks.

 

Regarding your first point... a small anecdote

 

I hate grocery shopping and love cooking. Going to Kroger or any other standard grocery store (even Sprouts) is the bane of my existence. When I lived in Dallas, I enjoyed going to WFM or Central Market (owned by HEB). My wife and I would actually do it as an activity we called "sip and shop." We would get there grab a beer or glass of wine and leisurely do our grocery shopping. I knew I was paying up for my groceries, but I didn't mind as I enjoyed the experience that much more.

 

Also, I recently moved back home to Little Rock, AR. As previously mentioned, I like to cook. There is no where in my town where I can get decent products except WFM and a few small specialty grocers.

 

I didn't start to look into WFM till today and my initial impression is that it is an interesting opportunity that warrants further research. The big question is do they have a brand that will allow them to continue to generate industry leading margins. For sanity's sake - WFM has consistently generated about 35% gross margins compared to ~31% at Sprouts, Nat Groc, and Fresh Mkt. I imagine there is some truth to both the bull and bear thesis. WFM will probably lose some of its pricing power and be only a slight premium to the aforementioned comps, but I also think it is better than those comps. WFM offers an experience (like sip and shop) that some people want.

[TwoCitiesCapital]

Whole Foods dives after results; announces $1B buyback

 

http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html

 

It doesn't seem like the results were a disaster, though I know everyone is watching comps/SSS.

 

Revenues are up and cannibalization of old store sales is to be expected as they open new stores nearby. This will especially be the case with the 365 stores. As long as total revenues are growing and SSS aren't absolutely collapsing, then I think we're ok here. I do take a small issue with the company's forecast of 1200 large stores remaining the same in spite of the launch of 365 - surely they see that if you're building a smaller store to attract an overlapping customer base that they'll need fewer big box stores. I'm sure this won't be an issue until we get closer to that 1200 store count, but hopefully they'll revise those figures if the 365 concept is successful to prevent overbuilding.

 

Gross margins came down slight q-o-q from 35.6% to 34.5% while turnover remained constant (but was up y-o-y). This is one quarter and that's a 1% drop in margins when everyone is calling for the end of WFM and it's stock has tanked 20% over this quarter and much more from it's peak. Total revenues continue to grow, SSS/Comps aren't cratering, margins are being relatively well maintained for how much talk "increasing competition" is getting, and earnings continue to grow. I think the fear-mongering is a little overdone, but someone please feel free to correct me.

 

Rough estimates of FCF came in a little low for my estimates at ~$800M. I'm using OpeX less maintenance CapEx. This is about 4% lower than last year while I was expecting modest growth putting the total figure close to $900M. It turns out my estimates of maintenance CapEx were a little low previously so I'm glad they're explicitly breaking this out now and that explains some of the divergence in my estimates. On a per share basis, FCF is flat from last year.

 

If FCF remains flat and that they borrow the entire $1 billion for the share repurchase (they won't), you'll get a a company with a $9.5B market cap and a 10.5B enterprise value doing ~$800 million in FCF with no expected growth despite spending nearly $500M in new store expansion each year. I'm ok with that.

 

They repurchased 3.5% over the past fiscal year and will be repurchasing an additional 10%+ over the course of the next 6 months (at these prices). This will be the first time they take on debt and it will be a conservative amount. I'm quite happy with a large buyback at these prices and that it doesn't come at the expense of their expansion.

 

Also, just noticed that only 11% of stores that were opened this year were in new markets. The other 89% were in existing markets - is it really a surprise that SSS are down when you open new stores near old ones and cannibalize on the same customer base? I would think that a slight negative in SSS would be expected if you opened 8-9% of sq. footage in areas that are already being serviced by another store and could attract some of those same customers.  I get that it's obviously better if SSS were positive through that trend, but I certainly don't think that -0.2% comps is the death of a company considering the amount of growth in the same market AND that total revenue is still growing at a healthy clip.

 

We'll see - 2016 is slated to have 20% of new stores in new markets. The first half of 2016 should give us a good look at what actual SSS figures would do absent store openings because the year is very back-end loaded for store additions. Also, 20% of stores next year will be in new markets.

[GregS]

TwoCitiesCapital, since you invited comments I will highlight my disagreement with two points you made.

