Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: Liberty on May 27, 2014, 01:07:24 PM

Title: WFM - Whole Foods Market
Post by: Liberty on May 27, 2014, 01:07:24 PM
So I don't know much about WFM and this is not an endorsement of the company, but I read an interesting piece on it and thought I'd post it in the WFM thread when I realized that there was no WFM thread. So here it is:

http://www.peridotcapital.com/2014/05/the-death-of-whole-foods-market-is-likely-greatly-exaggerated.html
Title: Re: WFM - Whole Foods Market
Post by: bizaro86 on May 27, 2014, 01:30:03 PM
Thanks for the thread, I've been meaning to look into them since I read this article in Fortune:

http://money.cnn.com/2014/04/09/leadership/whole-foods-america.pr.fortune/

I'm always looking for companies with huge growth potential, and I think they probably have it. There are zero whole foods in the city I live in, and I'd estimate there is room for at least 5-6. I actually think their store count estimates are low for how many they can get to. I've always regretted not buying Starbucks in 08/09 (I seriously considered it but bought stuff that was statistically cheaper but lower quality, which was a mistake), and I definitely see the parallels here.

Does anyone know whether they own their own real estate?

Also, Peridot is on here, that was a great post!
Title: Re: WFM - Whole Foods Market
Post by: DTEJD1997 on May 27, 2014, 01:32:26 PM
WFM has some nice stuff, no doubt...

HOWEVER, two things are relevant for me:

A). In two cities that I travel between (TX, MI) there are both Trader Joes and WFM.  I go to Trader Joes 5 times for every 1 time I go to WFM.  I think Trader Joes has products that are almost as good, but the prices are SIGNIFICANTLY lower.

B). I was once in WFM with my girlfriend.  A sharp eyed clerk asked if I would like to try a slice of "peppered turkey". OF COURSE I WOULD!  I replied.  It was absolutely delicious, some of the best turkey I've had.  Price?  $16.99 a pound!  This was 3 years ago...I don't care how good it is, I'm just not paying $16.99 a lbs. for sliced turkey lunch meat.

I've also noticed that sometimes WFM has "silly" high prices on some other items too.  I don't mind paying a bit more, but I'm not going to pay double.

In my opinion, WFM has a seriously damaged business model.
Title: Re: WFM - Whole Foods Market
Post by: rkbabang on May 27, 2014, 01:52:49 PM
WFM has some nice stuff, no doubt...

HOWEVER, two things are relevant for me:

A). In two cities that I travel between (TX, MI) there are both Trader Joes and WFM.  I go to Trader Joes 5 times for every 1 time I go to WFM.  I think Trader Joes has products that are almost as good, but the prices are SIGNIFICANTLY lower.

B). I was once in WFM with my girlfriend.  A sharp eyed clerk asked if I would like to try a slice of "peppered turkey". OF COURSE I WOULD!  I replied.  It was absolutely delicious, some of the best turkey I've had.  Price?  $16.99 a pound!  This was 3 years ago...I don't care how good it is, I'm just not paying $16.99 a lbs. for sliced turkey lunch meat.

I've also noticed that sometimes WFM has "silly" high prices on some other items too.  I don't mind paying a bit more, but I'm not going to pay double.

In my opinion, WFM has a seriously damaged business model.

I agree, but that doesn't mean much. The two closest Whole Foods to me are both about an hour drive, so I've only been to them about 4 or 5 times.  What I've noticed is that, (1) it is super expensive and I probably wouldn't buy much there even if it was close by, and (2) it was surprisingly crowded every time I've been there.

I used to have similar thoughts to yours about Starbucks, only I don't even think the product is superior.  Who is going to pay those prices for crappy coffee?   Yet, people do, and the stock has done very well (without me).

I'm not saying Whole Foods is the next Starbucks, but I've learned that my opinion of a product's quality or value doesn't always match what the marketplace thinks.
Title: Re: WFM - Whole Foods Market
Post by: rpadebet on May 27, 2014, 02:24:29 PM
What is the moat here?

Starbucks has the brand, customer experience (wifi etc) and just a mind boggling number of stores around you. (True story: there were 6 starbucks within a block or two of where I work and now they opened a 7th in my building recently! ). McDonalds or Dunkin cannot compete what that sort of network or in my opinion over crowding!

How much does it cost to open a Whole Foods store? What is the unique experience which new comers/existing competitors cannot replicate? As I read their balance sheet, their assets-current liabilities are worth about 4.5 bill approximately. They are all pretty much recently bought/leased, so not much hidden value there. Why bother paying 14 bill to buy something you can build/create at 5 bill? Just thinking like an investor who wants to own a business like this in whole. What accounts for the extra 9-10 bill in premium over what it costs to replicate?
Title: Re: WFM - Whole Foods Market
Post by: Cunninghamew on May 27, 2014, 02:35:01 PM
WFM has some nice stuff, no doubt...

HOWEVER, two things are relevant for me:

A). In two cities that I travel between (TX, MI) there are both Trader Joes and WFM.  I go to Trader Joes 5 times for every 1 time I go to WFM.  I think Trader Joes has products that are almost as good, but the prices are SIGNIFICANTLY lower.

B). I was once in WFM with my girlfriend.  A sharp eyed clerk asked if I would like to try a slice of "peppered turkey". OF COURSE I WOULD!  I replied.  It was absolutely delicious, some of the best turkey I've had.  Price?  $16.99 a pound!  This was 3 years ago...I don't care how good it is, I'm just not paying $16.99 a lbs. for sliced turkey lunch meat.

I've also noticed that sometimes WFM has "silly" high prices on some other items too.  I don't mind paying a bit more, but I'm not going to pay double.

In my opinion, WFM has a seriously damaged business model.

I don't have it handy, but PlanMaestro has a good graphic comparing the two biz models (Whole and Trader J). He posted it on twitter once, but it is worth looking at if you can find it
Title: Re: WFM - Whole Foods Market
Post by: bizaro86 on May 27, 2014, 02:57:30 PM
What is the unique experience which new comers/existing competitors cannot replicate?

Sometimes the answer to that question is intangibles. I've been in coffee shops I liked a lot better than an SBUX. What is the unique experience that Starbucks has that others can't recreate? Is it really their ubiquitous locations?
Title: Re: WFM - Whole Foods Market
Post by: rpadebet on May 27, 2014, 03:27:43 PM
What is the unique experience which new comers/existing competitors cannot replicate?

Sometimes the answer to that question is intangibles. I've been in coffee shops I liked a lot better than an SBUX. What is the unique experience that Starbucks has that others can't recreate? Is it really their ubiquitous locations?

I understand your point that the intangibles are subjective.

In Starbucks case, it is the intangibles like brand, ubiquity, experience everything put together. In NYC for example, I have seen as many tourists as city residents going to buy coffee at Starbucks. I think it is because, there is a level of comfort in knowing that the quality and taste of coffee wont differ much from what you have probably experienced back home at another Starbucks. That is an intangible which doesn't apply to grocers as much. Also coffee spend is a small portion of the customer wallet. Yes it is over priced, but it is a dollar here and dollar there scenario. In the long term it gets expensive, but each transaction doesn't appear to bite much superficially. I might have mentioned the 7th SBUX store in jest, but ubiquity like that can potentially alter a consumer's behavior i.e. I might have that extra cup of coffee now just because the new location is ultra convenient and I don't need to walk a block to get to it. :)

Coke can be replicated as a product and its been tried, but replicating the brand at today's prices makes owning Coke cheaper.

I don't think WFM's brand is that expensive to recreate. At least it wont take 10 billion. The consumer economics of grocers is very different than a cup of coffee or even a burger. If you had a competing grocer providing the same natural food at 5%-10% less, consumers would shift their habits eventually.  There is not much network effect as consumers in one town typically don't go grocery shopping when they are vacationing or are in another town. Ubiquity doesn't help as it doesn't alter consumer behavior that much. I am not more likely to do grocery shopping for double the amount, just because there is a WFM closer to where I stay.

So the question again is, is the intangible in WFM's case worth 10 billion?



Title: Re: WFM - Whole Foods Market
Post by: tooskinneejs on May 27, 2014, 03:30:02 PM
I hate shopping at Whole Foods because the prices are ridiculous and the crowds are always insane.  Therefore, I bought Whole Foods stock recently after the large drop in share price.  I guess this falls into the opposite of the "buy what you love" style of investing. 

I usually don't "pay up" for stocks and this is one of the most richly valued equities I've purchased.  But I think long term this investment will do well.
Title: Re: WFM - Whole Foods Market
Post by: yadayada on May 27, 2014, 03:35:03 PM
valuation is ridicilous at more then 20x earnings. I kinda want insane growth for that price. And they are barely growing. Might as well buy an index if you buy this?
Title: Re: WFM - Whole Foods Market
Post by: DanielGMask on May 27, 2014, 06:25:59 PM
1. 30+ years in the market with the same business model.
2. About 1B of pretax profits per year.
3. Leader in its niche.
4. Mackey receives no cash bonuses or stock option awards and has a $1 annual wage. He holds more than 700,000 shares.
5. No debt, highly profitable with sustained growth.
6. Lots of potential (less than 400 stores).

I think there's a clear moat even though some in this forum may don't agree with the business model (prices). I also think there's no margin of safety at current prices, but that has nothing to do with the business model or the moat!

Below 28 per share, I'll be interested. ;-)
Title: Re: WFM - Whole Foods Market
Post by: alpha23 on May 27, 2014, 06:35:53 PM
Interview with Bud Sorenson (WFM board member):

http://hwcdn.libsyn.com/p/7/1/2/712c26f0660fc2c3/Tuesday_Bud_R2__MP3_128kbit_44kHz_stereo.mp3?c_id=7209263&expiration=1401243780&hwt=128e5c5d5a395287b9f658c99651bd42
Title: Re: WFM - Whole Foods Market
Post by: Liberty on May 27, 2014, 07:08:17 PM
Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.
Title: Re: WFM - Whole Foods Market
Post by: Vish_ram on May 27, 2014, 07:46:15 PM
I think that the market for organic foods has changed in many ways.

For the last one year, Costco in my area is assembling all organic foods in a one section to attract the shoppers attention. They are adding coupons to these foods too. Kroger and others have a bigger section on organic items.

I used to go to WFM once in a few months and now reduced it to once a year.
Title: Re: WFM - Whole Foods Market
Post by: Liberty on May 28, 2014, 09:58:07 AM
Follow up to the original write up that started this thread:

http://www.peridotcapital.com/2014/05/sales-figures-disprove-thesis-that-whole-foods-shoppers-are-fleeing-to-the-competition.html
Title: Re: WFM - Whole Foods Market
Post by: rogermunibond on May 29, 2014, 08:17:17 AM
If I remember correctly, Munger's example was that economic theory did not take into account situations higher price leads to higher demand such as when kickbacks are used to pass price increases back to the buyer.  So in those cases the "laws of supply/demand" are subverted.

Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.
Title: Re: WFM - Whole Foods Market
Post by: merkhet on May 29, 2014, 08:20:24 AM
If I remember correctly, Munger's example was that economic theory did not take into account situations higher price leads to higher demand such as when kickbacks are used to pass price increases back to the buyer.  So in those cases the "laws of supply/demand" are subverted.

Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

He first talked about how a few people will use heuristics to figure out that you can price some goods at higher prices to lead to higher demand (like some luxury goods) -- but that there's an easier solution to use the higher prices to fund kickbacks.
Title: Re: WFM - Whole Foods Market
Post by: ajc on June 02, 2014, 09:11:09 AM
One minor - but I think somewhat important - point to add on the Starbucks similarities is the price paid relative to your weekly or monthly earnings.

For Starbucks, you're getting luxury, #1 status and a fix on the cheap (at least relatively speaking).
Same goes for stuff like Coca Cola, Wrigley's or a number of other products. As a result, it's easier to justify an expensive coffee to yourself even if times are tough.
The higher the percentage of your weekly spend this item becomes though, the less that holds and the more likely you are to switch brands to a cheaper more affordable version if you need to (like with Tesco vs Lidl in the UK).

There will be exceptions of course, but generally people find it easier to rationalize a little luxury each week than they do a whole lot.
So maybe that's something to keep in mind regarding Whole Foods.


Title: Re: WFM - Whole Foods Market
Post by: ukvalueinvestment on June 02, 2014, 10:04:27 AM
Starbucks is luxury, #1 Status???  ;D
Title: Re: WFM - Whole Foods Market
Post by: Gamecock-YT on June 02, 2014, 11:29:51 AM
Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

There's a chapter in Cialdini's Influence on the subject. I think it related back to a jewelry store unable to sell a stone at a discount but when they mistakenly put it with a much higher price they sold it in droves.
Title: Re: WFM - Whole Foods Market
Post by: rkbabang on June 02, 2014, 01:00:49 PM
Maybe it's because I just listened to the Munger speech from 1995 yesterday and it's fresh in memory, but Munger mentions the interesting phenomenon that sometimes when prices are higher, you actually sell more units. There's a psychological heuristic that most people have that goes something like "price is a proxy for quality".

Some people spend tens of thousands on their cars, or granite countertops, or vacations around the world. Some people want to splurge on food; that market has been well understood on the restaurant side forever, but was probably not that well understood on the grocery side until not that long ago (always been niche shops, but not much on the supermarket concept template, afaik).

No sure the brand is a good moat, or if it's cheap, but I can understand how this counter-intuitive business model makes sense. It meets a need, because while not everybody wants to pay a lot for food, not everybody wants to pay as little as possible either, and the price-insensitive part of the market must be quite profitable.

There's a chapter in Cialdini's Influence on the subject. I think it related back to a jewelry store unable to sell a stone at a discount but when they mistakenly put it with a much higher price they sold it in droves.

I remember either reading or watching something about when Martha Stewart first started out, she was selling pies that she was making in her kitchen. She couldn't sell any of them until she raised her price significantly, after that she couldn't keep up with demand.
Title: Re: WFM - Whole Foods Market
Post by: ajc on June 02, 2014, 04:53:23 PM
Starbucks is luxury, #1 Status???  ;D


Yeah, I'd say that's pretty much exactly what Starbucks represents. At least to the majority of the people around the world with a decent awareness of the brand.

That doesn't mean I don't think it's a bit of a kitschy product, but this is an investing forum not a high school art contest so leaving personal biases at the door is never a bad move.

Otherwise, shit just ends up going nowhere. Besides, every smart person knows an intelligent discussion is where the real value always tends to be at.

Title: Re: WFM - Whole Foods Market
Post by: NomadicRiley on June 03, 2014, 07:00:06 AM
I spent some time thinking about the Starbucks / Whole Foods analogy last week.  Initially I thought the analogy worked, but the more I think about it, the more I think it may not be that strong.

