Whole Foods shares dive as rivals pressure sales

Reuters/Yahoo ^ | 11/03/2006 | Jessica Wohl

[Uncledave]

Whole Foods shares dive as rivals pressure sales

By Jessica Wohl

CHICAGO (Reuters) - Shares of Whole Foods Market Inc. (Nasdaq:WFMI - news) plunged more than 20 percent on Friday, a day after the No. 1 natural and organic grocer said it is feeling the heat as traditional grocers entice customers with the fresh produce and prepared meals that have been a cornerstone of its strategy.

On Thursday, Whole Foods said it expects sales at stores open at least a year to rise 6 percent to 8 percent in 2007, far below the double-digit same-store sales increases the retailer has posted for the last three years.

In the fourth quarter of fiscal 2006, same-store sales rose 8.6 percent, down from 13.4 percent growth a year earlier and a 9.9 percent rise seen in the third quarter.

HSBC, which has an "underweight" rating on Whole Foods, slashed its price target on the shares to $33 from $58.

"The conventional markets have become more competitive," Chief Executive John Mackey said on a conference call on Thursday. "Competition is tougher. No question about it."

Shares of Whole Foods fell 21 percent to $47.34 in heavy Nasdaq trading. The shares were off 4.8 percent to $60.12 on Thursday, before the results and outlook were announced.

Shares of grocery distributor United Natural Foods (Nasdaq:UNFI - news), which counts Whole Foods as its biggest customer, fell 7.6 percent to $31.73.

PRESSURE FROM NICHE RETAILERS

Whole Foods said it is feeling pressure from niche retailers, such as privately-held Trader Joe's and Wegmans, which are known for good customer service and prepared foods.

At the same time, retail leader Wal-Mart Stores Inc. (NYSE:WMT - news) and traditional grocers such as Safeway Inc. (NYSE:SWY - news) have added more organic fare to their stores to reach shoppers who want to try organic foods but balk at Whole Foods' prices.

"There has been an explosion in interest from our supermarket competitors in virtually everything we are doing," Mackey told Whole Foods employees in a letter posted on his blog. "From copying many aspects in the design of our stores to selling more organic foods of all types, other supermarkets are studying and emulating us in dozens of different ways in their attempt to compete more aggressively against us."

Mackey said several Whole Foods executives have been approached by headhunters, leading the company to raise its salary cap, which limits how much total cash compensation anyone at Whole Foods can be paid, to keep such employees from jumping to rival companies.

"Raising the salary cap to 19 times the average pay has become necessary to help ensure the retention of our key leadership," Mackey wrote.

HSBC analyst Mark Husson said that he does not see why Whole Foods should trade at a premium "to quality long-term growth retailers like Sysco, Walgreen, and Costco."

"Super high premiums for concept stocks are only sustainable, we believe, while they are still 'working' or delivering vastly superior returns," Husson wrote in a note to clients. "When reality catches up and growth slows, the entire discounted future tends to collapse in -- and so do the multiples."

Shares of Whole Foods trade at about 36.4 times next year's expected profit -- a sharp premium to No. 1 U.S. grocer Kroger Co. (NYSE:KR - news), which trades at just 14 times its expected earnings, and No. 1 U.S. drugstore Walgreen, which trades at 18.5 times its expected profit.

[Uncledave]

I shop at Whole Foods quite a bit. Yes, it's pricey stuff in general, but I find their store brand products are fairly priced and very good quality. And the hot buffet and salad bars are a good deal for a quick healthy meal.

Anyway, looks like the stock is coming back down to earth.

[auto power]

The Whole Food grocery chain is contemplating a store in Indianapolis (Carmel I should say) and a few of the contentions are: 40,000 to 70,000 square fee....residents surrounding store area must be college educated.....northside/Carmel is considered one of the "elitist" areas of Indianapolis....(oh hum).....

[Gay State Conservative]

A student writing for MIT's "alternative" student monthly did a great piece about Whole Foods not long ago.In essence,she observed that for the typical customer,shopping at whole Foods isn't about health but is,instead,about the conspicuous display of affluence.

That's sure true in my neck of the woods.Porche SUV's outnumber VW buses by about 20 to 1 in our local Whole Foods store.

[svcw]

Hey good point.
I would say their stock has fallen because they are SO over priced...I mean Safeway has a whole line of organic foods (much cheaper), then there is Trader Joe's.

[Battle Hymn of the Republic]

whole foods is full of liberals here in the bay area, I can't stand even going in them.

I for one love seeing the other chains carry better foods and take away market share...

