Whole Foods (WFM): A Disaster That Could Still Make You Money

November 11, 2016

Whole Foods (WFM) has managed to run in place and go nowhere for more than a year.

Once a high-flier at $62.50 a share, the stock came crashing down to $27.50 where it has remained range-bound since October 2015.

And it looks as if insiders have had enough.

According to Bloomberg, one of the largest shareholders has reportedly met with activist funds to push for immediate changes to a possible sale.

Reportedly, the shareholder is upset with current strategy and the lack of appeal among the millennial generation.  All as increased competition and a change in consumer trends have put significant pressure on the company’s top line. 

In fact, in its latest earnings note, the company posted it fifth straight quarterly decline in same-store sales, and noted that in 2016, it saw its first annual decline in same-store sales since 2009.  Until there is further news of what’s to come, Whole Foods is likely to remain in a tight-channel between $27.50 and $30 a share. 

In short, it’s dead money at the moment. 

Outside of a potential merger or something, the stock looks terrible.

Merrill Lynch agrees, having downgraded the stock to an Underperform rating, noting:

We are downgrading WFM from Neutral to Underperform as we see increased risks to WFM’s comp and margin outlook from a more challenging operating environment. We are lowering our F17E EPS forecast from $1.55 to $1.42. We also believe WFM’s multiple will re-rate lower as comps and margins continue to come under pressure. Our PO is now $25 (was $34), which is 18x our F18E EPS of $1.40 (was $1.75).

Customer traffic declines accelerating WFM’s traffic comps decelerated dramatically (150bps) in F4Q to -4.2%, despite an easier comparison (2-yr traffic trends are -5.0%) and stepped-up promotions. As nat/org food proliferates in the conventional channel, we think WFM will continue to be disintermediated by more convenient and lower priced competitors, particularly given WFM’s large trade area relative to other food retailers. We believe comps could remain negative into F18 as headwinds from increased promotions at competitors, WFM’s value efforts, plans to streamline selection, and deflation are likely to offset the benefits from easier comparisons & ongoing sales initiatives.

The only reason to buy WFM at the moment is on hopes for a possible sale of the company.