* Starbucks derives tremendous value from it's ubiquity and consistency.  A customer in a strange city, a strange airport or even just a different part of their home town can walk into one and order their "usual" drink w/out so much as glancing at the menu.  That familiarity makes it much more convenient when someone is in a hurry, having a business meeting or even just distracted by other thoughts.  Going to a local competitor (assuming you are not intimately familiar with it already) involves reading the menu, deciding what you want, wondering if you'll be happy with the result.  This is an adventure that is fun and exciting when you're on vacation in a strange country with a spouse or friend, but not when you're at the airport catching a 6am flight or trying to make a business meeting.

* The net effect of the above is that Starbucks is able to create a weak network effect where the more starbucks there are, the more valuable they become.

* Whole Foods stores do not have this level of consistency.  Each Whole Foods I have been to is a different size, has a different layout and does not carry the exact same items.  This means the cognitive effort for someone who usually shops at the Whole Foods near their house to go to another Whole Foods is nearly as high as going to a different branded store altogether (Costco, Krogers, Trader Joe's etc). 

* Location density - Starbucks is famous for putting stores across the street from each other just so drivers don't have to make 2 left turns to visit them as they know that extra effort is enough to dissuade many customers.  Whole foods stores require a much, much larger population to support them so they can not have anywhere near the density and will be much more susceptible to easier substitution by competing brands based solely on location proximity (i.e. - there's a Krogers on the way home, so I'll just go there tonight).

* Thinking about my family's personal shopping habits (which may be unique, but I doubt it), the biggest drivers for grocery purchases (once the necessary level of quality/value is met) is location and familiarity with the store layout.  It takes much less time to run through a shopping list at the store you go to every week than the same list at a store you've never been to or visit rarely.  Even if the second store is part of the same chain.  This is a substantial deviation from traditional chain benefits (Starbucks, McDonalds, Subway, etc.) where a primary benefit is a visit to a different location of the chain is virtually the same as visiting the one nearest your house.

For these reasons, I do not feel that Whole Foods will get the same customer lock-in benefit as Starbucks did and will remain much more vulnerable to competition.
Title: Re: WFM - Whole Foods Market
Post by: rpadebet on June 03, 2014, 08:02:17 AM
I spent some time thinking about the Starbucks / Whole Foods analogy last week.  Initially I thought the analogy worked, but the more I think about it, the more I think it may not be that strong.

* Starbucks derives tremendous value from it's ubiquity and consistency.  A customer in a strange city, a strange airport or even just a different part of their home town can walk into one and order their "usual" drink w/out so much as glancing at the menu.  That familiarity makes it much more convenient when someone is in a hurry, having a business meeting or even just distracted by other thoughts.  Going to a local competitor (assuming you are not intimately familiar with it already) involves reading the menu, deciding what you want, wondering if you'll be happy with the result.  This is an adventure that is fun and exciting when you're on vacation in a strange country with a spouse or friend, but not when you're at the airport catching a 6am flight or trying to make a business meeting.

* The net effect of the above is that Starbucks is able to create a weak network effect where the more starbucks there are, the more valuable they become.

* Whole Foods stores do not have this level of consistency.  Each Whole Foods I have been to is a different size, has a different layout and does not carry the exact same items.  This means the cognitive effort for someone who usually shops at the Whole Foods near their house to go to another Whole Foods is nearly as high as going to a different branded store altogether (Costco, Krogers, Trader Joe's etc). 

* Location density - Starbucks is famous for putting stores across the street from each other just so drivers don't have to make 2 left turns to visit them as they know that extra effort is enough to dissuade many customers.  Whole foods stores require a much, much larger population to support them so they can not have anywhere near the density and will be much more susceptible to easier substitution by competing brands based solely on location proximity (i.e. - there's a Krogers on the way home, so I'll just go there tonight).

* Thinking about my family's personal shopping habits (which may be unique, but I doubt it), the biggest drivers for grocery purchases (once the necessary level of quality/value is met) is location and familiarity with the store layout.  It takes much less time to run through a shopping list at the store you go to every week than the same list at a store you've never been to or visit rarely.  Even if the second store is part of the same chain.  This is a substantial deviation from traditional chain benefits (Starbucks, McDonalds, Subway, etc.) where a primary benefit is a visit to a different location of the chain is virtually the same as visiting the one nearest your house.

For these reasons, I do not feel that Whole Foods will get the same customer lock-in benefit as Starbucks did and will remain much more vulnerable to competition.

Exactly. The analogy doesn't hold very well when you dig slightly deeper into the respective business models.

It is far easier for your local grocer to setup a "natural" food section within their store and undercut WFM margin's and take their business away. Margin compression will at some point overcome the growth from increased stores and the current multiples might seem appropriate at that point for a grocery business.

I am not suggesting it is a short candidate, but it is not a "layup" long as some are suggesting.
Title: Re: WFM - Whole Foods Market
Post by: CorpRaider on June 03, 2014, 08:26:00 AM
I spent some time thinking about the Starbucks / Whole Foods analogy last week.  Initially I thought the analogy worked, but the more I think about it, the more I think it may not be that strong.

* Starbucks derives tremendous value from it's ubiquity and consistency.  A customer in a strange city, a strange airport or even just a different part of their home town can walk into one and order their "usual" drink w/out so much as glancing at the menu.  That familiarity makes it much more convenient when someone is in a hurry, having a business meeting or even just distracted by other thoughts.  Going to a local competitor (assuming you are not intimately familiar with it already) involves reading the menu, deciding what you want, wondering if you'll be happy with the result.  This is an adventure that is fun and exciting when you're on vacation in a strange country with a spouse or friend, but not when you're at the airport catching a 6am flight or trying to make a business meeting.

* The net effect of the above is that Starbucks is able to create a weak network effect where the more starbucks there are, the more valuable they become.

* Whole Foods stores do not have this level of consistency.  Each Whole Foods I have been to is a different size, has a different layout and does not carry the exact same items.  This means the cognitive effort for someone who usually shops at the Whole Foods near their house to go to another Whole Foods is nearly as high as going to a different branded store altogether (Costco, Krogers, Trader Joe's etc). 

* Location density - Starbucks is famous for putting stores across the street from each other just so drivers don't have to make 2 left turns to visit them as they know that extra effort is enough to dissuade many customers.  Whole foods stores require a much, much larger population to support them so they can not have anywhere near the density and will be much more susceptible to easier substitution by competing brands based solely on location proximity (i.e. - there's a Krogers on the way home, so I'll just go there tonight).

* Thinking about my family's personal shopping habits (which may be unique, but I doubt it), the biggest drivers for grocery purchases (once the necessary level of quality/value is met) is location and familiarity with the store layout.  It takes much less time to run through a shopping list at the store you go to every week than the same list at a store you've never been to or visit rarely.  Even if the second store is part of the same chain.  This is a substantial deviation from traditional chain benefits (Starbucks, McDonalds, Subway, etc.) where a primary benefit is a visit to a different location of the chain is virtually the same as visiting the one nearest your house.

For these reasons, I do not feel that Whole Foods will get the same customer lock-in benefit as Starbucks did and will remain much more vulnerable to competition.

W/r/t your last point; do you shop at whole foods now?  Whole foods customers are highly unlikely to swing by the Kroger because it is closer, in my observation.  They walk by dozens of gristedes and other nice/organic grocers to get to the whole foods in union square and have done so for years.  Also, concerning the differing selections in different markets: that is accurate but one might argue the brand equity is in the store's curation of preferably local, organic foods supplemented by worldwide, vetted suppliers.  So if you visit san diego and want the "good" local stuff you go there just like you do at home in Chicago, despite the vendors being different.  Alternatively, wouldn't the store brand "365 value" provide the consistent labeling you're seeking on many items?  Not saying its a buy here, just that most value investors are probably not the target market.  Disclosure:  I bought this thing back in the depths of financial crisis and sold it way too early, but it took care of all my losses from other investments in short order; so I'm sure I have some personal affinity/biases for the company.  It's a good business (for a retailer) with good management, but I'm not comfortable with the valuation right here, given competitive threats.  Which, btw are TFM and Trader Joes and some of those guys; not Walmart.  People who shop here pay a premium so that they don't have to encounter people of Walmart....ever, imo.
Title: Re: WFM - Whole Foods Market
Post by: fareastwarriors on June 03, 2014, 08:28:28 AM
I worked as a cashier at Whole Foods for 4 years in a NYC suburb back in college. Thanks for bringing back the memories.

Title: Re: WFM - Whole Foods Market
Post by: NomadicRiley on June 03, 2014, 08:54:56 AM
[quote author=CorpRaider link=topic=11006.msg174668#msg174668 date=1401809160

W/r/t your last point; do you shop at whole foods now?  Whole foods customers are highly unlikely to swing by the Kroger because it is closer, in my observation.  They walk by dozens of gristedes and other nice/organic grocers to get to the whole foods in union square and have done so for years.  Also, concerning the differing selections in different markets: that is accurate but one might argue the brand equity is in the store's curation of preferably local, organic foods supplemented by worldwide, vetted suppliers.  So if you visit san diego and want the "good" local stuff you go there just like you do at home in Chicago, despite the vendors being different.  Alternatively, wouldn't the store brand "365 value" provide the consistent labeling you're seeking on many items?  Not saying its a buy here, just that most value investors are probably not the target market.  Disclosure:  I bought this thing back in the depths of financial crisis and sold it way too early, but it took care of all my losses from other investments in short order; so I'm sure I have some personal affinity/biases for the company.  It's a good business (for a retailer) with good management, but I'm not comfortable with the valuation right here, given competitive threats.  Which, btw are TFM and Trader Joes and some of those guys; not Walmart.  People who shop here pay a premium so that they don't have to encounter people of Walmart....ever, imo.
[/quote]

Yes - we do shop at Whole Foods.  I'm not arguing that Whole Foods isn't a great company w/ a long and profitable future in front it.  I absolutely believe it has very strong loyal following and will continue to grow and be profitable for many years to come.  I just don't believe it is likely to ever have as strong of a position as Starbucks and the network effect and pricing power they enjoy. 

That doesn't mean it can't be a great investment, but my expectations of future growth and profitability are lower than if I believed it could achieve a Starbucks type position.
Title: Re: WFM - Whole Foods Market
Post by: CorpRaider on June 03, 2014, 11:44:21 AM
You're probably right.  I've always been a little leery of SBUX's purported sustainable moat, however, since the business went to crap when Shultz tried to retire the first time.
Title: Re: WFM - Whole Foods Market
Post by: fareastwarriors on June 05, 2014, 09:37:37 AM
Whole Foods Bulls See Healthy Bounce From 28-Month Low: Options



http://www.bloomberg.com/news/2014-06-05/whole-foods-bulls-see-healthy-bounce-from-28-month-low-options.html (http://www.bloomberg.com/news/2014-06-05/whole-foods-bulls-see-healthy-bounce-from-28-month-low-options.html)
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on July 08, 2014, 08:02:27 AM
http://seekingalpha.com/article/2301695-why-whole-foods-is-cheap-take-advantage-of-mr-markets-panic

I agree with many that WF business model isn't exactly comparable to SBUX. What is clear is that it's wildly popular and sells high volumes at current stores despite insane pricing. Clearly their products will be under represented on a value investor board but I do think it's similar to SBUX in that they are able to get people to pay many multiples on price for a product than competitors.

Trader Joes may still be a direct competitor but space is clearly large enough for 2.

With no debt, relatively high past growth rates (and large growth rates planned for next decade), a slow changing market, a decent cash flow yield for growth company, I don't think 25x is terribly unreasonable - just not cheap. I took a small position today. Will back up the truck if something happens to force it into the low teens on the multiple.
Title: Re: WFM - Whole Foods Market
Post by: rogermunibond on July 08, 2014, 11:00:47 AM
Is the space big enough for five or six?  Sprouts, Fresh Market, and a host of regional operators Mom's Organic, for example.

Or are these little guys going to get acquired or quashed by WFM and TJs.
Title: Re: WFM - Whole Foods Market
Post by: DTEJD1997 on July 08, 2014, 11:14:00 AM
I was in WFM this weekend in MI.  It was a smaller location.

They had TONS of sales on stuff.  I would guess that there were more items on SALE than were regular priced.

Their sale prices were OK.  There were some real bargains, but most "sale" prices I would just consider "average".

So i wonder if there is competition in MI prompting WFM to run such a huge sale?  I know TJ is big, and I do a ton of shopping there.

WFM is nice, very nice, but I refrain from shopping there because TJ has comparable quality for MUCH lower prices...
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on July 08, 2014, 11:35:46 AM
I think more users on this forum are likely to be price sensitive but the reality is that every single person has mentioned that WF is packed when they go in. I have never shopped there but the ones I've walked by have always been packed. Clearly there is a large number of people who are underserved by other places and are willing to go to WF who are relatively price insensitive.

I don't understand why people pay $5 for coffee at SBUX but they do and it's been a phenomenal investment. The fact is, there is currently a market for higher margin, higher priced goods where stores compete on emotional response  and experience and not on price.

High end Androids have the same, if not better tech specs, than Apple iPhones, yet Apple still sells phones in droves based on a good product that is marketed very well. Trader Joe's may be cheaper but WF still sells food at high enough volumes and prices to generate double digit ROE without leverage. Also, TJ isn't publicly traded so it likely has less access to capital which can be a disadvantage to growth and soft markets.

I don't know how big the market is or how many businesses it can support, but I think 2 or 3 is a fair bet given what we see in other industries. The smaller players will fail or eventually be consolidated.

Periodot's blog on this also does a pretty good job explaining why the PE isn't nearly as high as it seems.
Title: Re: WFM - Whole Foods Market
Post by: DTEJD1997 on July 08, 2014, 11:43:29 AM
I think more users on this forum are likely to be price sensitive but the reality is that every single person has mentioned that WF is packed when they go in. I have never shopped there but the ones I've walked by have always been packed. Clearly there is a large number of people who are underserved by other places and are willing to go to WF who are relatively price insensitive.

Saturday afternoon did not have WFM packed.  They were doing business, not busy, but perhaps "active".  TJ on the other hand is usually very busy, approaching "packed" status.

Maybe people in Michigan are just more price sensitive...
Title: Re: WFM - Whole Foods Market
Post by: ragnarisapirate on July 08, 2014, 11:58:10 AM
I was in WFM this weekend in MI.  It was a smaller location.

They had TONS of sales on stuff.  I would guess that there were more items on SALE than were regular priced.

Their sale prices were OK.  There were some real bargains, but most "sale" prices I would just consider "average".

So i wonder if there is competition in MI prompting WFM to run such a huge sale?  I know TJ is big, and I do a ton of shopping there.

WFM is nice, very nice, but I refrain from shopping there because TJ has comparable quality for MUCH lower prices...

Maybe sale prices are their "regular" prices, or rather, what they want to sell items for, and the normal prices are just a way to juice margins?
Title: Re: WFM - Whole Foods Market
Post by: valueyoda on July 08, 2014, 12:13:50 PM
I still believe that both Whole Foods Market and Trader's Joe have 1-2 decades of expansion ahead without compromising their respective highly successful strategies. Whole Foods starts to become attractive at $38 after the recent sell off as a GARP stock. Remember that Wal Mart was never cheap during the 1980s and 1990s when it was rapidly expanding.
Title: Re: WFM - Whole Foods Market
Post by: Pauly on July 08, 2014, 12:52:56 PM
I haven't looked too closely, but does WFM break out the numbers for their own "365" branded items in their reports? I visit WF quite often and they're adding more and more 365 lines seemingly every week ; cereals, pasta sauce, diapers, olive oil etc. etc. I would imagine that the margins on these are more favorable..?