[Eric in the Ozarks]

When we visit our son in Seattle, the local Whole Foods store is on our list. Son calls it "Whole Paycheck Foods."

[retrokitten]

And the hot buffet and salad bars are a good deal for a quick healthy meal.

I love the hot bar! They have great sushi and pizza, too. My husband likes to go for their beer section. We hardly ever buy actual groceries there, but they get plenty of our money for take out!

[Buck W.]

I prefer Trader Joe's. Unfortunately, there are no TJs here in TX.

[Paleo Conservative]

Hey good point. I would say their stock has fallen because they are SO over priced...I mean Safeway has a whole line of organic foods (much cheaper), then there is Trader Joe's.

HEB has similar merchandise at better prices than Whole Foods, and they also have all the brands you'd expect at an ordinary grocery store too. Whole foods doesn't have a store in my city, but there are several HEB's and an HEB Plus!

[bradactor]

I live in Texas and remember the first Whole Foods store. Of course it was hot with the liberals in Austin. They have gone more market wide and some of their prices have increased as they have changed certain product lines and may be paying their employees more. They are getting ready to build one of the largest Whole Food Stores right next to the Pavilion Mall in Houston where I am currently doing security. Anyway, I still shop at Whole Foods but was glad to see Krogers and other stores compete. This will help in market pricing as well. Again the market works despite the liberals shouting their socialistic ways.

Brad in Houston

[muleskinner]

Whole Paycheck dittos

[AirForceBrat23]

...for the typical customer,shopping at whole Foods isn't about health but is,instead,about the conspicuous display of affluence.

True dat!

[Kimmers]

Zionsville is right in line with Carmel....My son needed to drive my Malibu so I borrowed my friends Volvo today....I feel so north side now...When we first moved here 20 years ago this was more of a farm community, I miss that. (ho-hum)

[Uncledave]

shopping at whole Foods isn't about health but is,instead,about the conspicuous display of affluence

I don't agree much with this. I do agree that consumers buy all sorts of things to impress others, but groceries? Do people keep their groceries on display like a rolex? If I wanted to impress somebody I would wait a long time if I expected them to rummage through my pantry with jealous admiration.

For me, I shop there and am willing to pay a premium because I like the food and I think some of the items are healthier. I choose to avoid things like nitrates, growth hormones, trans-fats and preservatives and it's easier to find these products at Whole Foods.

And as I posted earlier, there are some good deals on house brands. For example, I have a stack of their dark chocolate bars which at $1.50 each is a great deal, and the quality of the chocolate is superb. Their ice cream is terrific and cheaper than Breyers. Potato chips. Crackers. Butter. Bulk foods and nuts. On and on. The cheese department also blows away most supermarkets and I'm a cheese nut.

No, I don't own stock in them. Wish I bought it years ago -- and sold on Monday!

[grundle]

The article says:

Mackey said several Whole Foods executives have been approached by headhunters, leading the company to raise its salary cap, which limits how much total cash compensation anyone at Whole Foods can be paid, to keep such employees from jumping to rival companies.

"Raising the salary cap to 19 times the average pay has become necessary to help ensure the retention of our key leadership," Mackey wrote.

Here's their previous policy:

http://www.wholefoodsmarket.com/company/corevalues.html

we have a salary cap that limits the compensation (wages plus profit incentive bonuses) of any Team Member to fourteen times the average total compensation of all full-time Team Members in the company.

It seems that the economically illiterate liberals have been trumped by the real world.

[all the best]

Probably another left-wing academic who hates any display of American affluence and sees the whole world through that template. It is okay to prefer and be able to afford quality. It is envy and jealousy that we can do without.

[CDHart]

There's a Wild Oats market that we've gone to a couple of times. Very pricey, and I didn't think the quality was superior enough to be worth the extra money.

Carolyn

[Gay State Conservative]

It is okay to prefer and be able to afford quality. It is envy and jealousy that we can do without.

I don't think that's always true.Unlike at least some here,I'm not a big fan of conspicuous consumption.I'm a lot like my Dad,a child of the depression,in that way.

My Dad was always content to drive an Oldsmobile 88 although he could have afforded to drive something *much* fancier.Also,my Dad always wore a Timex watch although he could have easily afforded the most expensive Rolex made.

I,like him,am a saver,not a spender.

Also,in my neck of the woods (the rich,leftist suburbs of Boston) conspicuous consumption has risen to an art form.To me,there's something deeply offensive to seeing a teenage kid driving a new BMW.

But that's just me,I guess.