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Whole Foods Q4 Results A Morale Breaker

By Glenn Curtis

Tickers in this Article: WFMI, MCD

Organic supermarket Whole Foods Market (Nasdaq:WFMI) has had a tough year. It disappointed and shocked lot of people with its lower-than-expected second quarter results, then its CEO John Mackey's online chats about the company made headlines across the country, then news reports surfaced that the SEC was looking into the Mackey matter, and finally it just released lousy fourth quarter numbers.

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Sluggish Q4
The company did manage to grow same store sales at a healthy 8.2% pace and its overall sales by 30% (from roughly $1.3 to $1.7 billion). But the real news was its bottom line.

The company's earnings came in at 24 cents per share, well below the 28 cents a share the company earned in the comparable quarter last year and the 30 cents a share that analysts had been expecting. Legal bills and integration costs associated with its recent Wild Oats acquisition were behind the shortfall, and cost Whole Foods approximately 6 cents a share. (To learn more, see Mergers and Acquisition's: Why They Can Fail.)

It's tempting to think that this is no big deal - that the majority of integration costs are history. However, for a company like Whole Foods which has suffered so many other hits to its reputation this year, I think it is a bit of a problem. In my mind, the earnings miss destroyed any goodwill the company might have built up with investors over the past month or so.

Nothing Unique about Organic Foods
What is the incentive if you are a money manager or an individual investor to buy the stock right now? Frankly, I am at a bit of a loss. After all, Wal-Mart (NYSE:WMT) continues to offer up organic foodstuffs, and Kroger (NYSE:KR) a major supermarket with more than 2,400 locations in some 31 states has made a recent push in organics with a line of new breakfast and dinner items.

Next, think about Whole Foods' size. When the company started to really gain popularity among the investment community a couple of years back that there was this underlying assumption, especially among some retail investors, that its store base would somehow grow exponentially à la McDonald's (NYSE:MCD). But at present the company maintains just 269 stores, and its said to have around 87 in some stage of development. Frankly, that's a drop in the bucket compared to the major supermarkets out there. The company is probably not going to be a behemoth anytime soon. I also think that this may hinder investment in the company going forward.

Finally, what can investors hope for on the comparable store sales front? As mentioned above, its numbers have been pretty solid. But what is going to happen next year, or the year after that? My bet is that sooner or later its existing stores are likely to peak out and much of the excitement at that point will be over.

Bottom Line
Whole Foods' fourth-quarter numbers were a disappointment - just one of several the company has experienced this year. And very simply due to these disappointments, increasing competition, the company’s lack of size, and the possibility that comparable store sales growth could slow going forward.

I'm going to sit this one out. I just don't see the advantage of jumping in at current levels.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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