In Vancouver we don't have Sprouts, Fresh Market or Trader Joe's so I can't comment on those, but WF does very, very well here. Always busy, and the prices aren't too out of line with the other organic grocer alternatives. In fact WF is often the cheapest option. Plus, WF has a quality standard that other places can't seem to match. You rarely find rotten fruit or vegetables sitting out, or dairy that's just about out of date.
Title: Re: WFM - Whole Foods Market
Post by: DanielGMask on July 09, 2014, 02:25:52 AM
I don't think the incognita is about sustainability of the business model or the presence of a moat, since I think both variables are present. The real issue is what value to assign the company and if that number corresponds or not to current market valuation.

I've been reading this thread and seems that lots of people is comparing Trader Joes to WFM and I don't think that comparison is entirely accurate. Both companies serve a real need but to a different customer; Trader Joe's stores are smaller, carry a smaller number of SKUs and focuses on local suppliers, they serve what I consider to be a hardcore organic consumer, which by the way looks like a good business model, but not exactly the same business model of WFM.

I think that WFM has more growth potential and much more general consumer penetration, but anyway, we are talking about WFM and we should focus on value and future growth.
Title: Re: WFM - Whole Foods Market
Post by: ScottHall on July 09, 2014, 01:06:32 PM
http://seekingalpha.com/article/2301695-why-whole-foods-is-cheap-take-advantage-of-mr-markets-panic

I agree with many that WF business model isn't exactly comparable to SBUX. What is clear is that it's wildly popular and sells high volumes at current stores despite insane pricing. Clearly their products will be under represented on a value investor board but I do think it's similar to SBUX in that they are able to get people to pay many multiples on price for a product than competitors.

Trader Joes may still be a direct competitor but space is clearly large enough for 2.

With no debt, relatively high past growth rates (and large growth rates planned for next decade), a slow changing market, a decent cash flow yield for growth company, I don't think 25x is terribly unreasonable - just not cheap. I took a small position today. Will back up the truck if something happens to force it into the low teens on the multiple.

The author apparently didn't include growth capex in his DCF model, despite giving them credit for 14% growth in FCF. He is double counting the cash required to open those stores by not including growth capex, so his model isn't sensible.
Title: Re: WFM - Whole Foods Market
Post by: Ross812 on July 09, 2014, 02:14:06 PM
I looked into Whole Foods quite a bit over the last couple of days. I like grocery businesses due to their inherent 3% organic growth following population growth. Organics should outpace the 3%. I am having a hard time seeing WFM's advantage over their competitors. I need to dig in some more and see if their scale and increasing size will allow them to negotiate better prices with organic suppliers. Organic suppliers are selling to a large swath of grocers as organics increase in popularity and I'm not sure having a greater store count really helps in sourcing produce when much of the produce is sourced locally. Their house brand has the potential of allowing them to expand margins/sell at a discount, but their house brands still do not compete with Trader Jo's. I would also argue that Trader Jo's competes directly with WFM on dry goods and a few niche items. I know quite a few couples who shop at both; buying produce at WFM and dry goods and staples at TJ's. For what it's worth, I asked someone stocking shelves at WFM if he thought the TJ's opening across the street hurt them (TJ's opened about six  months prior). He said they were still really really busy except for their cheese. At any rate, I think WFM is still a little pricey for a grocer that will have a terminal PE around 12-14x; i'll be a little more interested at a PE of 20-22 ($30-$33). 
Title: Re: WFM - Whole Foods Market
Post by: DanielGMask on August 05, 2014, 07:22:12 AM
Just posted on Twitter by @LaMonicaBuzz: Please please please let this be true. $WFM up 5%. @Benzinga & @Briefingcom both cite chatter that @Carl_C_Icahn may be interested in stock.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on September 24, 2014, 08:08:09 PM
http://www.twocitiescapital.com/blog/whole-foods-market-wfm

Made a blog write up on WFM. Seems to me that the margin concerns were overblown since the past 9 months have actually had better results than last year. We'll see if that continues next quarter. Seems that reduced margins resulted in higher turnover which actually resulted in a positive addition to ROA and ROE. It's all explained in the post

Overall, seems like a decent bet at a reasonable price as previously mentioned. Would love to see them do a debt financed repurchase and spend another $1.5B or so even if Icahn isn't involved. They have the ability to service a billion in debt easily and it would go a long way into juicing future returns.

6.8% cash yield and 10% expected growth for years to come. Responsible capital allocation policies to augment returns. Best margin profile in the business - what's not to like?
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 06, 2014, 09:13:58 AM
Great earnings. Congrats to all.I think this will be a compounder.
Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on November 06, 2014, 11:19:17 AM
How is this any different than any other grocery retailer? You are buying future earnings, not past results. I feel like as they grow and WMT/Wegmans/Publix/ect expand organic offerings, margins will tank. Also, as organic grows in popularity won't margins shift from retailers to farmers? Demand increasing faster than supply in my opinion. What is the thesis for such high margins from a grocer? Upscale, loyal customer base?
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 06, 2014, 11:51:32 AM
How is this any different than any other grocery retailer? You are buying future earnings, not past results. I feel like as they grow and WMT/Wegmans/Publix/ect expand organic offerings, margins will tank. Also, as organic grows in popularity won't margins shift from retailers to farmers? Demand increasing faster than supply in my opinion. What is the thesis for such high margins from a grocer? Upscale, loyal customer base?

This has been the argument for the last year and why the stock was down to $38 from $65. Unfortunately, that narrative hasn't been supported by the numbers.

People who shop at WF don't shop at Wal-Mart. More of a matter of principle than it is the availability of organic food.
WF's direct competitors haven't been able to maintain anywhere near the same margins or returns and have resorted to higher leverage to reward shareholders. It's clear from their consistent margins despite the entrance of new competitors that WF has a franchise.

At $38 it was only trading at 15x cash flow with 10-12% annual growth likely to be regularly occurring in the near term and flexibility to repurchase a ton of shares.

If you ask yourself why people shop at WF and not Walmart, why not ask why people buy Coffee from Starbucks instead of McDonald's.
Title: Re: WFM - Whole Foods Market
Post by: rogermunibond on November 06, 2014, 02:03:36 PM
I think that's too dichotomized a view on consumer behavior.  I've shopped at both Walmart and WF/Wegmans.  Bought coffee at McD and Starbucks too.

Some of the produce and meats at Walmart can be quite good.  Same can be said for Aldi, to be perfectly frank.

If you allow yourself to be segmentized by marketers/retailers than be prepared at times to pay for the privilege.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 07, 2014, 05:24:17 AM
I think that's too dichotomized a view on consumer behavior.  I've shopped at both Walmart and WF/Wegmans.  Bought coffee at McD and Starbucks too.

Some of the produce and meats at Walmart can be quite good.  Same can be said for Aldi, to be perfectly frank.

If you allow yourself to be segmentized by marketers/retailers than be prepared at times to pay for the privilege.

Clearly that was an exaggerated generalization but it's not far from the truth for most WF shoppers. I'm the same as you and it's why I missed the boat on Apple and Starbucks. I prefer value for my dollar and I want the best alternative that I can get for the least amount of money.

 I know people who stop at Starbucks and pay $5 for a coffee every morning. They're willing to pay more and wait in line for this privilege as opposed to going across the street to the McD and getting it much cheaper and just as fast (if not faster).  People literally wait in line overnight to buy the newest iPhone at a premium when several high end Android phones are arguably better in specs, are seeing greater innovation in usability and experience, and cheaper in price (and no wait!).

I don't know why this. Just an observation that I've made and I think you're getting a reasonable price point to see if it plays out again. WFMs ROA and ROE have stayed remakably consistent, leverage is low, expected growth reasonable and are metrics are significantly better than peers - until these begin a permanent decline I think all the talk of cocompetition and collapsing margin is hogwash.

I'm not making a prediction here. Merely observing that the numbers haven't supported the short narrative for a year now and we're 40% lower for some reason.
Title: Re: WFM - Whole Foods Market
Post by: CorpRaider on November 07, 2014, 06:59:21 AM
They are going to start opening breweries in their stores?

I think there's a good deal of sustainable value in their "curator of food" role.  If you want, sustainable, organic, local, PC, whatever...you can just let them handle it for you.  There might be organic stuff at walmart but it's probably trucked in from chile or wherever is cheapest and you just know their suppliers and employees don't really give a crap.  Also, the service is good and they pay a living wage, about which apparently the gen y and millennial crowd give a crap.  It's like the Starbucks of food.  I don't shop there or anywhere much, but I can see why you would.
Title: Re: WFM - Whole Foods Market
Post by: GregS on November 07, 2014, 10:43:39 AM
I think both types of consumers exist - those that wouldn't touch Wal-Mart and those who will get their natural foods for the lowest price.  Whole Foods built their business on the back of the former and I don't believe they are really threatened by Wal-Mart moving into the space.  There's more to the business than just slapping "natural" or "organic" on the label and I doubt Wal-Mart will get that or even care to.  Wal-Mart will capture customers who are very price conscious but want to buy something a little bit better for their families.  But even as these customers improve their buying a bit, they are not really all that discerning.  People who care about sustainability or read every ingredient on the label have stopped shopping at Wal-Mart long ago if they ever did.  The beauty of Whole Foods is that you can just shop there without having to do all the extra work involved in healthy and sustainable eating (which, if you've ever tried, is really a lot of work).  That will be true as long as customers trust the brand ("Values Matter").  There's also a cultural and signaling issue that goes beyond just eating organic, not to mention Whole Foods offers a lot more in their store than just meats, produce and packaged foods.

Those that should be concerned about Wal-Mart are the Safeways and Krogers who can't compete with Whole Foods on brand image and overall quality and are now stuck with a unionized workforce competing with Wal-Mart on price.  I don't know about Kroger but Safeway has had a robust organic offering for years and are about to see direct competition at lower prices.  Good luck.

More concerning for Whole Foods is the direct competition from the Sprouts, Fresh Market, Trader Joe's and the like.  I think there is room for more competitors in the space as the market grows, however, just because the market has been proven doesn't mean the others can jump in and take share.  In my region, Sacramento, we saw Fresh Market come in to lots of fanfare then close down shortly thereafter.  Whole Foods is still thriving here.  I think the trust built up with customers makes shopping at Whole Foods a one-decision shopping experience for consumers who would otherwise spend time reading labels throughout the aisle and wondering where their fish came from.

Bottom line though was the 10 year test:  I asked myself, is Whole Foods going to be around in 10 years and will it still be a strong brand?  My response was a very strong yes.
Title: Re: WFM - Whole Foods Market
Post by: stevevri on November 07, 2014, 11:14:46 AM
...
They are going to start opening breweries in their stores?
...

Beyond the Brewery which is fascinating. There's a lot of interesting things in Whole Foods Stores.
New beautiful location has a full restaurant/bar http://www.desertsun.com/story/news/2014/09/23/whole-foods-palm-desert-sneak-peek/16099547/

The one over near me just put in a smoker and is smoking ribs, and brisket now too. Fremont,CA one has a beer garden. San Jose one a rooftop beer garden. There are some very innovative elements to this company. They get that you have to create excitement for the customer.
Title: Re: WFM - Whole Foods Market
Post by: Pauly on November 07, 2014, 12:19:42 PM
...
They are going to start opening breweries in their stores?
...

Beyond the Brewery which is fascinating. There's a lot of interesting things in Whole Foods Stores.
New beautiful location has a full restaurant/bar http://www.desertsun.com/story/news/2014/09/23/whole-foods-palm-desert-sneak-peek/16099547/

The one over near me just put in a smoker and is smoking ribs, and brisket now too. Fremont,CA one has a beer garden. San Jose one a rooftop beer garden. There are some very innovative elements to this company. They get that you have to create excitement for the customer.

...
They are going to start opening breweries in their stores?
...

Beyond the Brewery which is fascinating. There's a lot of interesting things in Whole Foods Stores.
New beautiful location has a full restaurant/bar http://www.desertsun.com/story/news/2014/09/23/whole-foods-palm-desert-sneak-peek/16099547/

The one over near me just put in a smoker and is smoking ribs, and brisket now too. Fremont,CA one has a beer garden. San Jose one a rooftop beer garden. There are some very innovative elements to this company. They get that you have to create excitement for the customer.

+1
There are a lot of intangibles to WFM that make it a stronger brand than a lot of people realize. Their stores are very intelligently laid out and are always in tip top condition; there isn't produce strewn all over the floor or palettes of soda sitting forgotten in the aisles. The employees, for the most part, seem to actually enjoy working there, and WF's sense of style and design is second to none in the grocery store space. This all adds up to a very pleasant atmosphere for the customer which in turn makes it an enjoyable place to spend time and money.

How many Whole Foods customers would give up this experience in order to save a few % on their bill?

I agree there's room for competition, but competing strictly on price and quantity of organic items isn't going to be enough. The trust that WF has built with their customers is a very real asset and will be very hard to replicate. I wouldn't bet against them.


Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 07, 2014, 02:14:12 PM
I'm surprised that there is even any debate about this. Let's consider some fact.

Net Margin x Asset Turnover = unlevered profit

Generally, you can increase margin and reduce turnover or reduce margin to increase turnover. You'll work these back and forth to find the optimum levels to achieve the greatest profit. It's very, very hard to increase margin and increase turnover. It's even harder to do this in an environment where your competitors are lowering their margins. Somehow, this is exactly what Whole Foods has done in the last 5 years. It is nearly impossible to concoct a scenario where WF could be growing revenues, margins, turnover, and profits in an environment where it is losing customers to competitors. This narrative was never supported by any figures outside of a fluctuating net margin from quarter to quarter. Even these fluctuations were met with increases in turnover and drove profits higher so it was clearly not bad for the business and clearly wasn't driven by competitive pressures. It was WF optimizing their profits.

We can debate what WF does to achieve a brand value and premium - but you can't debate that it has one or that it's competitors are doing anything to it at the current time.