 

On store count, I am more skeptical and I think this is a big issue.  They are at over 400 now and it already feels like saturation.  Cannibalization is an issue, competition is an issue, and I think getting even close to 1200 is a pipe dream.  Management hasn't taken that down yet and I don't expect them to anytime soon, given how firm they have been in that number.  Yet their move toward smaller format is a tell that they don't believe 1200 full size is possible.  I have no idea what the right number is but it's not near 1200.  Maybe there is a right mix of full and 365 stores that promotes continued growth with good ROIC, but no one has a basis for judging 365 at this point, not even management.

 

On margin, I don't take too much comfort in the fact that it hasn't moved much yet.  Last year, who would have thought comps would go negative?  How are they going to reverse that trend and defend their position?  Pricing, most likely.  Whole Foods has lost its edge on differentiation.  Many (including myself) thought Wal-Mart wasn't real competition because they weren't competing for the same customers, and that may still be true.  But you can buy the same quality and same brands at Costco, Trader Joe's, Sprouts, and now Safeway, Kroger and the like.  Yes, there are many customers very loyal to the brand, or shop there for the prepared foods, but I think that base is smaller than Whole Foods needs to maintain current sales at current margins.  In the end, I believe they get to margins could still be industry leading, but are closer to the rest of the industry before this bottoms.  Other grocers have GMs in the 20s.  What would, say, a 500 bp drop in GM to ~30% over the next few years do to their profits?

 

I think it's always good to point out what would get us to change our minds.  For me, it would be primarily comps resuming and sustaining their rise for several quarters, which would suggest further pricing actions wouldn't be necessary.  Until then, I consider those margins at risk.  I also think 365 is worth watching but I find it impossible to judge its chances.

[KJP]

 

Also- could someone also explain the economics behind why grocery stores tend to be regional? Why are there regional but not national scale advantages? thanks.

 

In the context of grocers or retailers like Wal-Mart, many of the benefits of scale come from optimizing the logistics side, e.g., making sure your truck can be very efficient on trips from the warehouse and so forth.  These types of logistics or "route density" advantages are inherently local.  That's why a regional company can actually have a scale advantage over another company that is larger nationally, but smaller locally.  There is a good explanation of this, with examples, in Bruce Greenwald's book Competition Demystified.

 

It also explains why there are many regional grocers.  They get scale over a regional area, but then they bump up against another strong regional player that already has scale in its home turf.  It is very costly and difficult to profitably break into the turf of another company that already has scale in the area.

[TwoCitiesCapital]

TwoCitiesCapital, since you invited comments I will highlight my disagreement with two points you made.

 

On store count, I am more skeptical and I think this is a big issue.  They are at over 400 now and it already feels like saturation.  Cannibalization is an issue, competition is an issue, and I think getting even close to 1200 is a pipe dream.  Management hasn't taken that down yet and I don't expect them to anytime soon, given how firm they have been in that number.  Yet their move toward smaller format is a tell that they don't believe 1200 full size is possible.  I have no idea what the right number is but it's not near 1200.  Maybe there is a right mix of full and 365 stores that promotes continued growth with good ROIC, but no one has a basis for judging 365 at this point, not even management.

 

On margin, I don't take too much comfort in the fact that it hasn't moved much yet.  Last year, who would have thought comps would go negative?  How are they going to reverse that trend and defend their position?  Pricing, most likely.  Whole Foods has lost its edge on differentiation.  Many (including myself) thought Wal-Mart wasn't real competition because they weren't competing for the same customers, and that may still be true.  But you can buy the same quality and same brands at Costco, Trader Joe's, Sprouts, and now Safeway, Kroger and the like.  Yes, there are many customers very loyal to the brand, or shop there for the prepared foods, but I think that base is smaller than Whole Foods needs to maintain current sales at current margins.  In the end, I believe they get to margins could still be industry leading, but are closer to the rest of the industry before this bottoms.  Other grocers have GMs in the 20s.  What would, say, a 500 bp drop in GM to ~30% over the next few years do to their profits?

 

I think it's always good to point out what would get us to change our minds.  For me, it would be primarily comps resuming and sustaining their rise for several quarters, which would suggest further pricing actions wouldn't be necessary.  Until then, I consider those margins at risk.  I also think 365 is worth watching but I find it impossible to judge its chances.

 

Hi Greg,

 

Thanks for your comments. I agree with you on the 1200 store count as was mentioned in my prior comment. I don't know what the right number of stores is, but I think you're right about it being significantly less than 1200. That being said, 800 is significantly less than 1200 and we're only half way there. 600 is significantly less than 1200 and we've got another 5 years or so before we'd hit that at the current rate of grwoth - so I'm not concerned about over saturation in the near term.

