Whole Foods Can't Shake Rap as Having Stock as Expensive as Its Produce

Editors' pick: Originally published Nov. 29.

There used to be a grocery store where customers stood in line to wait for the privilege of dropping a hundred bucks for the items in their shopping carts.

The store is still there. You've walked by it. You've shopped there. You know it as Whole Foods Market (WFM) . What's changed is your willingness to drop six dollars on a pound of organic kale there. (News flash: at my neighborhood food coop -- and, keep in mind, I live in New York City, where food snobbery is a badge of honor -- kale can be had for less than two bucks a pound.)

Whole Foods has been a crummy investment for the last 16 months. It's been stuck between about $29 and $35 a share ever since late summer of last yearn and hasn't tickled $40 since July 2015. And analysts are saying it's not likely to get back to that four handle - let alone the $63 price it commanded three years ago -- anytime soon. Shares rose a penny today to $30.94.

If you can get the wagyu beef on sale, don't hesitate. But the on-sale valuation of Whole Foods shares? That's no bargain, Wall Street says.

Not that management of the high-end food retailer hasn't tried to pretty itself up. In its most dramatic initiative the company has realigned the clunky management structure to put the company's visionary founder, John Mackey, in sole charge of the business. But Wall Street's takeaway is that the trends in place are the trends the retailer is going to have to continue to combat. Same store sales, for instance, fell 2.6% in the second quarter, steeper than the 2.1% decline Wall Street had anticipated. Customer traffic -- meaning the number of consumers coming through the doors - decline 4.2%, according to BMO Capital Markets. Analysts say any kind of a reversal in these trends is far enough down the road to keep savvy investors on the sidelines for several quarters.

"While the management reorganization at Whole Foods was long overdue, we expect more of the same in terms of operating and financial performance in 2017," Pivotal Research Group insisted in a research note earlier this month, responding to the company's organizational changes, as well as its fiscal fourth quarter results, which also came out as November got underway.

Pivotal has a "sell" rating on the stock, with a price target of $20, which would be a 35% haircut from where it's trading now.

Granted, Pivotal might be something of an outlier in its criticism of Whole Foods. Wells Fargo, for instance, says the stock is worth more like $30 a share. Which, without belaboring the obvious, is right where the stock is trading now. And, even then, it equates to a P/E of 21 times calendar 2017 estimates, which in the retailing world - especially the grocery business, where margins are notoriously thin -- is a pretty steep premium to pay for a stock that isn't showing a lot of oomph. By way of comparison, Kroger (KR) -- granted, not an apples to apples comparison, inasmuch as Kroger is positioned as a more conventional supermarket retailer - trades at a forward P/E of 15 times. 

Responding to the quarter reported early this month, Wells Fargo noted "traffic weakened and pricing was essentially flat." Yeah, the EPS actually beat forecasts. But sales comparisons have been down for nearly two years, and figure to contract further in calendar 2017.

Perhaps the one constructive measure to arise from the quarterly report: Whole Foods said that co-CEO Walter Robb will step down from his role at the end of this year. Doesn't the co-CEO structure always seem like one of those "student driver" vehicles you'd see in '60s movies? Who is actually piloting the automobile if there are steering wheels on both sides of the front seat?

Even though Mackey is due to resume sole responsibility for Whole Foods future, current CFO Glenda Flanagan, age 62, who has been with the company since 1988, is now slated to retire at the end of fiscal 2017.

All in all, the quarter was a mix - some good takeaways, some discouraging ones - but for the most part, Wall Street remains skeptical of the Whole Foods story for coming quarters. BMO Capital Markets takes its fiscal 2018 EPS targets to $1.38 from the prior peg of $1.53, and thinks the stock is worth, maybe, $23. Obviously there's a wide range of valuation estimates on the stock. But what's consistent is the utter absence of optimism about the story for the next four - and perhaps as long as eight - quarters.

The company is combating the over-arching perception that it's a destination for fashionistas and the twee, and can't move aggressively enough to shrug off its reputation for - and, let's just say it, okay? - being Whole Wallet.

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