Once you realizee that it clearly has premium brand pricing power and that the competition is currently failing to put a dent it then you can focus on all of the upside potential available to you from the current prices. When a I purchased a few months back, it was growing at 10% a year, had no debt, had a wise capital allocation policy funding dividends and buybacks (after the 40% drop), and only traded at 15x cash flow. This was a no brainer. Quite literally the easiest investment decision I've ever made. I'm not going to get rich quickly off of this one but I don't have any issues envisioning a reasonable scenario where it's returning 12-15% a year.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on February 11, 2015, 02:21:28 PM
http://finance.yahoo.com/news/whole-foods-sales-accelerate-shares-215045652.html

WFM beats on earnings. Accelerating SSS, expansion of 9-10% planned for this year, and higher profits. At this point in time, WFM will probably pull in somewhere between 1-1.2B in FCF on a market cap of $19B. Currently trades ~50% off of it's lows last year. Congrats to all who purchased. Let ride this for awhile.
Title: Re: WFM - Whole Foods Market
Post by: thepupil on July 30, 2015, 10:28:30 AM
this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.
Title: Re: WFM - Whole Foods Market
Post by: berkshire101 on July 30, 2015, 10:45:01 AM
this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

My experience with retailers is that you have to be the lowest cost producer to have any kind of long-term competitive advantage.  In the end, you're just selling a commodity.  I haven't seen any indication that that's WFM's focus.  They're looking to provide this healthy customer experience.  Which is good and all.  But when you have WMT and COST making organic a larger portion of their sales, and at cheaper prices, how will WFM compete long-term? 

WFM was one of the first to move into that organic space, and it was a niche market for a while.  But now, it's a much larger market with lower cost producers moving in.

Maybe that's the concern with WFM?  How will they compete on price against WMT and COST? 
Title: Re: WFM - Whole Foods Market
Post by: kab60 on July 30, 2015, 10:48:56 AM
(Other than the excessive stock compensation) what's the reason for the big discrepancy between cashflows and net earnings? It seems like depreciation is around 50 pct. higher than investments. Anything to be worried about or just an agressive depreciation schedule? It seems cheap on a FCF basis if you believe the story.
Title: Re: WFM - Whole Foods Market
Post by: kab60 on July 30, 2015, 10:53:06 AM
this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

My experience with retailers is that you have to be the lowest cost producer to have any kind of long-term competitive advantage.  In the end, you're just selling a commodity.  I haven't seen any indication that that's WFM's focus.  They're looking to provide this healthy customer experience.  Which is good and all.  But when you have WMT and COST making organic a larger portion of their sales, and at cheaper prices, how will WFM compete long-term? 

WFM was one of the first to move into that organic space, and it was a niche market for a while.  But now, it's a much larger market with lower cost producers moving in.

Maybe that's the concern with WFM?  How will they compete on price against WMT and COST?
Maybe they don't have to compete head to head on price with WMT and Costco? Isn't that the bull thesis? Most of the people I know who buy Organic wouldn't want to do in Wal-Mart because they associate it with a lot of stuff that they don't like whereas WMT har a different story to tell; a nice story so you might actually wanna stay for an expensive coffee (I figure it's somewhat pricey, haven't been there).
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on July 30, 2015, 11:03:32 AM
this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

My experience with retailers is that you have to be the lowest cost producer to have any kind of long-term competitive advantage.  In the end, you're just selling a commodity.  I haven't seen any indication that that's WFM's focus.  They're looking to provide this healthy customer experience.  Which is good and all.  But when you have WMT and COST making organic a larger portion of their sales, and at cheaper prices, how will WFM compete long-term? 

WFM was one of the first to move into that organic space, and it was a niche market for a while.  But now, it's a much larger market with lower cost producers moving in.

Maybe that's the concern with WFM?  How will they compete on price against WMT and COST?

Tell that to people who shop at Starbucks. We live in a society and a culture that has enough participants who care about responsible sourcing, employee welfare, quality of products, etc. that they're happy to pay a premium. This is why a large number of WFM shoppers won't be caught dead in a WMT. WMT doesn't appeal to their values.

McDs coffee has consistently scored just as well, if not better, than some of Starbucks coffee - yet people will still pay 5x as much for SBUX? A similar argument could be made for the massive value premium Keurig gets for selling it's convenience of a single serve at home. People care about things beyond price and WFM caters to that and has been very successful over the past decade doing just that.

WFM isn't in the business of competing with Walmart. There is some competitive overlap, but they're not direct competitors and they won't be unless if WMT finds some way to make up the massive trust deficit. It's focus on "low prices" seems like it will prevent that from happening. WMT is the McD/Dunkin/home brew version of the organic food market. WFM is the SBUX. There's room for both.

(Other than the excessive stock compensation) what's the reason for the big discrepancy between cashflows and net earnings? It seems like depreciation is around 50 pct. higher than investments. Anything to be worried about or just an agressive depreciation schedule? It seems cheap on a FCF basis if you believe the story.

Whole foods has been extending their store print by about 10% a year. This results in massively high depreciation costs as it's a relatively new business with relatively new buildings/investments. Also, if you look at their CapEx, a large % of it is growth CapEx which will continue to hit depreciation in years to come. If you look at the FCF of the business (Operating Cash Flow less Maintenance CapEx), you get a very different picture than from the P/E.
Title: Re: WFM - Whole Foods Market
Post by: Jurgis on July 30, 2015, 11:49:03 AM
WFM isn't in the business of competing with Walmart.

That's probably true. The concern would be competition with someone like Wegmans and maybe Trader Joe's (though TJ does not cover everything WF/supermarkets cover).

Anecdotally, we don't shop at Walmart because of historic reasons perhaps. We buy most groceries at Stop&Shop, which is generic grocery supermarket, nothing to write home about, because it is closest to our place and takes least time to get to.

When we drive farther, we go to Trader Joe's, we go to new Wegmans that opened last year, we go to HMart (Korean supermarket), and Russian store. We went to WFM couple times, we like Wegmans more.
Edit: out of the above in terms of crowds, TJs doing great, HMart doing great partially because of being Asian specialty supermarket. I think it's early to tell how Wegmans will do when novelty wears off.

But then we are usually not trendsetters or trendfollowers, so things we like don't necessarily do well (apart from TJs which did great so far, but not investable).

Edit2: If WFM was close, we probably would go there (more?), but even now we go farther to Wegmans/TJs than the distance to WFM, so it's not purely distance.
Title: Re: WFM - Whole Foods Market
Post by: scorpioncapital on July 30, 2015, 12:31:55 PM
Whole Foods - good for - speciality items you'd pay more for anyway like foreign imports. - the food buffett. Although I have seen companies like Loblaws start to do the exact same thing.

Title: Re: WFM - Whole Foods Market
Post by: Mephistopheles on August 03, 2015, 08:54:49 PM
Skimmed through the annual report tonight. I love what I see so far: strong cash flow generation, solid balance sheet, great margins, above average growth industry, quality management, and all for a wonderful price. But can it last? SSS have slowed down in the last couple of years. Here are the figures:

2000: 9%
2001: 9%
2002: 10%
2003: 9%
2004: 15%
2005: 13%
2006: 11%
2007: 7%
2008: 5%
2009: -3%
2010: 7%
2011: 9%
2012: 9%
2013: 7%
2014: 4%
1Q15: 4.5%
2Q15: 3.6%

Obviously competition has heated up with Trader Joes, Kroger, Fresh Market, and the big boxes like Costco and Wal-Mart. Costco is apparently the biggest seller of organic products now. Though, I do feel shopping experience is an important aspect of this business and that Whole Foods operates in a different niche than WMT/COST (just a feeling, nothing more).

I'm intrigued for now, but need to dig in a bit deeper. But the price is enticing. And I'm sure they're buying back hand over fist. Last summer they bought back 2.6 million shares at depressed prices a bit above this level, so the management seems like they are great capital allocators. Current market cap is $12.7 billion and they should bring in close to $1 billion this year in free cash flow ex. growth capex.

The question is - does the shopping experience play a vital role in this business? If so, we have a great company at a great price with great management.
Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on August 03, 2015, 09:21:19 PM
They sell groceries and compete with Walmart. I'm shocked they've done what they've done.
Title: Re: WFM - Whole Foods Market
Post by: loganc on August 03, 2015, 10:30:37 PM
They sell groceries and compete with Walmart. I'm shocked they've done what they've done.

I am sympathetic with this sentiment, but I don't think Whole Foods is competing for the same demographic.  For example, I am in Nashville, TN and I live in a fairly urban setting (by Nashville standards).  The Whole Foods is geographically much closer to the high  income population than Walmart.  I am very hard pressed to believe that the population that lives near Whole Foods and relatively far from a Walmart even considers Walmart as a viable option for grocery shopping.       

The relevant competition in my mind is Trader Joe's and I believe Trader Joe's to be a very good competitor.  Honestly, I would not even consider an investment in Whole Foods based on my perceived strength of Trader Joe's.   

Edit: I think one should also consider the difficulty of this business.  Imagine the complexity of inventory management for a grocery chain.  It seems to me like a very, very tough business.
Title: Re: WFM - Whole Foods Market
Post by: thepupil on August 04, 2015, 04:31:29 AM
I think the idea of whole foods competing with Walmart is laughable. they compete with nicer traditional grocers and the growing smaller specialty ones (as well as local butchers, fishmongers, bakeries, and restaurants and farmers markets)

No one who shops at whole foods shops at Walmart. Call me a snob, but I havent even been to Walmart in 3+years and I've never considered purchasing food from there. Despite it being the largest food retailer, I've never heard of anyone who buys their food there (probably because I don't live in a retail desert and mostly run in urban and affluent circles highly unlikely have a convenient Walmart to go to much less shop there)

Whole foods is a spectacular tenant because they drive traffic of high $ customers and they've built out the best real estate footprint because of that.

The debate here is whether the nice traditional grocers which have far lower margins can finally catch up to whole foods (wegmans, some nicer safeways, public greenwise, some krogers, Costco should probably be included) or if the rapidly growing small guys like sprouts and TFM and TJ's will cause death by a thousand cuts. In my anecdotal experience, nothing beats whole foods on quality and wfm offers good value relative to the specialty ones (fresh market is actually more $ and lacks the whole hippie organic credibility).

I actually think one can shop at whole foods on a budget if you utilize the 365 branded stuff (which is awesome and another reason why wfm has higher margins, lots of private label) and avoid the prepared foods (which are spectacular and another reason whole foods has higher margins).

Some of wfm' margin advantage is definitely sustainable in that they sell a different mix of private label, prepared foods, perishables, and seafood (their seafood is expensive but the only option for me at least, they're the only ones who have enough turnover for everything to be fresh and delicious).


 I live alone and my weekly bill (prepare most meals) is like $30-$40 plus proteins and alcohol. It's virtually the same at the nice traditional grocer nearby (Harris teeter)

Walmart / food lion / aldi aren't competing for whole foods $; that's a whole different customer.

I want this stock to be a little cheaper. I think it's pretty cheap now but only if there is reasonable prospect of utilizing the balance sheet a little more to accelerate stock repurchases. I don't think john Mackey and his band of under compensated business hippies are going to wake up tommorow and say "hey let's do a levered recap" which makes me want to pay a little less for the stock.
Title: Re: WFM - Whole Foods Market
Post by: Palantir on August 04, 2015, 05:35:11 AM
I just like shopping at WF, maybe it is the ambience or it is because I only buy select items there but I'd rather buy food there than at my local grocery.
Title: Re: WFM - Whole Foods Market
Post by: oddballstocks on August 04, 2015, 06:32:04 AM
They sell groceries and compete with Walmart. I'm shocked they've done what they've done.

Hmmm..have you ever been to either?  It's like saying Starbucks competes with the DMV because the DMV serves watered down black liquid called 'coffee'.

Having shopped at both places I can tell you that the Walmart crowd would never go to Whole Foods and vice versa.  At the local Walmart the parking lot is filled with Ford F-250 trucks that are lifted with giant tail pipes, lots of blue collar rah rah America types.  The Whole Foods is in a very upscale part of town with a parking lot filled with Prius', Volvo, BMW and Mercedes cars.  Whole Foods captures consumers who are not price conscious about their food.

We have friends who shop there almost exclusively.  They are well aware that you can purchase similar items at Aldi cheaper, but that's not the point, they like the experience and feel that anything from Whole Foods is automatically healthier.

I'll add that Whole Foods has an excellent craft beer selection.  Their bar proves my post, all drafts are priced a buck or two higher than other local places, yet when I go the bar is filled and people are buying.  Why aren't they going down the street to Poor Richard's Pour House to buy their beer cheaper for a few bucks?

To say Walmart competes with Whole Foods is like saying Porsche or Mercedes are competing against the Ford Econoline van.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on August 04, 2015, 07:02:30 AM
If competition was really an issue, their margins would be cratering since they're consistently multiples above their so-called "competitors." There is no evidence in the numbers that "increased competition" is hurting WFM other than the declining trend in SSS. I am more inclined to believe the decline in SSS mirrors the slow recovery of the economy and not so much the success of competitors. It's not like mass of upper class people shopping at WFM gets larger every year. This can be helped, in part, by international expansion.

Trader Joe's is a much better comparison; however, even TJs isn't serving the exact same market. WFM is planning on starting a new store initiative with smaller stores and lower cost goods. So far, details have been few, but if they're smaller stores selling private label brands, then WFM will be taking TJ head-on in capturing a younger, less affluent market with high quality goods.

I don't see why there isn't enough room for 2 large players in this kind of landscape for the foreseeable future. It's not like the grocery industry has to consolidate to a single player for their to be profit....
Title: Re: WFM - Whole Foods Market
Post by: Palantir on August 04, 2015, 07:05:22 AM
But why is WFM starting a lower price point competitor if their core business is so strong?
Title: Re: WFM - Whole Foods Market
Post by: thepupil on August 04, 2015, 07:24:23 AM
But why is WFM starting a lower price point competitor if their core business is so strong?

I think they are running out of areas to expand the full-format stores which likely require a critical mass of high income households in a certain area. One of my bigger areas of concern is if this company knows when to stop growing. Should ROIC fall because new stores are more marginal, will they switch to running the company for cash and focus on capital return. We're probably not at that point yet (there's only one store in Alabama right now for example, but they are building a few more), but we will get there. The annual letters and comp are focused on ROIC and free cash flow so it's not like they totally disregard this stuff. Also the stock comp is a little high and becomes more burdensome as growth slows and company matures.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on August 04, 2015, 07:28:58 AM
But why is WFM starting a lower price point competitor if their core business is so strong?

This is the real question. I'm confused by the new store model as well. It's not like WFM can blindly ignore that there are competitors with lower prices, but their margins have been maintained and every quarter they experience revenue and profit growth all while SSS have remained positive. My only guess is that it's one of two things:

1) Whole Foods really wants to appeal to a younger generation who simply can't afford to shop there. Think college students and young professionals just a few years out of school.

2) Price competition is starting to hurt, but hasn't creeped into any of the numbers other than SSS and I'm totally wrong about it being the economy to blame.

Either way, it's not the death of WFM and I am sure that the management will be up to the challenge. I'll wait until the results are in the numbers to determine if the new store concept is a good idea or proof of their decline.
Title: Re: WFM - Whole Foods Market
Post by: berkshire101 on August 04, 2015, 08:20:04 AM
Anyone else looking at COST and their growing selection of organic products?  The customer base is relatively the same, more towards the middle to higher income bracket. 
Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on August 04, 2015, 11:15:34 AM
All the responses about WMT are missing my point. It doesn't matter if they are better/different than WMT specifically, they sell groceries. Can a business that relies on selling groceries really be great? The point is, there  is tons of competition for grocery stores aimed at every demo of customers (Wegmans, TJs, WMT, COST, TGT, Publix, and the list goes on). Wegmans is expanding south, Publix is expanding north. As they converge, WFM is going to be very pressured, in my opinion. I'm not saying WFM is going to disappear by any stretch on the imagination. I'm just pointing out that they sell groceries and it's up there with the worst possible businesses to be in.