 

Especially if you consider the current store count and divide it by the states - that is 8 per state. If you're suggesting the market can't handle substantially more than 8 per state in a fast growing section of produce for a national chain, I think you may be seriously mistaken. There are 8 Whole Foods in Manhattan alone. I think other large Metropolitan cities could handle a number of stores well - places like Miami, Chicago, L.A., etc. could all handle multiple Whole Foods meaning that the remainder of the state is left with only room for 1-3 Whole Foods? I seriously doubt it. 1200 may be a pipe dream, but 700-800 is more reasonable and is 2x the stores now and you're paying for none of that growth if margins remain semi-stable.

 

If margins do decline 500 bps like you say, there's the chance you make up for it in maintaining market share in a fast growing market while also doubling your store count. That being said, I've yet to see any convincing evidence of massive margin erosion. The lower margins we saw in the past led to increased turnover and increased profits - if that's the result of falling margins then please, bring it on! I understand that there is increasing competition - I also understand WFM provides a more pleasant shopping/dining/drinking experience than the majority of those competitors and that there is more than enough room in the market for a number of players.

 

I would change my mind if I saw significant margin reduction that didn't lead to higher turnovers and profits. What I won't do is look at the competition who has failed to do compete effectively enough to cause massive margin erosion in the past and suddenly determine that they're guaranteed to be successful at it in the future and sell WFM based on speculation that hasn't been supported by the data so far. Whole Foods revenues are growing. Comparables were still up year over year. FCF would have grown had it not been for the increase in maintenance capex in Q3 (which appears like an anomaly because the large gain isn't reflected in any other quarters). The capital structure is becoming more "efficient" while still remaining conservative.

 

I will say that the SSS figures were a bit disconcerting for the quarter and current YTD, but they aren't collapsing by any means. They were still +2.5% for the year despite the fact that 90% of new stores were added to areas already having a Whole Foods. I think it's more likely that Q4 and Q1 might just be weak quarters than to assume that the competition, who has failed to affect WFM at any point in the past, are suddenly beginning to affect them now - especially since gross margins remained elevated, revenues continued to grow, and customer spend per visit continues to grow despite supposed cost cutting.

 

 

 

 

[GregS]

Those points are well taken. I plan to dig into the numbers and call the next few days and will update my thoughts if there is anything worth updating.

 

My working hypothesis is that WFM fundamentals are declining, albeit slowly, and that we haven't seen bottom yet. GMs would be hit next. If they can use price to drive sales and higher ROI, great. 365 is basically based on that idea. I don't feel like that concept was introduced from a position of strength, however.

 

This will be a buy at some point. Whole Foods will still be around in 10 years, but how profitable the business will be is the question.

[JayGatsby]

I noticed prep food was about 20% of sales. Does anyone know the profit contribution? or have a ball-park guess?

If prepared food is 20% of sales, I'd venture that sales as a result of prepared foods is far higher than 20%. When I get the prepared food I usually grab a can of some new tea concoction, grab an apple or something and maybe grab one of those protein candy bars for the morning.

 

This gets back to Sionnach's question of what's their competitive advantage. I think it's i) unique food selection that you can't find elsewhere and ii) prepared foods, that combine into the experience that TwoCities and Cunninghamew mentioned. Similar to Starbucks, Whole Foods is an affordable luxury that people rationalize because of the experience and because it's healthier or tastes better.What's interesting to me about this is that, similar to my restaurant hypothesis, this doesn't indicate a need to go down market and fight the price battle. They should have tons of opportunity to continue to exploit this all sizes of stores. Rather than create a smaller store with a value proposition I'd be curious to see them create a smaller store that's more expensive. You probably can't market it as that, but basically a higher percentage of food stands / prepared food and a lower percentage of canned beans. Maybe their 1200 stores is based on that ability to create smaller, more focused markets depending on the demographics.

[DTEJD1997]

Hey all:

 

I used to work with a guy that worked at Whole Foods.  Hey said it was a pretty good place to work at UNTIL they brought in the crew from K-Mart.  He claims they hired a bunch of people from there a few years back & the results were predictable.  Perhaps we are seeing the more complete fruition of that with the latest earnings report.

 

On a different note...are these guys going to be able to maintain a high P/E now that earnings are CONTRACTING?

 

I used to shop at WFM a lot more than I currently do.  One of the reasons is that Kroger is now carrying the brand of Indian TV dinners that I like.  They are WAY cheaper than WFM.  They also have about 10 locations for every one WFM, so it is a whole lot more convenient for me to shop there.

