Do Not Let Controversy Cloud Judgement on Whole Foods

Friday, July 13, 2007
By Faisal Laljee

Whole Foods (WFMI) is a organic grocer that people love to frequent. But this once darling of wall street is a fallen angel, with the stock plummetting from $80 back in December of 2005 to a recent $40. In fact, the stock is at the same level as it last was back in August of 2004.

The 50% drop in stock price over the last 18 months seems justified. After all, revenues have been increasing in low double digits, guidance has been poor, margins have been shrinking, larger competitors like Safeway (SWY) and Kroger (KR) have started selling organic foods so there is plenty of competition and above all, earnings have been falling.

The most recent controversy surrounding the CEO of Whole Foods posting frequent messages on Yahoo Finance’s message boards is another blow to the company. Or is it? The attention that the company will get from all the chatter about the CEO, not to mention the subsequent ouster of John Mackey, which seems to be on the cards now, might actually be a good thing for the stock. Perhaps this is one of the reasons the stock was up almost 4% today on higher than average volume. Either that or some of 14% shares shorted were covered.

With almost 200 stores, Whole Foods is still a young chain. in comparison, Safeway has over 1700 stores in US and Canada. But does Whole Foods really compete with Safeway? Perhaps it competes with Safeway’s upscale Pavilions chain, but certainly not Vons or Randalls. Whole Food’s specialty is organic foods, but the shopping experience there is far more superior than at most other grocers.

The point here is not to be outright bullish or bearish on WFMI. I think there is a contrarian opportunity to be had here, but investors on either side will need to be patient and adventurous.

– Faisal Laljee
Full Disclosure: I do not own WFMI but my position can change anytime without notice

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