Also, how long will organics hold their premium pricing once more studies are released? A bet on premium pricing for organics assumes these studies will show the health benefits of what is only perceived at the moment. The benefits provided to employees is also extremely generous relative to every other grocery store. How long can they keep their Ford-like operating structure (when Henry Ford overpaid employees so they could buy his products)?

It's also pointless discussing grocery stocks when we all know Wegmans is biding their time before further expansion/dominance. They are just preparing communities for the empty store fronts in the wake of their dominance everywhere they go. :) (sarcasm but not at all homerism)
Title: Re: WFM - Whole Foods Market
Post by: Mephistopheles on August 04, 2015, 11:29:29 AM
Shopper experience matters. Similar to how you can charge more for a sweater at Banana than at Gap for a one of the same quality.  Wmt may sell the same food but doesn't necessarily mean they will attract the same customers or get the same price.

Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on August 04, 2015, 11:40:55 AM
All the responses about WMT are missing my point. It doesn't matter if they are better/different than WMT specifically, they sell groceries. Can a business that relies on selling groceries really be great? The point is, there  is tons of competition for grocery stores aimed at every demo of customers (Wegmans, TJs, WMT, COST, TGT, Publix, and the list goes on). Wegmans is expanding south, Publix is expanding north. As they converge, WFM is going to be very pressured, in my opinion. I'm not saying WFM is going to disappear by any stretch on the imagination. I'm just pointing out that they sell groceries and it's up there with the worst possible businesses to be in.

Also, how long will organics hold their premium pricing once more studies are released? A bet on premium pricing for organics assumes these studies will show the health benefits of what is only perceived at the moment. The benefits provided to employees is also extremely generous relative to every other grocery store. How long can they keep their Ford-like operating structure (when Henry Ford overpaid employees so they could buy his products)?

It's also pointless discussing grocery stocks when we all know Wegmans is biding their time before further expansion/dominance. They are just preparing communities for the empty store fronts in the wake of their dominance everywhere they go. :) (sarcasm but not at all homerism)

Most of the people that I know that buy Whole Foods' products don't do so because of it's "health benefits". They do it because they have particularly strong feelings about animals should be raised/slaughtered or because they don't want there to be the possibility of harmful chemicals on/in the food they eat or because they believe that farmhands should be paid a reasonable wage, etc. Most people I know who shop at WFM do so because they know the products are sourced responsibly and they are willing to pay more for that ideal.

This is WFM competitive advantage - only time will tell if consumer sentiment towards this will change, but it won't be because Walmart now offers organic produce at 1/2 the cost.
Title: Re: WFM - Whole Foods Market
Post by: DCG on August 04, 2015, 11:45:59 AM
The prepared food, salad bar, and bakery sections are an advantage they have over many other stores (especially places like Walmart). Whole Foods has a different customer than Walmart, so that's not a good comparison. That's like saying people won't buy iPhones because there are cheaper phones available.


I don't own any WFM, but it's on my watch list. I like the stores, although don;t shop there super often, as I usually get about 6 things; the bill comes to $100 - and then I get in the car and ask 'what did I just buy?'. They do have a good amount of food & that is tough to find elsewhere, and do a great job getting you buy thing you weren't planning on buying.


I don't think the stock is that cheap at its current price though.
Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on August 04, 2015, 11:48:50 AM
Start comparing WFM to Wegmans, Publix, and Trader Joe's instead of WMT and see how well the investment thesis holds up.
Title: Re: WFM - Whole Foods Market
Post by: rogermunibond on August 04, 2015, 12:53:12 PM
Kind of hard to compare WFM to privately held companies like the three you name.  Easier to compare with KR, TFM, SFM, etc.

I don't think organic produce/meats/shellfish/dairy are necessarily where WFM will have the ability to hold value but definitely in the prepared foods WFM has better quality and selection than the above publically traded companies as well as Wegmans, Publix, and Trader Joes.
Title: Re: WFM - Whole Foods Market
Post by: thepupil on August 04, 2015, 12:59:12 PM
Kind of hard to compare WFM to privately held companies like the three you name.

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 https://www.bamsec.com/companies/81061/publix-super-markets-inc

Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on August 04, 2015, 01:07:09 PM
Kind of hard to compare WFM to privately held companies like the three you name.

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 https://www.bamsec.com/companies/81061/publix-super-markets-inc

Thanks Pupil.

http://www.otcmarkets.com/stock/PUSH/quote

I posted this article by accident but I'll include it. I get the argument made about experience at WFM, but they are competing with Wegmans (and the other 2 I mentioned, which has a pretty wonderful shopping experience). Wegmans has ~$75m sales/store compared to $30m/store at WFM. I don't think anyone is even close by this measure.

You think WFM has a moat? People avoid moving to other locations because they won't be near a Wegmans... That's a moat!

http://www.cbsnews.com/news/could-this-be-the-best-company-in-the-world/
Title: Re: WFM - Whole Foods Market
Post by: thepupil on August 04, 2015, 01:19:46 PM
these are the first few google results of "whole foods effect on RE prices"...what you say of Wegman's the same can be said of Whole Foods. Proximity to Whole Foods is always a big selling point for real estate. I personally don't know whether or not WFM has a moat.

https://urbanful.org/2014/11/03/whole-foods-effect/
http://www.salon.com/2012/05/05/whole_foods_is_coming_time_to_buy/
http://blogs.marketwatch.com/realtimeadvice/2012/03/09/can-whole-foods-boost-home-prices/
http://www.washingtonpost.com/wp-dyn/content/article/2006/07/21/AR2006072101582.html
Title: Re: WFM - Whole Foods Market
Post by: krazeenyc on August 04, 2015, 01:39:29 PM
Kind of hard to compare WFM to privately held companies like the three you name.

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 https://www.bamsec.com/companies/81061/publix-super-markets-inc

Thanks Pupil.

http://www.otcmarkets.com/stock/PUSH/quote

I posted this article by accident but I'll include it. I get the argument made about experience at WFM, but they are competing with Wegmans (and the other 2 I mentioned, which has a pretty wonderful shopping experience). Wegmans has ~$75m sales/store compared to $30m/store at WFM. I don't think anyone is even close by this measure.

You think WFM has a moat? People avoid moving to other locations because they won't be near a Wegmans... That's a moat!

http://www.cbsnews.com/news/could-this-be-the-best-company-in-the-world/

Whole Foods average store size is ~40K sq ft. Wegmans average store size is ~120K sq ft.
Title: Re: WFM - Whole Foods Market
Post by: Picasso on August 04, 2015, 02:09:55 PM
Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on August 04, 2015, 02:46:20 PM
Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.
Title: Re: WFM - Whole Foods Market
Post by: Picasso on August 04, 2015, 02:55:43 PM
Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now.  I think it makes sense for WFM to probably engage in some sort of leverage since you are already assuming a stable business with good cash flows with an investment grade balance sheet.

Kroger has been a 4 bagger over a few years from combining the operational and financial engineering end of things.  I'm just saying WFM may be stuck with what Wall Street views as a "unoptimized" balance sheet.
Title: Re: WFM - Whole Foods Market
Post by: Mephistopheles on August 04, 2015, 02:56:22 PM
Kind of hard to compare WFM to privately held companies like the three you name.

Publix has public filings because it has so many stockholders (publix is owned by a family + a large % is owned by its employees), very admirable company, and amazing subs.

 https://www.bamsec.com/companies/81061/publix-super-markets-inc

Thanks Pupil.

http://www.otcmarkets.com/stock/PUSH/quote

I posted this article by accident but I'll include it. I get the argument made about experience at WFM, but they are competing with Wegmans (and the other 2 I mentioned, which has a pretty wonderful shopping experience). Wegmans has ~$75m sales/store compared to $30m/store at WFM. I don't think anyone is even close by this measure.

You think WFM has a moat? People avoid moving to other locations because they won't be near a Wegmans... That's a moat!

http://www.cbsnews.com/news/could-this-be-the-best-company-in-the-world/

Whole Foods average store size is ~40K sq ft. Wegmans average store size is ~120K sq ft.

Was just about to post that.

Besides, if we assume that WFM serves a different niche than WMT, and that its real competitors are Wegman's, Trader Joes, Fresh Market and the like, then it's entirely possible that there is enough room for all of these companies because the size of the pie is growing. Besides, none of these have a major low cost advantage over the others, unlike Walmart.

Title: Re: WFM - Whole Foods Market
Post by: Mephistopheles on August 04, 2015, 02:59:06 PM

The relevant competition in my mind is Trader Joe's and I believe Trader Joe's to be a very good competitor.  Honestly, I would not even consider an investment in Whole Foods based on my perceived strength of Trader Joe's.   


Would you mind expanding on this? Are there any numbers regarding this or are you saying it's your gut feeling?
Title: Re: WFM - Whole Foods Market
Post by: bizaro86 on August 04, 2015, 03:09:51 PM

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now. 


Do you have any examples of this you could share? That sounds like exactly the sort of thing I'd like to buy.

I agree stable businesses should use leverage, but if they have a good FCF yield and ROE without it, that's better in some ways, as the upside of some sort of leveraged recap is still on the table.
Title: Re: WFM - Whole Foods Market
Post by: thepupil on August 04, 2015, 03:18:43 PM
Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now.  I think it makes sense for WFM to probably engage in some sort of leverage since you are already assuming a stable business with good cash flows with an investment grade balance sheet.

Kroger has been a 4 bagger over a few years from combining the operational and financial engineering end of things.  I'm just saying WFM may be stuck with what Wall Street views as a "unoptimized" balance sheet.

agree completely, and I alluded to that earlier. I want to pay a lower price for WFM because I don't see the business hippies that run the show here all of the sudden borrowing $2 or $3B and tendering for a big chunk of the company. That option of a forced re-rating from a levered recap is worth less with WFM's management.

I think the company may be vulnerable to an activist to do just this.
Title: Re: WFM - Whole Foods Market
Post by: Picasso on August 04, 2015, 03:19:10 PM

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now. 


Do you have any examples of this you could share? That sounds like exactly the sort of thing I'd like to buy.

I agree stable businesses should use leverage, but if they have a good FCF yield and ROE without it, that's better in some ways, as the upside of some sort of leveraged recap is still on the table.

Not to derail the topic, but EXPD comes to mind.  Lowest multiple in years, cash makes up a massive percentage of the balance sheet, they don't really need the cash, and they have no debt.  ValueAct took a small position in them last year and sold out fairly quickly.  I think they might have had a difficult time convincing them to lower their cost of capital.

There are other examples but look what Einhorn did with Apple a few years ago.  It was considered criminal to keep 20% of the market cap in cash with no debt when they could easily issue AA bonds.  WFM is probably A+ rated which is still well below their current cost of capital.

I think the downside to these unlevered stocks is a potential takeout of a long-term compounder.  You can easily lose ownership of something to get a short-term bid by private equity or the major shareholders.
Title: Re: WFM - Whole Foods Market
Post by: EricSchleien on August 04, 2015, 03:19:40 PM
Don't even compare Fresh Market to Whole Foods!

There's a WF coming to Bedford, NH right by their Fresh Market. Wouldn't surprise me if they put it out of business.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on August 04, 2015, 03:48:55 PM
Is part of the problem with WFM their near death experience in 2008?  It seems that ever since then their capital allocation decisions have centered around the business and avoiding leverage.

this would be bad because? They achieve similar ROEs without anywhere near the financial leverage of their competitors.

Unlevered capital structures when you have a lot of free cash flow in a low rate environment aren't getting very high multiples right now.  I think it makes sense for WFM to probably engage in some sort of leverage since you are already assuming a stable business with good cash flows with an investment grade balance sheet.

Kroger has been a 4 bagger over a few years from combining the operational and financial engineering end of things.  I'm just saying WFM may be stuck with what Wall Street views as a "unoptimized" balance sheet.

I would totally be ok with this - a small buyback program going on every year, plus the ability to reinvest dividends at a reasonable multiple, plus the financial flexibility to whether or storm or acquire a rival when the opportunity arises = long-term compounding ability.
Title: Re: WFM - Whole Foods Market
Post by: Jurgis on August 04, 2015, 08:26:16 PM
I don't think organic produce/meats/shellfish/dairy are necessarily where WFM will have the ability to hold value but definitely in the prepared foods WFM has better quality and selection than the above publically traded companies as well as Wegmans, Publix, and Trader Joes.

Anecdotally: not really. We prefer Wegmans.
Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on August 05, 2015, 09:45:02 AM
This made the front-page of Reddit yesterday.

http://www.usatoday.com/story/money/2015/08/05/whole-foods-oops-asparagus-water-mistake/31152405/

Obviously a mistake by the company concerned with your health :) Notice it's "water" and not "spring water". That is literally tap water with some asparagus in a jar.
Title: Re: WFM - Whole Foods Market
Post by: JayGatsby on November 02, 2015, 10:07:43 PM
This piqued my attention: http://www.nytimes.com/2015/11/03/business/wall-st-sours-on-whole-foods.html

I think the core Whole Foods business is phenomenal, which is why I started looking into it when I saw the headline. My biggest problem with it now is I think management is listening to the wall street analysts and losing focus on what they're good at. I'd always assumed that from a profit perspective they were really more of a restaurant than a grocery store. I don't have one close now (they're building a "flagship" across the street currently), but what I noticed about the one in my old neighborhood was the average cart (often basket) wasn't very big or very full. It seemed like a lot of people were going there because they needed food now. In fact, some people skipped the basket all together and used a bowl instead. If you wanted to you could also shop for groceries, but that wasn't really the point. The margins whole foods earned were above average, but the customers were happy because it was cheaper and healthier than other dining alternatives. 

Then wall street came along and told them they were going to lose market share to grocery stores. Rather than stay the course and keep building restaurants that happened to look like grocery stores they shifted course and decided to get into the low margin grocery business via their new 365 Markets. So now, rather than focus their capital on high ROE restaurants where they're the category leader in a category with almost no one else, they're diverting it to low ROE grocery stores (using 100% equity) in a hypercompetitive segment where they're really just trying to be almost as good as trader joes.

Still seems like a reasonable value for the price (4 year low), but far from a slam dunk. I guess they view their operating leases as debt which is why they maintain such a conservative balance sheet.
Title: Re: WFM - Whole Foods Market
Post by: WideMoat on November 03, 2015, 04:00:38 AM
I'm working in this one right now.  The only observation I would make based on your commentary is that the low margin business can have a reasonable ROIC--if it is well managed.  Trader Joe's serves as evidence, though they have very high inventory turns in their most successful stores.

