With shares of Whole Foods Market (NASDAQ:WFM) trading at around $88.13, is WFM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
Whole Foods dominates the organic and natural foods retail space. Growth has been strong through the years, which has led to the ambitious goal of opening 1,000 stores in the United States. That might seem like a good idea now, but the economic environment is likely to get worse before it gets better – organically. If Whole Foods opens this many stores and the consumer weakens, then the company will likely find itself in a difficult predicament. It would be extremely difficult for Whole Foods to meet earnings expectations due to consumer weakness. Investors might want to make the argument that these are mostly affluent shoppers. However, that argument doesn't hold up. Look at 2008 as an example. If that type of environment presents itself again, would investors feel comfortable owning stock in Whole Foods? If many Whole Foods shoppers are affluent, then they likely have investments and/or they're own businesses. That being the case, if things head south, their incomes will decline. They will then look for cheaper shopping alternatives. This scenario has already played itself out a few years ago.
Whole Foods is still seeing comps growth, but the growth is slowing. Last quarter's results were disappointing, and a cautious outlook was given. All that said, there are many positives for Whole Foods, which include:
Shareholder-friendly Offers great customer experience Highly innovative Analysts love the stock: 16 Buy, 11 Hold, 0 Sell Consistent improvements in revenue and earnings on annual basis Quality debt management Cash-rich Focus on quality Strong management International growth potential Strong margins (compared to peers)Whole Foods also has an extremely high employee satisfaction score of 3.5 of 5 on Glassdoor.com. It should also be noted that an impressive 74 percent of employees would recommend the company to a friend. The company culture is excellent.
Analysts had originally expected FY2013 revenue of $13.2 billion, but Whole Foods announced that it expects revenue to come in between $12.9 billion and $13 billion.
Now let's take a look at some comparative numbers. The chart below compares fundamentals for Whole Foods, Safeway Inc. (NYSE:SWY), and The Kroger Co. (NYSE:KR). Whole Foods has a market cap of $16.33 billion, Safeway has a market cap of $5.58 billion, and Kroger has a market cap of $17.94 billion.
| WFM | SWY | KR | |
| Trailing P/E | 33.24 | 8.81 | 12.44 |
| Forward P/E | 25.92 | 9.64 | 11.22 |
| Profit Margin | 4.06% | 1.45% | 1.55% |
| ROE | 14.68% | 20.96% | 36.87% |
| Operating Cash Flow | $961.72 Million | $1.56 Billion | $2.83 Billion |
| Dividend Yield | 0.90% | 3.00% | 1.80% |
| Short Position | 1.90% | 25.70% | 2.10% |
Let's take a look at some more important numbers prior to forming an opinion on this stock.
E = Equity to Debt Ratio Is Strong
The debt-to-equity ratio for Whole Foods is stronger than the industry average of 1.00. It's also much stronger than the debt-to-equity ratios for its peers.
Top 5 Dividend Stocks To Watch For 2014Debt-To-Equity | Cash | Long-Term Debt | |
| WFM | 0.07 | $926.00 Million | $25.00 Million |
| SWY | 2.06 | $295.00 Million | $6.17 Billion |
| KR | 2.11 | $238.00 Million | $8.88 Billion |
T = Technicals Are Mixed
Whole Foods has performed extremely well over a three-year time frame, but that momentum has faded.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| WFM | 1.83% | -2.87% | 8.69% | 134.10% |
| SWY | -10.78% | 30.87% | 17.44% | 7.45% |
| KR | 3.95% | 33.10% | 50.73% | 62.32% |
At $88.13, Whole Foods is trading above its 50-day SMA, but below its 100-day SMA and 200-day SMA.
| 50-Day SMA | 86.18 |
| 100-Day SMA | 89.02 |
| 200-Day SMA | 91.95 |
E = Earnings Have Been Strong
Earnings and revenue have consistently improved on an annual basis.
| 2008 | 2009 | 2010 | 2011 | 2012 | |
| Revenue ($)in billions | 7.95 | 8.03 | 9.01 | 10.11 | 11.70 |
| Diluted EPS ($) | 0.82 | 0.85 | 1.43 | 1.93 | 2.52 |
When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. There were also improvements in revenue and earnings on a sequential basis.
| 12/2011 | 3/2012 | 6/2012 | 9/2012 | 12/2012 | |
| Revenue ($)in billions | 3.39 | 2.67 | 2.73 | 2.91 | 3.86 |
| Diluted EPS ($) | 0.65 | 0.64 | 0.63 | 0.60 | 0.78 |
Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
T = Trends Do Not Support the Industry
The consumer is more health-conscious than in the past, and gas prices have come down. Therefore, it might seem as though trends support the industry. However, as mentioned earlier, what happens when incomes for affluent shoppers decline? Many will still shop at Whole Foods, but a decent percentage of them will search for more affordable options. Nobody is rich enough to stop appreciating bargains. While Whole Foods shoppers aren't likely to switch to Wal-Mart Stores Inc. (NYSE:WMT), many middle-income shoppers will switch from their current supermarket to Wal-Mart, which will give Wal-Mart the most potential in this space in a difficult economic environment.
Conclusion
If the economy is actually recovering and can maintain momentum on its own, then Whole Foods is a landslide winner. But that would be a very risky bet. This might be bucking the trend, but the following rating is based on logic in relation to the Main Street economy as well as a focus on capital preservation.
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