 

WFM has some pretty good prepared foods, I'll give them that...but I can eat MUCH better than that for just a bit more at some great Chinese, Indian & Middle Eastern family places that I know.

 

I also shop at Trader Joes a whole lot more.

 

I think WFM value proposition has been compromised.  At least that is the situation in the midwest.

 

Finally, yes they opened a location in the middle of Detroit.  At first, I thought one of their developers had a stroke, or lost their mind.  HOWEVER, that is in a rather unique area.  Museums & Wayne State University are less than 1/2 mile away.  There are also numerous hospitals even closer than that.  So there are a tremendous amount of highly educated people in close proximity...Being in Detroit, it is still in a somewhat dicey area with hobos & such wandering about...I very much DOUBT that Detroit proper could support more than 1 location.  The Detroit Metro area might be able to take a few more locations...BUT Trader Joes has blocked them out in some areas.  For example, Grosse Pointe already has a Trader Joes & two Krogers along with a few smaller family specialty grocers.  I don't think WFM could move into that area...It is already sewn up.

 

I think that the next few quarters are absolutely critical.  Earnings have to start growing again...otherwise the P/E ratio gets whacked.

[GregS]

I finally got a chance to look at the release and conference call.  Looks like comp decline has accelerated and they expect margins to continue to contract.  The first five weeks of the new quarter saw 2.1% comp sales decline, compared to the 0.2% decline for the recent quarter.  Remember that right before the start of fiscal Q4, NYC had its weights and measure audit which resulted in major negative publicity, which depressed comps at the very end of the quarter and into Q4.  If this was the only factor, we would have expected a rebound in the first part of fiscal Q1, not an acceleration.

 

Also recall that this all comes on the heels of management changing their comp sales reporting earlier in the year from stores opened 53 to 57 weeks, to reflect the sales boost due to new openings.  Under the previous standard, the numbers would probably look worse.

 

Guidance shows things are not getting better.

Sales growth of 3% to 5%

Approximately 30 new stores, including three 365 stores and two to three relocations

Square footage growth of 7% or greater

EBITDA margin of approximately 8.5%

Capital expenditures of 5% of sales

ROIC greater than 13.5%

 

They go on to say:

The Companys results are highly dependent on comps, which have been particularly difficult to predict in this competitive landscape. While there has been some stabilization in the two-year comp trend since the end of the fourth quarter, it has been only five weeks. The Company is hopeful that comps will improve over the course of the year given its toughest comparison is in the first quarter, and many sales-building initiatives are still gaining traction or are planned to roll out later in the year. The higher end of the sales outlook reflects a 2.8% two-year comp, in line with the current run rate, and flat comps for the year, improving from -2% in the first quarter, to relatively flat in the second and third quarters, to 3% by the fourth quarter. The lower end of the sales outlook reflects the possibility that comps could get marginally worse before they get better, with an inflection point later in the year.

 

Theres some positive in there about the stabilization in two year comp trend, but they basically admit they are just guessing on comps.  What happens to sales growth if comps remain negative for the year?  Flat to negative sales growth with 7% square footage growth is not good.

 

What about gross margins?  Heres what they say:

Primarily reflecting its value efforts, the Company expects the year-over-year decline in gross margin, excluding LIFO, in fiscal year 2016 to be greater than last years 45 basis point decline.

So even optimistic management admits margins will contract. 

 

Maybe their initiatives will work, but its too early to tell.  Guidance is on the hopeful side, while the trend in comps/margins continues to be negative.  Is a supermarket with this profile worth 18x earnings?  Like I said, it is a buy at some point but we go lower first.  In any event, given the unknowns and downside potential, there is no margin of safety at this price.

 

My view is not unique, but its been interesting to see the decline arrested around the $30 mark and I suspect their are too many investors thinking "great company at a great price."  Buybacks will probably help defend the stock price in the short term, but another quarter or two like this will hit the stock.

 

[Viking]

GregS, thanks for posting your thoughts; i agree with everything you have written. My read is results the next quarter are likely going to get worse. After that? To early to tell. However, the large stock buyback will likely provide some support for the shares.

 

I do like their business and feel they have a strong brand. I will continue to read up on the company.

[rogermunibond]

Lex column in the FT was opining that WFM should just go private.

 

http://www.ft.com/intl/cms/s/3/806fd1f0-83dd-11e5-8e80-1574112844fd.html

[TwoCitiesCapital]

Lex column in the FT was opining that WFM should just go private.

