Sowing More Growth

In March 2001, Perry Odak took over as president and CEO. He brought with him the reputation of being a turnaround artist, having dramatically improved Ben & Jerry's before selling the brand to Unilever in 2000. Odak wasted no time in laying out a plan to rebuild Wild Oats that includes organically growing Wild Oats' store base to 150 by the end of 2006 from 106 stores today. Last month the company cut back its 2005 new-store plans from 20 to 15, but we believe management will ultimately achieve its goal of having 50% of its store base that is less than five years old by the end of 2006.

Another important piece to a successful turnaround at Wild Oats is a rebound in operating margins, which are notoriously thin in grocery retail, usually in the low single-digits. On an annual basis, Wild Oats' operating margins are running at about 1% to 2%, but by 2006, management has a stated goal of moving this number closer to the 4% level it enjoyed a few years ago.

We realize that increasing profitability could prove difficult as the company will be spending a lot to build new stores and improve operations, but a recent initiative helped convince us that the company is dedicated to achieving its goal. Wild Oats is working with Stop & Shop stores in the Northeast to test a store-within-a-store concept that would designate a section of the Stop & Shop to higher-margin Wild Oats' branded products.

Only one of the 10 analysts who follows Wild Oats has a buy rating on the stock. Given the company's loss of 9 cents a share in 2004, the consensus outlook calls for Wild Oats to earn only 29 cents a share in 2005. Notwithstanding the negative tone of the analyst commentary out there, we believe the company can exceed those full-year estimates if it executes on its strategy.