Whole Foods Market: Buy or Sell?

Whole Foods Market (WFM) announced second quarter ended April 10, 2016 total sales of $3.7 billion, slightly above $3.6 billion during the same period last year. Going forward, the company estimates complete fiscal year 2016 sales expansion of about 3%, depicting comps decline of nearly 2%.

Whole Foods Market declared second quarter of 2016 net income of $142 million or $0.44 per diluted share, down 10 percent year-over-year from $158 million or $0.44 per diluted share in second quarter of 2015. Moving ahead, the company forecasts full fiscal year 2016 EBITDA margin of nearly 8.5%.

The key food company reported a slight year-over-year top line improvement primarily driven by enhanced sales trend for the quarter but, bottom line suffered due to an unfavorable expansion in cost of goods sold as total sales percentage.

Secular growth

The global food consumption trend is changing significantly and consistently over the years with people becoming health conscious and thus, shifting to consuming organic foods that opens up several new growth opportunities for the key food company, going forward.
In addition, there has been a notable growth in general fresh food choices with consumers increasingly shifting towards eating fresh and healthy food. According to the Supermarket Guru Grocers Association Consumer Survey of 2015, 50% of the population responded that their diet might become healthier, 28% of overall shoppers require minimum processing and about 25% need lesser ingredients.

Importantly, the consumption trend in the US has shifted from earlier being household-driven to greatly becoming individualized. Therefore, the expanding count of individual consumption events is believed to have several key impacts on food retailers including, major changes in positioning and packaging.

The consistent changes in food consumption patterns of people from hugely oil-based and unhealthy foods to organic fresh foods is expected to drive notable consumer demand for healthy food and thus, benefiting the key food company.

Facing weakness

The food retail organization’s trading multiples have varied significantly since last year. The key multiples for organic and natural foods supermarket are the highest, recorded at 9.8x EBITDA for 2015 and 7.5x EBITDA for 2016. But, their stock values are together declining 52.2% since February 3, 2015 till February 3, 2016. The multiples for large cap supermarkets are recorded at 7.1x EBITDA for 2015 and 7.0x EBITDA for 2016. Mid-cap and small-cap supermarkets are trading in accordance with their bigger counterparts at about 7.1x EBITDA for 2015 and 6.6x EBITDA for 2016.

The consolidated value and volume of overall food retail deals from 2010 till 2015 have grown consistently and notably with 2015 total deal volume and total deal value of 66 million transactions and $17 billion respectively. The private equity projection for 2015 equaled $395 billion and hugely competitive market is driving superior growth for EBITDA multiples. Moreover, several key acquirers are in a lookout for strategic acquisitions to drive long-term growth in this hugely competitive industry.

The year-over-year declining stock price trend of natural/organic supermarket stocks seems concerning despite accelerated shift of consumption pattern towards organic or healthy foods from fat-rich or unhealthy foods. However, the rising EBITDA multiples for natural/organic supermarkets signifies strong customer traction for healthy foods.

Conclusion

Overall, the investors are advised to “Hold” their position in Whole Foods Market, Inc. considering the company’s significant long-term growth prospects with favorable shift in consumption pattern towards organic foods. The profit margin of 3.26% also seems satisfactory. The PEG ratio of 3.64 indicates healthy company growth. However, the key foods company needs to optimize its debt-burdened balance sheet with notable total debt of $1.05 billion against weaker total cash position of $848 million only, restricting the company to make future growth investments.
Published on Jul 26, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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