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Why Some Say Whole Foods Is Less Filling

Also, why there was fire in Cramer's eyes when he looked my way during the taping of last week's <I>Fox</I> show.

Food for thought:


Whole Foods Market


should've paid closer attention to what happened to



when it announced not long ago that it was creating a new Internet biz. Wall Street just


the idea, demanding that Starbucks pay more attention to the tepid growth of its core coffee biz.

Along comes Whole Foods, a supermarket chain and direct marketer of nutritional supplements. Last week it announced a new Internet strategy and plans to spin off its new Internet unit as a separate public company within a year. Wall Street's reaction: The stock fell by nearly 10% the day after the announcement.

Why? In announcing the change, the company said that the earnings of its core biz could grow by 15% to 20%. Huh? This is the same company analysts thought would grow more in the range of 20% to 25%.

Rarely is it a good sign when a company switches strategy, especially when it makes a big deal about becoming a dot-com. In the case of Whole Foods, it's hard


to think that the company is trying to divert investor attention away from the real story: The earnings growth of its core supermarket biz is starting to stall.

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Signs of trouble, in recent quarters, have included a steady decline in the inventory yield, which some short-sellers view as the single most important warning of trouble. Another measure of how much profit your inventory is yielding, inventory yield is calculated by taking gross profit, subtracting payables and dividing by inventories. One money manger once told me that when the inventory yield stops growing, it's like a doctor telling you that you have an abnormal heartbeat or a clogged artery. At Whole Foods, inventory yields have been declining for two years. Also in decline: inventory turns and every major return, including return on invested capital, return on assets and return on equity.

What's more troubling to some analysts, though, is that ever since missing earnings last January, the company has come up with different excuses for each miss. In the first quarter, expenses were out of control. Then, in the second quarter, store-opening expenses were too high. Investors don't like excuses. "Even after missing estimates significantly last January, the numbers are still being moved around a little bit,'' says analyst Sandhya Raju of

Merrill Lynch

. In other words, they're erratic.

The apparent result: a Whole Foods dot-com, to be called

when it launches next spring. What's more, CEO John Mackey says he plans to spend considerable time with the Internet unit. That concerns Raju, who worries that the core biz itself "won't get what it needs" in terms of management attention, especially since the company has stepped up the number of new store openings, which have been going well.

Whole Foods execs couldn't be reached. A spokeswoman, who had never heard of

, took my questions and promised to pass them along to the proper person. If somebody ever gets back to me, I'll get back to you.

Cutting room:

The part of "" show on


that I like the least, as a participant, is predictions. It's where I have to come up with


, based on what my sources tell me, that won't eventually come back and haunt me. It's hard for a biz journalist to make predictions -- that's not what we do. But if you read my column with any frequency, you can get a pretty fair picture of what I'm likely to predict. (I generally stay away from macro calls, like the market or

Dave Kansas'

fabulous -- no, make that

unbelievably fabulous

-- call on gold. Three weeks ago, he said it was going


! Fifteen years of doing nothing, and then along comes Kansas and gold has its biggest gain in 15 years!)

So, there I was last week with a prediction to make, and the best I could come up with (or the one I liked best) was my column suggesting that



would buy

Hollywood Entertainment


. My sources were excellent, and despite


constant haranguing of journalists who write what he considers "rumors," I felt this was a story that was way too good not to write. (Hollywood and Blockbuster merging? Bitter enemies? You gotta be kidding!)

Enter the show's Word on TheStreet segment. Cramer's to my left. He doesn't know what I'm going to predict until I say it on the air. (

Gary "Mr. TV" Schreier

tries to keep it that way so we get some real spontaneity in this segment.) I mention the Blockbuster/Hollywood thing, and Cramer, clearly agitated, asks, "Are you telling me, if I buy this Hollywood Entertainment, I'm going to make some money on this?" (You could see the fire in his eyes when he started talking. You could feel the heat less than a foot away.)

To which I say, "There could be some antitrust issues that could cause this not to happen."

Cramer: "Are you telling me..."

Me: "But what I'm telling you -- no, what I'm going to tell you -- is these guys are in discussions."

Cramer: "All right."

Me: "I can't tell you anything more than that."

Him: "Because I'll tell you, I'm going to buy the stock."

Me: "That's your decision."

Him: "All right."

Me: "That's a decision you have to make and live by."

If you read between the lines, Cramer, who just


those kind of speculative stories, was trying to get me to commit. But I'll


commit on that kind of story. Discussions are discussions, and deals aren't deals until they're signed. So why write about them? Because that's what I do. I report. I hear from two exceptional sources that the two companies have been talking about merging, and if I believe it's true, I can't just sit on it.

That's where Cramer and I part ways. He keeps talking about making you money. Fine, he's a hedge fund manager. That's not my job. I'm not an analyst. I'm not a broker. I'm a reporter. I work for a news organization. My job is to report, to keep you informed. And with Blockbuster/Hollywood, that's what I did. I kept you informed on what may eventually be quite a story.

Did the same thing on the show: Based on the quality of my sources, I said that they believe a deal is likely to occur by year-end.

But what I didn't say -- and what I wish I could always say and what I wish could always be printed at the top of this column in neon lights -- is something I've written here frequently: Making


investment decision based exclusively on what you read in this column, or read and/or hear anyplace else, is a sure way of eventually getting yourself in trouble. This should merely be a starting point for your own research. That said, lemme tell you, I take what I write seriously and take no pride in giving me and/or my sources failing marks in this column's

semiannual report card.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.