As an aside, their naming and marketing choices thusfar have not been overwhelming (365?).  Perhaps their execution can rise above humble beginnings, but mark me skeptical.
Title: Re: WFM - Whole Foods Market
Post by: DCG on November 03, 2015, 04:35:41 AM
Interesting way to look at it Jay.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 03, 2015, 05:55:45 AM
This piqued my attention: http://www.nytimes.com/2015/11/03/business/wall-st-sours-on-whole-foods.html

I think the core Whole Foods business is phenomenal, which is why I started looking into it when I saw the headline. My biggest problem with it now is I think management is listening to the wall street analysts and losing focus on what they're good at. I'd always assumed that from a profit perspective they were really more of a restaurant than a grocery store. I don't have one close now (they're building a "flagship" across the street currently), but what I noticed about the one in my old neighborhood was the average cart (often basket) wasn't very big or very full. It seemed like a lot of people were going there because they needed food now. In fact, some people skipped the basket all together and used a bowl instead. If you wanted to you could also shop for groceries, but that wasn't really the point. The margins whole foods earned were above average, but the customers were happy because it was cheaper and healthier than other dining alternatives. 

Then wall street came along and told them they were going to lose market share to grocery stores. Rather than stay the course and keep building restaurants that happened to look like grocery stores they shifted course and decided to get into the low margin grocery business via their new 365 Markets. So now, rather than focus their capital on high ROE restaurants where they're the category leader in a category with almost no one else, they're diverting it to low ROE grocery stores (using 100% equity) in a hypercompetitive segment where they're really just trying to be almost as good as trader joes.

Still seems like a reasonable value for the price (4 year low), but far from a slam dunk. I guess they view their operating leases as debt which is why they maintain such a conservative balance sheet.

I've been buying here. The recent drop in margins over the last few quarters was accompanied by increased turnover which generated a higher contribution to ROE. I am ok with falling margins if that's what it gets you. I'm not going to speculate about the success of the 365 stores. Management feels like they see a niche that can be filled and are working to fill it. If it's a success, shareholders will be happy. If it's not a success, I trust that management will shut it down and stick with what the know before blowing too much cash. I just hope they report the breakout the results for the main grocery stores and the new, smaller, cheaper ones so that shareholders can keep them accountable to that.

As for the price, you're paying about around 9-10x FCF less maintenance CapEx without paying for any of the future growth. The industry is expected to continue to grow massively as it's still only a small part of the grocery business and millenials attitudes towards fair wages, ethical and organic sourcing, etc. doesn't appear to be a fad that they'll fall out of overnight. Even without industry growth, current sq. footage growth is currently 10% each year with the potential for international expansion (have no idea how well that would work, just throwing it out there as a possibility).

I think at this price you get modest returns if 365 is a bust and growth stops OR you get a multi-year compounder. I'm obviously hoping for the later, but I don't think you'll be disappointed by a lack of execution at prices under $40.
Title: Re: WFM - Whole Foods Market
Post by: DCG on November 03, 2015, 06:36:02 AM
How many stores have they added the Watering Hole (https://www.wholefoodsmarket.com/service/watering-hole-wine-craft-beer-bar) bar section to?


It seems like adding a growler-filling section to stores would be a good idea.
Title: Re: WFM - Whole Foods Market
Post by: JayGatsby on November 03, 2015, 11:16:55 AM
I think at this price you get modest returns if 365 is a bust and growth stops OR you get a multi-year compounder. I'm obviously hoping for the later, but I don't think you'll be disappointed by a lack of execution at prices under $40.
You're probably right. I get really nervous though when I see management shift direction, particularly when I think they're being led to water by wall street analysts and the new strategy doesn't make intuitive sense to me. Too often you see the core business suffer as a result. Take Green Mountain Coffee as an example. They had a great business selling overpriced single-serve coffee pods that generally tastes mediocre. They were a coffee company that sold electronics. Then they took coffee out of their name and decided they were an electronics company that sold coffee and any food/beverage that would fit in a small plastic cup. They lost their luster with consumers, volumes have declined and stock is down ~50% since they announced the name change. Whole Foods is running ~10% EBITDA margins today so a small change either direction can have a pretty huge impact on cash flow. Coming out publicly and saying Store A is overpriced, but Store B isn't seems like a pretty dangerous experiment.

Sidebar, this is all hearsay but I've heard that from a profit perspective Trader Joes is actually more of a liquor store than a grocery store. I heard the reason the reason they don't sell through instacart is that customers on instacart tend to only buy what they need and Trader Joes doesn't make much margin on that. In Colorado companies are  only allowed one liquor license for the whole state. Traders Joes expansion there has been slower than you'd otherwise probably expect and some people say that when you strip the alcohol sales out the returns just aren't that great. Can't confirm any of that as fact, only what I've heard
Title: Re: WFM - Whole Foods Market
Post by: ccplz on November 03, 2015, 11:28:23 AM
http://brattlestreetcapital.blogspot.ca/2014/11/whole-foods-rock-and-hard-place.html

http://brattlestreetcapital.blogspot.ca/2014/11/whole-foods-redux.html

Interesting thoughts on WFM from last year. I think it's still relevant today.
Title: Re: WFM - Whole Foods Market
Post by: GregS on November 03, 2015, 11:39:52 AM
Jay, I think you are thinking about this the right way.  I jumped into WFM about a year ago because of the strong brand, maintenance FCF and strong balance sheet, and ended up selling after a bounce in same store sales faded.  Note that comps were basically flat during the last two weeks of the last quarter when the NY weights and measures issue came out, and who knows how far that carried through.  I round-tripped the stock and sold for a small loss.

Whether management is listening to Wall Street or otherwise, it is clear to me they are abandoning their core strategy going forward in response to stiff competition.  They are basically adopting the business model of TJ's, Sprouts and others of small format grocery stores.  They can have good ROIC as others pointed out, and management noted these stores use less labor and can be built upon existing distribution.  But Whole Foods was a differentiated concept in large part because of the prepared foods and restaurant-style offerings, and now they will just be another natural foods store.  They will compete in large part on price, which is a major shift in strategy.  Why abandon your core concept?

I see two possibilities:  1. management is just screwing up here, and this will be a New Coke-style flop, or 2. as many critics have alleged for awhile, full scale Whole Foods markets have more or less reached capacity and there is no significant store growth possible, while competition will eat away at existing stores.  Given the new stores in Detroit and inner-city Chicago, and declining SSS, the latter is a distinct possibility.  If this is true, it basically means Whole Foods' moat in its brand and store concept is illusory.

Either way, I'm pessimistic on the new stores but will watch to see if I can be proven wrong.  I haven't seen enough to make me want to take a bet on management at this point.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 03, 2015, 12:40:50 PM
http://brattlestreetcapital.blogspot.ca/2014/11/whole-foods-rock-and-hard-place.html

http://brattlestreetcapital.blogspot.ca/2014/11/whole-foods-redux.html

Interesting thoughts on WFM from last year. I think it's still relevant today.

Thanks for sharing. His concerns about brand dilution and lower margins mirror my own, but I also see how the management has executed in the past and trust them while trying new things.
Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on November 04, 2015, 10:46:32 AM
COST is now the largest organic food retailer in the US. I think the top-4 is COST, WFM, WMT/Kroger (not sure who is #3 and who is #4).

Costco alone grew their organic food revenue by ~33% ($1b) in the past 12 months. I'm impressed that Whole Food's has the margins they do, all things considered.

http://www.businessinsider.com/costco-becomes-top-seller-of-organic-food-2015-6
http://www.fool.com/investing/general/2015/06/07/which-retailer-is-the-leading-organic-food-seller.aspx
Title: Re: WFM - Whole Foods Market
Post by: DCG on November 04, 2015, 11:27:27 AM
As has been mentioned in this thread, I think their prepared food selection is their advantage over other grocery stores (and places like Costco). They also do carry a lot of brands that aren't carried elsewhere.
Title: Re: WFM - Whole Foods Market
Post by: fareastwarriors on November 04, 2015, 01:20:51 PM
Whole Foods dives after results; announces $1B buyback

http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html (http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html)
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 04, 2015, 01:49:31 PM
Whole Foods dives after results; announces $1B buyback

http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html (http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html)

It doesn't seem like the results were a disaster, though I know everyone is watching comps/SSS.

Revenues are up and cannibalization of old store sales is to be expected as they open new stores nearby. This will especially be the case with the 365 stores. As long as total revenues are growing and SSS aren't absolutely collapsing, then I think we're ok here. I do take a small issue with the company's forecast of 1200 large stores remaining the same in spite of the launch of 365 - surely they see that if you're building a smaller store to attract an overlapping customer base that they'll need fewer big box stores. I'm sure this won't be an issue until we get closer to that 1200 store count, but hopefully they'll revise those figures if the 365 concept is successful to prevent overbuilding.

Gross margins came down slight q-o-q from 35.6% to 34.5% while turnover remained constant (but was up y-o-y). This is one quarter and that's a 1% drop in margins when everyone is calling for the end of WFM and it's stock has tanked 20% over this quarter and much more from it's peak. Total revenues continue to grow, SSS/Comps aren't cratering, margins are being relatively well maintained for how much talk "increasing competition" is getting, and earnings continue to grow. I think the fear-mongering is a little overdone, but someone please feel free to correct me.

Rough estimates of FCF came in a little low for my estimates at ~$800M. I'm using OpeX less maintenance CapEx. This is about 4% lower than last year while I was expecting modest growth putting the total figure close to $900M. It turns out my estimates of maintenance CapEx were a little low previously so I'm glad they're explicitly breaking this out now and that explains some of the divergence in my estimates. On a per share basis, FCF is flat from last year.

If FCF remains flat and that they borrow the entire $1 billion for the share repurchase (they won't), you'll get a a company with a $9.5B market cap and a 10.5B enterprise value doing ~$800 million in FCF with no expected growth despite spending nearly $500M in new store expansion each year. I'm ok with that.

They repurchased 3.5% over the past fiscal year and will be repurchasing an additional 10%+ over the course of the next 6 months (at these prices). This will be the first time they take on debt and it will be a conservative amount. I'm quite happy with a large buyback at these prices and that it doesn't come at the expense of their expansion.
Title: Re: WFM - Whole Foods Market
Post by: Sionnach on November 04, 2015, 01:54:44 PM
can someone explain what the competitive advantage is here? its appears to be a the highest-price seller. I would think you have to argue the "starbucks effect" in order to suggest a competitive advantage, but I could be wrong.

Also- could someone also explain the economics behind why grocery stores tend to be regional? Why are there regional but not national scale advantages? thanks.

Title: Re: WFM - Whole Foods Market
Post by: Cunninghamew on November 04, 2015, 02:02:24 PM
As has been mentioned in this thread, I think their prepared food selection is their advantage over other grocery stores (and places like Costco). They also do carry a lot of brands that aren't carried elsewhere.

I noticed prep food was about 20% of sales. Does anyone know the profit contribution? or have a ball-park guess?

I looked at Sprout and Fresh Mkt 10k and they don't provide a similar break-out or I missed it
Title: Re: WFM - Whole Foods Market
Post by: Cunninghamew on November 04, 2015, 02:15:25 PM
can someone explain what the competitive advantage is here? its appears to be a the highest-price seller. I would think you have to argue the "starbucks effect" in order to suggest a competitive advantage, but I could be wrong.

Also- could someone also explain the economics behind why grocery stores tend to be regional? Why are there regional but not national scale advantages? thanks.

Regarding your first point... a small anecdote

I hate grocery shopping and love cooking. Going to Kroger or any other standard grocery store (even Sprouts) is the bane of my existence. When I lived in Dallas, I enjoyed going to WFM or Central Market (owned by HEB). My wife and I would actually do it as an activity we called "sip and shop." We would get there grab a beer or glass of wine and leisurely do our grocery shopping. I knew I was paying up for my groceries, but I didn't mind as I enjoyed the experience that much more.

Also, I recently moved back home to Little Rock, AR. As previously mentioned, I like to cook. There is no where in my town where I can get decent products except WFM and a few small specialty grocers.

I didn't start to look into WFM till today and my initial impression is that it is an interesting opportunity that warrants further research. The big question is do they have a brand that will allow them to continue to generate industry leading margins. For sanity's sake - WFM has consistently generated about 35% gross margins compared to ~31% at Sprouts, Nat Groc, and Fresh Mkt. I imagine there is some truth to both the bull and bear thesis. WFM will probably lose some of its pricing power and be only a slight premium to the aforementioned comps, but I also think it is better than those comps. WFM offers an experience (like sip and shop) that some people want.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 04, 2015, 02:35:00 PM
Whole Foods dives after results; announces $1B buyback

http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html (http://www.cnbc.com/2015/11/04/whole-foods-shares-drop-95-on-earnings-miss.html)

It doesn't seem like the results were a disaster, though I know everyone is watching comps/SSS.

Revenues are up and cannibalization of old store sales is to be expected as they open new stores nearby. This will especially be the case with the 365 stores. As long as total revenues are growing and SSS aren't absolutely collapsing, then I think we're ok here. I do take a small issue with the company's forecast of 1200 large stores remaining the same in spite of the launch of 365 - surely they see that if you're building a smaller store to attract an overlapping customer base that they'll need fewer big box stores. I'm sure this won't be an issue until we get closer to that 1200 store count, but hopefully they'll revise those figures if the 365 concept is successful to prevent overbuilding.

Gross margins came down slight q-o-q from 35.6% to 34.5% while turnover remained constant (but was up y-o-y). This is one quarter and that's a 1% drop in margins when everyone is calling for the end of WFM and it's stock has tanked 20% over this quarter and much more from it's peak. Total revenues continue to grow, SSS/Comps aren't cratering, margins are being relatively well maintained for how much talk "increasing competition" is getting, and earnings continue to grow. I think the fear-mongering is a little overdone, but someone please feel free to correct me.

Rough estimates of FCF came in a little low for my estimates at ~$800M. I'm using OpeX less maintenance CapEx. This is about 4% lower than last year while I was expecting modest growth putting the total figure close to $900M. It turns out my estimates of maintenance CapEx were a little low previously so I'm glad they're explicitly breaking this out now and that explains some of the divergence in my estimates. On a per share basis, FCF is flat from last year.

If FCF remains flat and that they borrow the entire $1 billion for the share repurchase (they won't), you'll get a a company with a $9.5B market cap and a 10.5B enterprise value doing ~$800 million in FCF with no expected growth despite spending nearly $500M in new store expansion each year. I'm ok with that.

They repurchased 3.5% over the past fiscal year and will be repurchasing an additional 10%+ over the course of the next 6 months (at these prices). This will be the first time they take on debt and it will be a conservative amount. I'm quite happy with a large buyback at these prices and that it doesn't come at the expense of their expansion.

Also, just noticed that only 11% of stores that were opened this year were in new markets. The other 89% were in existing markets - is it really a surprise that SSS are down when you open new stores near old ones and cannibalize on the same customer base? I would think that a slight negative in SSS would be expected if you opened 8-9% of sq. footage in areas that are already being serviced by another store and could attract some of those same customers.  I get that it's obviously better if SSS were positive through that trend, but I certainly don't think that -0.2% comps is the death of a company considering the amount of growth in the same market AND that total revenue is still growing at a healthy clip.

