Whole Foods Market's Fortunes Remain Under Pressure

The high road taken by Whole Foods Market continues to be pitted by potholes, at least when it comes to its financial fortunes.

Last summer, on Aug. 7, 2006 , we took a look in this space at the remarkable fact that although Whole Foods had registered a quarterly sales increase in excess of 30%, that its earnings increased by 18%, and that comparable-store sales grew by nearly 10%, its stock value fell to a 52-week low.

Since that time, Whole Foods has made known its intention to acquire its chief rival, Wild Oats Markets, but that has had little positive effect on its stock value. Indeed, its stock established another 52-week low mark last week in trading below $39. That's more than $32 below its 52-week high. All this seems less strange as time goes on.

Let's take a look now at more recent numbers, then consider what's happening. As was reported in last week's SN, during Whole Foods' second quarter, which ended early last month, sales rose 12% while earnings fell by 9% and comps were 6.6%. In short, financial performance has dropped to levels that scarcely could have been imagined a year ago. No doubt that is driving its stock performance down.

Most likely, though, it's not financial performance alone that's spooking investors. As was reported last week, the Federal Trade Commission is taking a look at the proposed union of Whole Foods and Wild Oats, raising the possibility that stores will have to be divested. Whole Foods, awaiting FTC's musings, has been obliged to extend its cash and debt-assumption tender of about $700 million twice now. The latest expires this week.

Beyond that, investors seem to be wondering if buying Wild Oats is such a good idea. After all, Wild Oats' financials, also reported in SN last week, are, as usual, far weaker than those of Whole Foods. Wild Oats, during its most recent quarter, which ended in March, experienced a sales increase of under 4%, an income drop of nearly 44% and an increase in comps of just 0.3%. That raises the issue of what Whole Foods can do with Wild Oats to improve its financial performance, and at what cost?

Wild Oats' stores are much smaller on average than are those of Whole Foods, and many could use a little buffing up in any event. Couple those facts with Whole Foods' intention to rebanner Wild Oats as Whole Foods, and it's easy to see that Whole Foods will be obliged to sink a lot of capital into its acquisition or risk blurring the image it projects to consumers.

Now let's indulge ourselves in a look at a largely, but not completely, unrelated topic. Investment firm Yucaipa Cos., headed by Ron Burkle, intends to acquire 76 specialty magazine titles from Primedia. That transaction would be accomplished through magazine distributor Source Interlink Cos., of which Yucaipa is a major holder. Yucaipa also has minority stakes in Wild Oats, Pathmark and Supervalu. (Unrelated fact: SN's owning company, Penton Media, is partially comprised of titles acquired from Primedia.) Yucaipa's Primedia acquisition, then, will make Source Interlink both an information distributor and a content provider. We'll see what can be made of that substance.