Breakout

For Whole Foods, this is how the 'growth' story ends

In a photo made Wednesday Aug. 29, 2012, construction workers finish the parking lot of the soon-to-open Whole Foods Market in Boise, Idaho. Across the country, aggressive expansion plans by Whole Foods and specialty grocer Trader Joe's, among others, are forcing independent food co-ops, the cradle of the organic retail trade, with roots dating back to the 1970s, to make changes to stay relevant. (AP Photo/John Miller).
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In a photo made Wednesday Aug. 29, 2012, construction workers finish the parking lot of the soon-to-open Whole Foods Market in Boise, Idaho. Across the country, aggressive expansion plans by Whole Foods and specialty grocer Trader Joe's, among others, are forcing independent food co-ops, the cradle of the organic retail trade, with roots dating back to the 1970s, to make changes to stay relevant. (AP Photo/John Miller).

The selloff in Whole Foods Market (WFM) after its latest earnings warning appears to spell the end, at least for the foreseeable future, of any remaining hope the organic-foods seller can still be a "growth" stock amid greater competition, even as the better-, smarter-eating trend broadens.

Following the first quarter, it seemed the biggest problem for Whole Foods was matching, or exceeding, its previous success. That still has truth to it. But it's clear with the second quarter completed that, although it might well be a solid company in isolation, in the view of traders and investors it's not going to deserve premium pricing on its stock anytime soon. In the past five years, it's gained an average of 74%. So far this year, it's fallen 33%.

A large part of that drop has occurred today, even though it already was weak through the first four months of 2014. Shares of the Austin, Texas, grocery and prepared-foods chain were having one of the ugliest days in their history Wednesday, sliding 19.4% to $38.67 after the company lowered its full-year estimates for the third time in only a few months. It's only had three occasions in which it fell more in one session.

Volume in the stock was eight times the daily average after sellers digested the results, which saw the company earn 38 cents a share in the quarter, missing estimates by 3 cents. Revenue and same-store sales were also below what was expected. The last time the stock, which reached its all-time high of $65.59 in October, traded under $40 was about two years ago. Since that peak, shares are down 41%.

It was the outlook that was the larger problem, considering Whole Foods yet again proved to be "overly optimistic"  the company's words  in terms of how all would turn out. (The earnings call transcript can be read here.) Whole Foods remains profitable year after year. Its sales continue to advance at a double-digit pace. Even after its reduced views, it still thinks revenue will be up at least 10.5% this year. However, that's not good enough, considering it trails the past few years by about two percentage points.

Industry problem?

Worries that competition will mean lowering prices, therefore eating into profits over time, aren't out of line, but Whole Foods isn't now nor will it ever be a cheap shopping experience. Executives said that, while they'll be more attentive to competing on price, they're planning to convince customers they have the total package  that means better selection, top-notch service, good, clean stores and so on.

Undoubtedly, some customers will abandon it for other merchants if they can get exactly the same goods for a better price, whether that's at Trader Joe's, Kroger (KR), Walmart (WMT) or another natural-foods store. Another set will remain loyal. Aiding Whole Foods is the fact that it's got a scale advantage, having almost 400 stores at this point, next to no debt and more than $1 billion in cash; it plans to ultimately reach 1,200 U.S. locations. That expansion won't come cheaply, of course, but it has a large enough lead on its competitors to where it should be able to more easily establish a hold in the neighborhoods where it does build out.

Not surprisingly, multiple analysts didn't want to focus on any of that, and they issued downgrades. Traders, meanwhile, took the view that Whole Foods' problems won't make winners out of similar stores at its expense, signaling that, instead, they too will struggle for consumer dollars in a lower-price fight. Sprouts (SFM), reporting earnings this week, was down 13.1%. The Fresh Market (TFM) was losing 8.6%. Fairway (FWM) was lower by 7.6%.

Ahead of these latest results, most of the price and enterprise valuation metrics for Whole Foods were essentially in line with its five-year average, including a forward multiple around 27 and a price/earnings-to-growth ratio of 2.1. Generally, those have been 29.2 and 1.7, respectively, in the past few years. Wall Street's price target was $50.39, but at this point, faith in this name is running short, so it'll take a serious and unlikely reversal to get shares close to there in the near term. The decline since the high, and the magnitude of the post-earnings plunge, suggest this isn't a mere stumble that will easily be forgotten. Whole Foods is going to have to re-earn adherents, and that's not going to be easy.

If it weren't public, you'd say Whole Foods has a pretty good set of numbers and fine prospects in these days of ostensibly eating healthier, even after the decreased guidance. You'd wouldn't care about two straight earnings shortfalls or the slowest same-store sales growth since the first quarter of 2010.

But it is public. So it's not only about customers or employees or ingredients; it's also about shareholders, the harshest judges of all. And they can make about any company, whether it's expanding profits or not, look like its very future is in question. Whole Foods' future isn't, although you wouldn't know it today.

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