 

http://www.ft.com/intl/cms/s/3/806fd1f0-83dd-11e5-8e80-1574112844fd.html

 

Levering up to repurchase shares was one of my thesis for getting in and then increasing my stake upon the Icahn involvement rumors. I'm glad to see the 10% buyback on top of what they've already done this year, but I don't think they have the wiggle room to be able to take the entire company private any time soon unless if they want to jeopardize growth opportunity. 

 

I imagine that the company COULD sustain more debt, but an additional $10B would be excessive and the current growth plans wouldn't allow for more than ~200M in annual buybacks. TBH, I'm excited about the $1B in buybacks, but would rather they focus the remainder of their FCF and any new debt on executing their expansion plans. This is a company that has a runway ahead of it with plenty of optimization left to be done to squeeze margins out of regular stores.

 

 

 

 

[TwoCitiesCapital]

Whole Foods beats on revenues and earnings. Still down slightly in after hours trading.

 

http://money.cnn.com/news/newsfeeds/articles/globenewswire/6174876.htm

 

SSS down by 1.8% and margins have eroded since the last quarter. ROE was saved by the $1B debt-for-repurchase transaction and has actually increased from prior quarters. Adjusting the balance sheet for the ~$400M in cash that remains to be used for the repurchases, and you see that earnings quality has deteriorated, but not by much. Hard to know if this was in response to a tough quarter where GDP slowed substantially or if this is the result of the success of their competitors - we'll find out when the others report over the next month.

 

I'm still holding at these levels and still don't see a death-spiral scenario in margins. Still expecting FCF ~1+B this year and high-double digit ROEs largely due to the optimization of the balance sheet with $1B in debt and the repurchase of 10% of the outstanding equity.

[krazeenyc]

Whole Foods beats on revenues and earnings. Still down slightly in after hours trading.

 

http://money.cnn.com/news/newsfeeds/articles/globenewswire/6174876.htm

 

SSS down by 1.8% and margins have eroded since the last quarter. ROE was saved by the $1B debt-for-repurchase transaction and has actually increased from prior quarters. Adjusting the balance sheet for the ~$400M in cash that remains to be used for the repurchases, and you see that earnings quality has deteriorated, but not by much. Hard to know if this was in response to a tough quarter where GDP slowed substantially or if this is the result of the success of their competitors - we'll find out when the others report over the next month.

 

I'm still holding at these levels and still don't see a death-spiral scenario in margins. Still expecting FCF ~1+B this year and high-double digit ROEs largely due to the optimization of the balance sheet with $1B in debt and the repurchase of 10% of the outstanding equity.

 

If you shop at Whole Foods, you would have expected the margin compression. They've brought the prices down significantly on their organic produce in response to competition.  The more important question and one that is much harder to answer is where the margins ultimately settle. 

[eggbriar]

"If you shop at Whole Foods, you would have expected the margin compression. They've brought the prices down significantly on their organic produce in response to competition.  The more important question and one that is much harder to answer is where the margins ultimately settle."

 

I noticed that they did an increase of 5-15% on a lot of their 365 products right at the end of the year.

[JayGatsby]

This is pretty interesting: https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/

 

Originally it sounded like the new 365 was basically a whole foods knockoff but now it seems they're pushing much harder on the prepared food. Seems like a good strategy... get people in the store for low margin groceries and then upsell them on coffee, prepared food, etc.

[DTEJD1997]

Hey all:

 

There have been reports that Trader Joes has lowered prices even further.  The speculation is that as they grow their store count, they further cut prices to put pressure on Whole Foods as part of their business plan.

 

http://www.businessinsider.com/trader-joes-is-reportedly-slashing-prices-2016-3

 

I will go to Trader Joes much more often than I go to Whole Foods.  Trader Joes has more locations.  They are also closer to where I live & work.  The prices at Trader Joes are also hard to beat.

 

Whole Foods may have somewhat better quality & definitely better presentation, BUT is it worth paying 50% more?

 

I'll never forget the time my ex-girlfriend & I went shopping at Whole Foods.  A clerk was handing out samples of smoked turkey lunchmeat.  It was EXCELLENT, some of the very best I've ever had.  Clerk asked me if I was interested in buying some.  YES!  How much is it?  Clerk answered it was $19/lbs.  Ex burst out laughing...I was floored.  I don't care how good turkey tastes, I am not paying $19/lbs. 

 

So WFM was/is definitely vulnerable on their prices.