Saturday, July 5, 2014

Going Organic - WFM


The sign of a well run organization, from a shareholder perspective is a consistently good RoE. If a company shows consistently better RoE compared to competitors, it is a sign of a management responsive to the shareholders. A number of things play into an improved RoE including high profitability, growing retained earnings, a shrinking float, low debt and many other factors. So it is not everyday that you look towards retail, or even worse, towards a grocery store for these characteristics.

Hello, WFM!

Whole Food Markets (WFM) has been synonymous with organic food and the brand is held in high regard when it comes to a great "natural" shopping experience. It is a "Trader Joe's" sort of experience but at a larger scale. I have to admit that I have not shopped too many times at WFM, but when I have, I am almost amazed at the "farmers market" style of shopping in there. Everything seems more like a real market, the closet you can get to a real market, in the world of big box retailing I suppose. The quality of the products is also very impressive, except for their relatively higher prices. But I guess you pay up for AAPL don't you?

Lets set aside the experience and look at the numbers:

1. Forward P/E of 22 - At expected 10% revenue growth it is high but not off the charts
2. RoE of 15%+ - For a grocery store this is pretty impressive. Costco is one comparison I can draw
3. Debt - 60 Million. - This is off the charts for a grocery chain. You goto to love this as a shareholder
4. Growing retained earnings - Even in the last quarter were net income shrunk
5. Relatively small - Still only 300 odd stores in terms of overall size is very small.
6. 1 time sales - You are not paying too much at current levels - though not that cheaper compared to other low margin grocers.
7. Enterprise value - less than 1. Not that far out for a grocery store but on the cheaper side though
8. A dividend - Small one, but something nevertheless for a growing company.

Now with all this said, the market is not at these levels for no reason. WFM has been showing signs of struggling with competition, both from companies like Safeway that has made a push into organic in a big way and  Sprouts that is making a direct go at WFM. Sprouts, especially, is going the rout of slashing prices to catch up with WFM. This is very costly for WFM that is trying to be a premium service in a cut-throat market. Much like APPL in the desktop/laptop market. Couple of quarters with bumpy Net income showing has also made the market nervous about the prospects of WFM.

With all that in mind, the thing I like most about WFM are the same things I like about AAPL.

1. A strong brand recognition for a market segment
2. A resistance towards "slash and burn" approach to pricing and marketing
3. The incredibly low levels of debt for a grocery chain
4. A very low number of stores and the opportunity to expand - given the low debt load
5. A management that seems shareholder friendly
6. A market that is disillusioned with the name
7. Apparently, a founder that is a non-conformist.
8. Close to 8% short interest - Compared to a industry average of about 2-3%

Having said all that, I would jump in today if the stock was less than 35. At 39 it is not too far out. I could buy some now and wait for the pull back in the off chance I do not see the sub 35 pricing. Maybe I will do just that. I just need some convincing to get there. I am working on it. Maybe the way to do it is to sell some Intel at 32$ (I am yet to sell it seeing the momentum into earning) and go into the grocery business.


2 comments:

  1. I did sell 60% of my INTC but am yet to initiate position on WFM. Today's market reaction to missed revenues at WFM has brought the stock closer to the desired target of sub-35$ pricing.

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  2. I waited and waited for it to break $35 and it got away... now at 47$ I am not getting in. Though there is some regret, I have learnt that chasing investments is the biggest mistake especially if you are opening a position in a new script. I guess I will have to let this one go for now.

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