Whole Foods Market (WFM) is an easy company to root for. They retail quality products with an accent on healthy and organic ingredients. They conduct business in an ethical manner with decent, fair treatment for their employees. They offer value, but not bargains, real or imagined, and a better, more relaxed shopping experience. It is just the type of company that most people want to see succeed.
If you look at a chart of their stock (a few paragraphs down), however, it seems that they are doing anything but succeeding.
WFM has lost 23.7% since the high of $65.59 in October of last year. It would be reasonable to look at that chart and conclude that growth had stopped... reasonable, but wrong.
The Revenue and EPS numbers (see chart below) show continued growth from year to year in each quarter and by both metrics. You will also notice that the other thing that has shown consistent growth since its inception in 2011 is the dividend that WFM pays.
The problem here, as is so often the case in life as well as markets, is that Whole Food Markets has been judged, not on how they are doing, but on how others think they should be doing and what they are likely to do in the future. It is expectations, not results, driving the stock price. The belief that expectations will remain important leads me to conclude that, for those with an appetite for risk, buying WFM in front of their earnings release and conference call next week may pay dividends.
Expectations, you see, have changed. Over the last few quarters, Whole Food Markets’ management seems to have made a conscious effort to start managing those expectations as well as the company. Growth and earnings forecasts have been cut and the language of the board has been tempered somewhat. It is this, rather than the actual results that has driven the stock lower. After a couple of quarters of that, however, expectations are now significantly lower and easy to beat.
The fact is, as I have said many times, exponential growth is difficult for any company to maintain. After a while the law of large numbers catches up. Usually, by that time, expectations and analysts’ forecasts are already getting out of hand and when reality begins to intrude the reaction is as swift and dramatic as it was on the way up. Also, as with the move up, the move down is often overdone. For evidence, you need look no further than Apple (AAPL).
Guidance changes are the number one mover of stocks, however, so a stock dropping as management begins to rein in those expectations is hardly a surprise. That downward momentum, moreover, has been re-enforced and exaggerated by news that other stores, most notably Wal-Mart (WMT) and Target (TGT), have moved into the organic market with their own range of products. On the surface, that would seem to be bad news for Whole Foods Market, but of course it isn’t.
Maybe my little corner of small town America is different from the rest of the world, but I cannot imagine any regular Whole Foods Market shopper that I know switching to either of those stores in any event less that the closure of every other food store in town. This is what happens when economists make predictions; they assume that people will act as rational economic beings. If Wal-Mart offers organic products for less, then buyers of organic products will shop there, surely? The obvious logic of that statement is only matched by its obvious foolishness.
There are other competitors such as The Fresh Market (TFM) and Sprouts Farmers’ Market (SFM) that could take business away from WFM, and that possibility is priced in, but Wal-Mart and Target? If anything, those stores’ move towards organic and “healthy” products is just recognition that this is a rapidly growing market, which it is.
As the above chart shows, while the rate of growth in organic food consumption took a hit in the recession and has yet to recover, there is still consistent growth. To continue their own increases in revenues and earnings, WFM has simply to stand still relative to competitors. I believe they can do at least that.
Whole Foods Market is still the biggest and best known brand in a growing market. If economic conditions continue to improve, the rate of growth in that market could improve with them. Even if they don’t, growth remains. The stock has returned to Earth with a forward P/E of around 28 and is hovering around a previous level of significant support at around $50.
More importantly, the market has been trained to expect negative noises from the earnings call coming up next week. In that situation, the board doesn’t have to switch to optimism to get a positive reaction; in line results and no further reduction in outlook would be seen as a positive. If that scenario plays out, then now is your chance to buy a brand leader in an expanding market at a relative discount. It may be the only bargain that Whole Foods Market will ever offer you. Snap it up while you can.