We'll see - 2016 is slated to have 20% of new stores in new markets. The first half of 2016 should give us a good look at what actual SSS figures would do absent store openings because the year is very back-end loaded for store additions. Also, 20% of stores next year will be in new markets.
Title: Re: WFM - Whole Foods Market
Post by: GregS on November 04, 2015, 02:40:17 PM
TwoCitiesCapital, since you invited comments I will highlight my disagreement with two points you made.

On store count, I am more skeptical and I think this is a big issue.  They are at over 400 now and it already feels like saturation.  Cannibalization is an issue, competition is an issue, and I think getting even close to 1200 is a pipe dream.  Management hasn't taken that down yet and I don't expect them to anytime soon, given how firm they have been in that number.  Yet their move toward smaller format is a tell that they don't believe 1200 full size is possible.  I have no idea what the right number is but it's not near 1200.  Maybe there is a right mix of full and 365 stores that promotes continued growth with good ROIC, but no one has a basis for judging 365 at this point, not even management.

On margin, I don't take too much comfort in the fact that it hasn't moved much yet.  Last year, who would have thought comps would go negative?  How are they going to reverse that trend and defend their position?  Pricing, most likely.  Whole Foods has lost its edge on differentiation.  Many (including myself) thought Wal-Mart wasn't real competition because they weren't competing for the same customers, and that may still be true.  But you can buy the same quality and same brands at Costco, Trader Joe's, Sprouts, and now Safeway, Kroger and the like.  Yes, there are many customers very loyal to the brand, or shop there for the prepared foods, but I think that base is smaller than Whole Foods needs to maintain current sales at current margins.  In the end, I believe they get to margins could still be industry leading, but are closer to the rest of the industry before this bottoms.  Other grocers have GMs in the 20s.  What would, say, a 500 bp drop in GM to ~30% over the next few years do to their profits?

I think it's always good to point out what would get us to change our minds.  For me, it would be primarily comps resuming and sustaining their rise for several quarters, which would suggest further pricing actions wouldn't be necessary.  Until then, I consider those margins at risk.  I also think 365 is worth watching but I find it impossible to judge its chances.
Title: Re: WFM - Whole Foods Market
Post by: KJP on November 04, 2015, 02:50:05 PM

Also- could someone also explain the economics behind why grocery stores tend to be regional? Why are there regional but not national scale advantages? thanks.

In the context of grocers or retailers like Wal-Mart, many of the benefits of scale come from optimizing the logistics side, e.g., making sure your truck can be very efficient on trips from the warehouse and so forth.  These types of logistics or "route density" advantages are inherently local.  That's why a regional company can actually have a scale advantage over another company that is larger nationally, but smaller locally.  There is a good explanation of this, with examples, in Bruce Greenwald's book Competition Demystified.

It also explains why there are many regional grocers.  They get scale over a regional area, but then they bump up against another strong regional player that already has scale in its home turf.  It is very costly and difficult to profitably break into the turf of another company that already has scale in the area.
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 04, 2015, 03:03:23 PM
TwoCitiesCapital, since you invited comments I will highlight my disagreement with two points you made.

On store count, I am more skeptical and I think this is a big issue.  They are at over 400 now and it already feels like saturation.  Cannibalization is an issue, competition is an issue, and I think getting even close to 1200 is a pipe dream.  Management hasn't taken that down yet and I don't expect them to anytime soon, given how firm they have been in that number.  Yet their move toward smaller format is a tell that they don't believe 1200 full size is possible.  I have no idea what the right number is but it's not near 1200.  Maybe there is a right mix of full and 365 stores that promotes continued growth with good ROIC, but no one has a basis for judging 365 at this point, not even management.

On margin, I don't take too much comfort in the fact that it hasn't moved much yet.  Last year, who would have thought comps would go negative?  How are they going to reverse that trend and defend their position?  Pricing, most likely.  Whole Foods has lost its edge on differentiation.  Many (including myself) thought Wal-Mart wasn't real competition because they weren't competing for the same customers, and that may still be true.  But you can buy the same quality and same brands at Costco, Trader Joe's, Sprouts, and now Safeway, Kroger and the like.  Yes, there are many customers very loyal to the brand, or shop there for the prepared foods, but I think that base is smaller than Whole Foods needs to maintain current sales at current margins.  In the end, I believe they get to margins could still be industry leading, but are closer to the rest of the industry before this bottoms.  Other grocers have GMs in the 20s.  What would, say, a 500 bp drop in GM to ~30% over the next few years do to their profits?

I think it's always good to point out what would get us to change our minds.  For me, it would be primarily comps resuming and sustaining their rise for several quarters, which would suggest further pricing actions wouldn't be necessary.  Until then, I consider those margins at risk.  I also think 365 is worth watching but I find it impossible to judge its chances.

Hi Greg,

Thanks for your comments. I agree with you on the 1200 store count as was mentioned in my prior comment. I don't know what the right number of stores is, but I think you're right about it being significantly less than 1200. That being said, 800 is significantly less than 1200 and we're only half way there. 600 is significantly less than 1200 and we've got another 5 years or so before we'd hit that at the current rate of grwoth - so I'm not concerned about over saturation in the near term.

Especially if you consider the current store count and divide it by the states - that is 8 per state. If you're suggesting the market can't handle substantially more than 8 per state in a fast growing section of produce for a national chain, I think you may be seriously mistaken. There are 8 Whole Foods in Manhattan alone. I think other large Metropolitan cities could handle a number of stores well - places like Miami, Chicago, L.A., etc. could all handle multiple Whole Foods meaning that the remainder of the state is left with only room for 1-3 Whole Foods? I seriously doubt it. 1200 may be a pipe dream, but 700-800 is more reasonable and is 2x the stores now and you're paying for none of that growth if margins remain semi-stable.

If margins do decline 500 bps like you say, there's the chance you make up for it in maintaining market share in a fast growing market while also doubling your store count. That being said, I've yet to see any convincing evidence of massive margin erosion. The lower margins we saw in the past led to increased turnover and increased profits - if that's the result of falling margins then please, bring it on! I understand that there is increasing competition - I also understand WFM provides a more pleasant shopping/dining/drinking experience than the majority of those competitors and that there is more than enough room in the market for a number of players.

I would change my mind if I saw significant margin reduction that didn't lead to higher turnovers and profits. What I won't do is look at the competition who has failed to do compete effectively enough to cause massive margin erosion in the past and suddenly determine that they're guaranteed to be successful at it in the future and sell WFM based on speculation that hasn't been supported by the data so far. Whole Foods revenues are growing. Comparables were still up year over year. FCF would have grown had it not been for the increase in maintenance capex in Q3 (which appears like an anomaly because the large gain isn't reflected in any other quarters). The capital structure is becoming more "efficient" while still remaining conservative.

I will say that the SSS figures were a bit disconcerting for the quarter and current YTD, but they aren't collapsing by any means. They were still +2.5% for the year despite the fact that 90% of new stores were added to areas already having a Whole Foods. I think it's more likely that Q4 and Q1 might just be weak quarters than to assume that the competition, who has failed to affect WFM at any point in the past, are suddenly beginning to affect them now - especially since gross margins remained elevated, revenues continued to grow, and customer spend per visit continues to grow despite supposed cost cutting.



Title: Re: WFM - Whole Foods Market
Post by: GregS on November 04, 2015, 04:27:05 PM
Those points are well taken. I plan to dig into the numbers and call the next few days and will update my thoughts if there is anything worth updating.

My working hypothesis is that WFM fundamentals are declining, albeit slowly, and that we haven't seen bottom yet. GMs would be hit next. If they can use price to drive sales and higher ROI, great. 365 is basically based on that idea. I don't feel like that concept was introduced from a position of strength, however.

This will be a buy at some point. Whole Foods will still be around in 10 years, but how profitable the business will be is the question.
Title: Re: WFM - Whole Foods Market
Post by: JayGatsby on November 04, 2015, 07:35:17 PM
I noticed prep food was about 20% of sales. Does anyone know the profit contribution? or have a ball-park guess?
If prepared food is 20% of sales, I'd venture that sales as a result of prepared foods is far higher than 20%. When I get the prepared food I usually grab a can of some new tea concoction, grab an apple or something and maybe grab one of those protein candy bars for the morning.

This gets back to Sionnach's question of what's their competitive advantage. I think it's i) unique food selection that you can't find elsewhere and ii) prepared foods, that combine into the experience that TwoCities and Cunninghamew mentioned. Similar to Starbucks, Whole Foods is an affordable luxury that people rationalize because of the experience and because it's healthier or tastes better.What's interesting to me about this is that, similar to my restaurant hypothesis, this doesn't indicate a need to go down market and fight the price battle. They should have tons of opportunity to continue to exploit this all sizes of stores. Rather than create a smaller store with a value proposition I'd be curious to see them create a smaller store that's more expensive. You probably can't market it as that, but basically a higher percentage of food stands / prepared food and a lower percentage of canned beans. Maybe their 1200 stores is based on that ability to create smaller, more focused markets depending on the demographics.
Title: Re: WFM - Whole Foods Market
Post by: DTEJD1997 on November 04, 2015, 08:22:34 PM
Hey all:

I used to work with a guy that worked at Whole Foods.  Hey said it was a pretty good place to work at UNTIL they brought in the crew from K-Mart.  He claims they hired a bunch of people from there a few years back & the results were predictable.  Perhaps we are seeing the more complete fruition of that with the latest earnings report.

On a different note...are these guys going to be able to maintain a high P/E now that earnings are CONTRACTING?

I used to shop at WFM a lot more than I currently do.  One of the reasons is that Kroger is now carrying the brand of Indian TV dinners that I like.  They are WAY cheaper than WFM.  They also have about 10 locations for every one WFM, so it is a whole lot more convenient for me to shop there.

WFM has some pretty good prepared foods, I'll give them that...but I can eat MUCH better than that for just a bit more at some great Chinese, Indian & Middle Eastern family places that I know.

I also shop at Trader Joes a whole lot more.

I think WFM value proposition has been compromised.  At least that is the situation in the midwest.

Finally, yes they opened a location in the middle of Detroit.  At first, I thought one of their developers had a stroke, or lost their mind.  HOWEVER, that is in a rather unique area.  Museums & Wayne State University are less than 1/2 mile away.  There are also numerous hospitals even closer than that.  So there are a tremendous amount of highly educated people in close proximity...Being in Detroit, it is still in a somewhat dicey area with hobos & such wandering about...I very much DOUBT that Detroit proper could support more than 1 location.  The Detroit Metro area might be able to take a few more locations...BUT Trader Joes has blocked them out in some areas.  For example, Grosse Pointe already has a Trader Joes & two Krogers along with a few smaller family specialty grocers.  I don't think WFM could move into that area...It is already sewn up.

I think that the next few quarters are absolutely critical.  Earnings have to start growing again...otherwise the P/E ratio gets whacked.
Title: Re: WFM - Whole Foods Market
Post by: GregS on November 10, 2015, 11:53:02 AM
I finally got a chance to look at the release and conference call.  Looks like comp decline has accelerated and they expect margins to continue to contract.  The first five weeks of the new quarter saw 2.1% comp sales decline, compared to the 0.2% decline for the recent quarter.  Remember that right before the start of fiscal Q4, NYC had its weights and measure audit which resulted in major negative publicity, which depressed comps at the very end of the quarter and into Q4.  If this was the only factor, we would have expected a rebound in the first part of fiscal Q1, not an acceleration.

Also recall that this all comes on the heels of management changing their comp sales reporting earlier in the year from stores opened 53 to 57 weeks, to reflect the sales boost due to new openings.  Under the previous standard, the numbers would probably look worse.

Guidance shows things are not getting better.
Quote
• Sales growth of 3% to 5%
• Approximately 30 new stores, including three 365 stores and two to three relocations
• Square footage growth of 7% or greater
• EBITDA margin of approximately 8.5%
• Capital expenditures of 5% of sales
• ROIC greater than 13.5%

They go on to say:
Quote
The Company’s results are highly dependent on comps, which have been particularly difficult to predict in this competitive landscape. While there has been some stabilization in the two-year comp trend since the end of the fourth quarter, it has been only five weeks. The Company is hopeful that comps will improve over the course of the year given its toughest comparison is in the first quarter, and many sales-building initiatives are still gaining traction or are planned to roll out later in the year. The higher end of the sales outlook reflects a 2.8% two-year comp, in line with the current run rate, and flat comps for the year, improving from -2% in the first quarter, to relatively flat in the second and third quarters, to 3% by the fourth quarter. The lower end of the sales outlook reflects the possibility that comps could get marginally worse before they get better, with an inflection point later in the year.

There’s some positive in there about the “stabilization” in two year comp trend, but they basically admit they are just guessing on comps.  What happens to sales growth if comps remain negative for the year?  Flat to negative sales growth with 7% square footage growth is not good.

What about gross margins?  Here’s what they say:
Quote
Primarily reflecting its value efforts, the Company expects the year-over-year decline in gross margin, excluding LIFO, in fiscal year 2016 to be greater than last year’s 45 basis point decline.
So even optimistic management admits margins will contract. 

Maybe their initiatives will work, but it’s too early to tell.  Guidance is on the hopeful side, while the trend in comps/margins continues to be negative.  Is a supermarket with this profile worth 18x earnings?  Like I said, it is a buy at some point but we go lower first.  In any event, given the unknowns and downside potential, there is no margin of safety at this price.

My view is not unique, but it’s been interesting to see the decline arrested around the $30 mark and I suspect their are too many investors thinking "great company at a great price."  Buybacks will probably help defend the stock price in the short term, but another quarter or two like this will hit the stock.
Title: Re: WFM - Whole Foods Market
Post by: Viking on November 10, 2015, 12:30:03 PM
GregS, thanks for posting your thoughts; i agree with everything you have written. My read is results the next quarter are likely going to get worse. After that? To early to tell. However, the large stock buyback will likely provide some support for the shares.

I do like their business and feel they have a strong brand. I will continue to read up on the company.
Title: Re: WFM - Whole Foods Market
Post by: rogermunibond on November 10, 2015, 12:57:38 PM
Lex column in the FT was opining that WFM should just go private.

http://www.ft.com/intl/cms/s/3/806fd1f0-83dd-11e5-8e80-1574112844fd.html
Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on November 10, 2015, 01:15:03 PM
Lex column in the FT was opining that WFM should just go private.

http://www.ft.com/intl/cms/s/3/806fd1f0-83dd-11e5-8e80-1574112844fd.html

Levering up to repurchase shares was one of my thesis for getting in and then increasing my stake upon the Icahn involvement rumors. I'm glad to see the 10% buyback on top of what they've already done this year, but I don't think they have the wiggle room to be able to take the entire company private any time soon unless if they want to jeopardize growth opportunity. 

