Digestion Issues Loom for Whole Foods

Dr. Arun Jain, a supermarket industry expert and professor of marketing at the University at Buffalo, argues that the pair are a perfect fit.

"The changes that need to be made at Wild Oats are precisely what Whole Foods is good at," says Jain. "This isn't General Motors (GM) taking over Chrysler where the blind [would be] leading the blind," he says.

The deal also could appease Wall Street's obsession with Whole Foods' same-store sales. While Whole Foods posted a respectable 7% rise in same-store sales for its fiscal first quarter, that was down from 13% growth the year before.

Furthermore, stores open eight to 11 years grew comp sales by 4.6%, while same-store sales at stores 11 years or older fell to a 3.8% comp from 7.3% last quarter. Keep in mind, those are numbers that executives at other grocers such as Safeway (SWY) or Kroger (KR) would sell their first born for.

Sell-side analysts, however, don't like to see those numbers headed lower. Assuming that Whole Foods can improve Wild Oats' comps significantly, it could buoy the declining figures at its own stores.

Whole Foods has stated it plans to reach $12 billion in sales by 2010. Wild Oats and its more than $1 billion in annual sales will certainly help to achieve that goal.

The $700 million, including debt, that it will cost Whole Foods to complete the transaction is a fair price to pay, according to Jain.

"It was very important for Whole Foods to expand quickly," he says. "This frees them of the hassle of looking for real estate and recruiting employees."

Whole Foods has been facing increasing competition in the organic space from ordinary grocers, as well as big-box retailers such as Wal-Mart (WMT) and Target (TGT).

For the long term, I suspect investors will do just fine in Whole Foods. However, I agree with Bank of America analyst Scott Mushkin's argument that, "The success of the stock now not only depends on the success of the new stores, but also the successful integration of Wild Oats."

On Wall Street, there are currently seven buys, seven holds and one sell rating on Whole Foods, including three upgrades Thursday. That means there is still plenty of room for downgrades should Whole Foods hit speed bumps in the assimilation of Wild Oats.

Though everyone is congratulating the bride and groom on Thursday, the company won't be given a long honeymoon period should it see decreasing margins and slowing growth.

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