Shares of Whole Foods (Nasdaq:WFMI) have come impressively off their lows and seem to be performing exceptionally well during this still-sluggish economic environment. But that doesn't mean that I am willing to get involved in the stock right now, as I see a fair amount more downside risk than upside potential at this point.
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Fourth-Quarter Results
The Texas-based supermarket released its fourth-quarter results this past week. It earned 20 cents per diluted share, which was good news because analysts had been expecting just 18 cents. But the bad news is the following line within the release: "The Company estimates diluted earnings per share, based on approximately 170 million weighted average shares outstanding, in the range of $1.05 to $1.10." The problem with this is that Wall Street is looking for $1.11 a share.
Future Expectations
Of course, this is probably not the end of the world for Whole Foods or its shareholder base. However, I think it would certainly disrupt things if analysts lowered their expectations on the heels of this news. In addition, I would argue that from a valuation standpoint there is a lot to be desired. In short, who is going to look at this situation and see this as a bargain right now? The company trades at about 25.7 times the upper end of the its outlook. That is an extremely steep price to pay for a company that offers many higher-priced goods that are more suited for a rapidly growing economy and a consumer that is able to spend plenty of money. I should also add that paying such a steep multiple of expected earnings isn't that attractive as Wall Street is expecting about a 10.8% growth in the next year ($1.11 to $1.23).
Comparison Shopping
Anyone that has ever been in a Whole Foods store can plainly see that the company sells a wealth of high-quality health foods and has an impressive layout. As I stated before, in a rapidly growing economy I think there would be a huge demand for Whole Foods' products. This is not to say that in the current economy that consumers won't want to eat healthy, but the comp store sales were off 0.9% in the quarter, which is nothing to brag about.
In addition, other popular discount chains are selling healthy foods, which offers some pretty stiff competition for Whole Foods. Healthy fare can be found at a good number of chains from discounters to supermarkets. Target (NYSE:TGT), for example, sells sugar-free items and organic food. And while it's certainly not a one-stop shop health food marketplace like Whole Foods, I think it can benefit from the growing demand for healthy food.
Wal-Mart (NYSE:WMT) is in a similar boat. It too cannot be confused with a Whole Foods. It doesn't have the same product selection by any stretch and isn't focused on the food business. But WMT sells some sugar-free and organic food, and I'd much rather be involved with this company - especially due to the upcoming holiday season. Finally, Kroger (NYSE:KR) has dabbled in healthier foods too. And it can be bought for about 12.1 times this year's estimate, which is a much better bargain.
Bottom Line
I don't dislike Whole Foods. However, I think the shares are too expensive on a price-to-expected earnings basis, and I'm also concerned about the competition issue. For the time being, I will not be consuming this stock. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
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