Wednesday, December 24, 2008

WHOLE FOODS on the line, or is it?

Some concern from our readers has been circulating recently concerning the viability of Whole Foods as a going concern. I thought I would throw just a couple of tools at it--just a couple--to see if this is true. 

First, the company's gross margin is steady, as of October 2008, the end of its fiscal year, at 34%. Safeway's GM for its last fiscal year was 28%. Kroger's was 23%. Also keep in mind that although highly visible, Whole Foods is still a small player in the national grocery store chain market. Its stores are small. Total sales for 08 were $8 billion, compared to $42 billion for Safeway. 

Now for some bad news. Not gonna go into details of why, but operating ROA for Whole Foods has declined sharply in 2008, down from 15% in 2006, 9.2% in 2007, to a poor 6.9% in 2008. Still, that covers its cost of debt (4.718% for $700 million, 8% for $450 million), and gets it to the next year, 2009....

So the question is will the bad economy hurt Whole Foods, which can't afford to get hurt more. Well, Whole Foods is a health food store. Are people who hate MSG, high fructose corn syrup, and trans-fats suddenly going to decide they like them and start shopping at Super-Valu instead? I think not. Something else in the monthly budget will suffer, like eating out, or summer vacation.

Another thing to consider is that in this line of business, the name of the game is in distribution channels and vertical growth. If you want to know whether Whole foods will outperform its competitors, you should consider how much control they have over their suppliers. 

The thing about this current economy of ours is that it is allowing our vision to be blurred. Yes, our capital markets have failed us. Yet despite that, companies still need to borrow funds in order to leverage themselves, and there can be plenty of good debt as well as bad debt. Whole Foods holds a lot of debt, true, but I'd wait for the next quarterly to come out before I start writing it off. Meanwhile, if you are not afraid of risk yourself, it may be a great buy. It's so cheap, after all, you don't have much to lose.

Whole Foods (WFMI): buy

(Reader is not obligated to follow my advice, and does so at his or her own risk...)