I imagine that the company COULD sustain more debt, but an additional $10B would be excessive and the current growth plans wouldn't allow for more than ~200M in annual buybacks. TBH, I'm excited about the $1B in buybacks, but would rather they focus the remainder of their FCF and any new debt on executing their expansion plans. This is a company that has a runway ahead of it with plenty of optimization left to be done to squeeze margins out of regular stores.



Title: Re: WFM - Whole Foods Market
Post by: TwoCitiesCapital on February 10, 2016, 01:42:08 PM
Whole Foods beats on revenues and earnings. Still down slightly in after hours trading.

http://money.cnn.com/news/newsfeeds/articles/globenewswire/6174876.htm (http://money.cnn.com/news/newsfeeds/articles/globenewswire/6174876.htm)

SSS down by 1.8% and margins have eroded since the last quarter. ROE was saved by the $1B debt-for-repurchase transaction and has actually increased from prior quarters. Adjusting the balance sheet for the ~$400M in cash that remains to be used for the repurchases, and you see that earnings quality has deteriorated, but not by much. Hard to know if this was in response to a tough quarter where GDP slowed substantially or if this is the result of the success of their competitors - we'll find out when the others report over the next month.

I'm still holding at these levels and still don't see a death-spiral scenario in margins. Still expecting FCF ~1+B this year and high-double digit ROEs largely due to the optimization of the balance sheet with $1B in debt and the repurchase of 10% of the outstanding equity.
Title: Re: WFM - Whole Foods Market
Post by: krazeenyc on February 10, 2016, 04:07:17 PM
Whole Foods beats on revenues and earnings. Still down slightly in after hours trading.

http://money.cnn.com/news/newsfeeds/articles/globenewswire/6174876.htm (http://money.cnn.com/news/newsfeeds/articles/globenewswire/6174876.htm)

SSS down by 1.8% and margins have eroded since the last quarter. ROE was saved by the $1B debt-for-repurchase transaction and has actually increased from prior quarters. Adjusting the balance sheet for the ~$400M in cash that remains to be used for the repurchases, and you see that earnings quality has deteriorated, but not by much. Hard to know if this was in response to a tough quarter where GDP slowed substantially or if this is the result of the success of their competitors - we'll find out when the others report over the next month.

I'm still holding at these levels and still don't see a death-spiral scenario in margins. Still expecting FCF ~1+B this year and high-double digit ROEs largely due to the optimization of the balance sheet with $1B in debt and the repurchase of 10% of the outstanding equity.

If you shop at Whole Foods, you would have expected the margin compression. They've brought the prices down significantly on their organic produce in response to competition.  The more important question and one that is much harder to answer is where the margins ultimately settle. 
Title: Re: WFM - Whole Foods Market
Post by: eggbriar on February 10, 2016, 04:34:41 PM
"If you shop at Whole Foods, you would have expected the margin compression. They've brought the prices down significantly on their organic produce in response to competition.  The more important question and one that is much harder to answer is where the margins ultimately settle."

I noticed that they did an increase of 5-15% on a lot of their 365 products right at the end of the year.
Title: Re: WFM - Whole Foods Market
Post by: JayGatsby on April 07, 2016, 09:43:27 AM
This is pretty interesting: https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/

Originally it sounded like the new 365 was basically a whole foods knockoff but now it seems they're pushing much harder on the prepared food. Seems like a good strategy... get people in the store for low margin groceries and then upsell them on coffee, prepared food, etc.
Title: Re: WFM - Whole Foods Market
Post by: DTEJD1997 on April 07, 2016, 11:40:19 AM
Hey all:

There have been reports that Trader Joes has lowered prices even further.  The speculation is that as they grow their store count, they further cut prices to put pressure on Whole Foods as part of their business plan.

http://www.businessinsider.com/trader-joes-is-reportedly-slashing-prices-2016-3

I will go to Trader Joes much more often than I go to Whole Foods.  Trader Joes has more locations.  They are also closer to where I live & work.  The prices at Trader Joes are also hard to beat.

Whole Foods may have somewhat better quality & definitely better presentation, BUT is it worth paying 50% more?

I'll never forget the time my ex-girlfriend & I went shopping at Whole Foods.  A clerk was handing out samples of smoked turkey lunchmeat.  It was EXCELLENT, some of the very best I've ever had.  Clerk asked me if I was interested in buying some.  YES!  How much is it?  Clerk answered it was $19/lbs.  Ex burst out laughing...I was floored.  I don't care how good turkey tastes, I am not paying $19/lbs. 

So WFM was/is definitely vulnerable on their prices.
Title: Re: WFM - Whole Foods Market
Post by: DCG on April 07, 2016, 11:47:43 AM
This is pretty interesting: https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/ (https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/)

Originally it sounded like the new 365 was basically a whole foods knockoff but now it seems they're pushing much harder on the prepared food. Seems like a good strategy... get people in the store for low margin groceries and then upsell them on coffee, prepared food, etc.


Couldn't they just do that at Whole Foods though?
Title: Re: WFM - Whole Foods Market
Post by: GregS on April 07, 2016, 12:39:36 PM
This is pretty interesting: https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/ (https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/)

Originally it sounded like the new 365 was basically a whole foods knockoff but now it seems they're pushing much harder on the prepared food. Seems like a good strategy... get people in the store for low margin groceries and then upsell them on coffee, prepared food, etc.


Couldn't they just do that at Whole Foods though?

Their current model is get people in the store for high margin groceries and upsell them.  How long is that going to last?
Title: Re: WFM - Whole Foods Market
Post by: JayGatsby on April 07, 2016, 07:03:00 PM
This is pretty interesting: https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/ (https://www.washingtonpost.com/news/business/wp/2016/04/07/what-to-expect-from-whole-foods-new-low-price-grocery-chain/)

Originally it sounded like the new 365 was basically a whole foods knockoff but now it seems they're pushing much harder on the prepared food. Seems like a good strategy... get people in the store for low margin groceries and then upsell them on coffee, prepared food, etc.


Couldn't they just do that at Whole Foods though?

Their current model is get people in the store for high margin groceries and upsell them.  How long is that going to last?
Exactly. High lease expense, high gross margin, low turnover (at least relative to trader joe's), thin margin per square foot. Small changes in comps can have a large impact on earnings. Makes sense to shed some of the space and really focus on the niche products. Will be interesting to watch from the sidelines.
Title: Re: WFM - Whole Foods Market
Post by: fisch777 on April 08, 2016, 07:29:29 AM
WFM is in tough spot.  They had low CAC/natural traffic flow as first mover in natural/organic, but this has faded with competition and public perception.  First sequential negative comps for the first time since GFC and WFM is "investing in price" to drive traffic back to stores that has trickled elsewhere due to increasing competition and perception of high prices @ WFM.  Anecdotally, 3 years ago, WFM was the only "natural" grocer in the vicinity of my neighborhood.  Fast forward to today, there is a Fresh Market, TJs and Sprouts within 2 miles of the WFM store.  Game changer.
Title: Re: WFM - Whole Foods Market
Post by: rkbabang on April 08, 2016, 08:16:21 AM
WFM is in tough spot.  They had low CAC/natural traffic flow as first mover in natural/organic, but this has faded with competition and public perception.  First sequential negative comps for the first time since GFC and WFM is "investing in price" to drive traffic back to stores that has trickled elsewhere due to increasing competition and perception of high prices @ WFM.  Anecdotally, 3 years ago, WFM was the only "natural" grocer in the vicinity of my neighborhood.  Fast forward to today, there is a Fresh Market, TJs and Sprouts within 2 miles of the WFM store.  Game changer.

In my town we have had a Fresh Market for about 2 years and WFM is opening a new store literally right next door to it.  It is the next parking lot over.  It opens this weekend.  We also have 2 Hannaford's, 1 Market Basket, and 1 independent local grocery store (yes there are some of these left), all of which sell organic foods so there is definitely a ton of competition, all in a town of about 23K people.  All we need now is a Trader Joe's to move in.
Title: Re: WFM - Whole Foods Market
Post by: CorpRaider on May 25, 2016, 04:34:08 PM
Saw a video hit on the rollout of the 365 concept.  Man these guys are just the best retailers in the space.  Talk myself down...selling food it a horrible business, even with the recent consolidation undertaken by Kroger and TFM getting tanked by PE...But I will say this. I don't shop there just for the "organic" bs that everyone had now.  If you shop there you at least know they made an effort to make sure you're not eating skechy food and they have the ethical rating stuff and the ethical treatment of employees.  The shiz sells to millenials (and xers) see Bux, Star.  Maybe I can just buy some SRG and get in with their landlord.
Title: Re: WFM - Whole Foods Market
Post by: fareastwarriors on April 10, 2017, 02:37:59 PM
Whole Foods Market Inc. shares surged the most in more than two years after activist investor Jana Partners LLC acquired a stake and suggested that the organic-food grocer consider putting itself up for sale.

The investment firm announced an 8.3 percent stake in a filing on Monday, saying it would seek talks with management and push for a review of Whole Foods’ strategic alternatives. Jana also may nominate at least three directors in a bid to help foster a turnaround.


https://www.bloomberg.com/news/articles/2017-04-10/whole-foods-gains-as-investor-pressures-chain-to-consider-sale (https://www.bloomberg.com/news/articles/2017-04-10/whole-foods-gains-as-investor-pressures-chain-to-consider-sale)
Title: Re: WFM - Whole Foods Market
Post by: fareastwarriors on April 12, 2017, 09:49:27 AM
Whole Foods Wanted to Be More Than a Supermarket, and Therein Lies the Problem

Squeezed by competitors and an activist investor, co-founder John Mackey tries cutting prices and other conventional grocery-store tactics; shedding the ‘Whole Paycheck’ image

https://www.wsj.com/articles/whole-foods-wanted-to-be-more-than-a-supermarket-and-therein-lies-the-problem-1492012489 (https://www.wsj.com/articles/whole-foods-wanted-to-be-more-than-a-supermarket-and-therein-lies-the-problem-1492012489)
Title: Re: WFM - Whole Foods Market
Post by: rkbabang on April 12, 2017, 11:31:44 AM
WFM is in tough spot.  They had low CAC/natural traffic flow as first mover in natural/organic, but this has faded with competition and public perception.  First sequential negative comps for the first time since GFC and WFM is "investing in price" to drive traffic back to stores that has trickled elsewhere due to increasing competition and perception of high prices @ WFM.  Anecdotally, 3 years ago, WFM was the only "natural" grocer in the vicinity of my neighborhood.  Fast forward to today, there is a Fresh Market, TJs and Sprouts within 2 miles of the WFM store.  Game changer.

In my town we have had a Fresh Market for about 2 years and WFM is opening a new store literally right next door to it.  It is the next parking lot over.  It opens this weekend.  We also have 2 Hannaford's, 1 Market Basket, and 1 independent local grocery store (yes there are some of these left), all of which sell organic foods so there is definitely a ton of competition, all in a town of about 23K people.  All we need now is a Trader Joe's to move in.


It's funny I just noticed this post from me from last year.  Trader Joe's is opening right next door to the Whole Foods (on the other side from the Fresh Market), construction is just starting grand opening set for early 2018.

http://www.unionleader.com/business/trader-joes-friendly-toast-sign-leases-for-bedford-development-20170331
Title: Re: WFM - Whole Foods Market
Post by: berkshire101 on April 12, 2017, 01:17:50 PM
this seems interesting again...anyone who knows this company better than I see anything alarming in the results? I think the overcharging thing will blow over and be a non-issue long term.

My experience with retailers is that you have to be the lowest cost producer to have any kind of long-term competitive advantage.  In the end, you're just selling a commodity.  I haven't seen any indication that that's WFM's focus.  They're looking to provide this healthy customer experience.  Which is good and all.  But when you have WMT and COST making organic a larger portion of their sales, and at cheaper prices, how will WFM compete long-term? 

WFM was one of the first to move into that organic space, and it was a niche market for a while.  But now, it's a much larger market with lower cost producers moving in.

Maybe that's the concern with WFM?  How will they compete on price against WMT and COST?

Guess I said this like 2 years too early???
Title: Re: WFM - Whole Foods Market
Post by: CorpRaider on April 12, 2017, 05:02:02 PM
Yeah, I wanted to get interested but I don't do retail, especially not food retail.  I do think they've got more than just organic and healthy.  I think they sell people on the fact that they curate and rate the food and manage the sourcing for you so you can feel better about contributing to a sustainable, ethical, local food economy.  They are basically not bastards, or at least that's their schtick. 
Title: Re: WFM - Whole Foods Market
Post by: DanielGMask on April 14, 2017, 05:30:26 AM
Supermarkets as a general category compete on 4 main areas:

1. Location. Customers shop near home or work and there's a limit to how far they will drive to do it.
2. Price. If the price difference is big, customers drive a little more, if not, then they'll keep shopping where's closer.
3. Selection. There are a few brands or product lines that are not in every supermarket and that's a way supermarkets try to differentiate themselves from the competition.
4. Ambience and company image. Depending on what each company stands for and the ambience of their stores, some customers prefer some supermarkets over others.

Having said that, there are a few segments or categories within the industry and not one company satisfying every customer. Wal-mart is good at availability (one near almost every home) and price (always low prices). Target is good at selection (selected items available just in Target, at least in the format they sell them) and company image and ambience (nicer brand, nicer stores, better shopping experience), plus their other categories are bigger than their grocery line.

Costco targets big families and restaurants (bigger quantities of everything), has good pricing and a great reputation for introducing new products and new lines (lots of customers go to Costco just to see what's new without a clear shopping list). Their image and ambience is much better than that of Sam's and even though they are growing and selling a lot of money per store, many customers that shop at Costco also shop at a regular supermarket like Wal-Mart since both are a need to fulfill customer needs. So Costco and Sam's are not in the same category than Wal-Mart and Target.

Whole Foods is in another category also and competing with other brands as Trader Joe's, even though Trader Joe's isn't really in the exact same category than WFM. WFM has a good reputation as the leading organic seller in the country and even though they may not be the biggest seller of organic food in dollar amounts, they do have the top of mind category. The stores are beautiful and shopping there is an experience, not just going to the supermarket. Trader Joe's has a smaller format and looks more like an indie option that serves well some type of customer but not all, and I don't see Trader Joe's being a real threat to WFM.

So looking at WFM and stating that their basket size is too high to compete with Kroger or Wal-mart or Costco is not looking at this in the correct way. Comparisons aside (since it's clearly not the same), saying that is like saying that McDonald's and Dunkin or 7-eleven are taking Starbucks out of business because their coffee is way cheaper. When you are capable of selling an experience packaged in a good store ambience with a different product that your competition (at least slightly different), you redefine a category or create a new one, and then price is no longer your only KPI.

I'm long WFM.
Title: Re: WFM - Whole Foods Market
Post by: fareastwarriors on April 14, 2017, 10:30:42 AM
Yeah, I wanted to get interested but I don't do retail, especially not food retail.  I do think they've got more than just organic and healthy.  I think they sell people on the fact that they curate and rate the food and manage the sourcing for you so you can feel better about contributing to a sustainable, ethical, local food economy.  They are basically not bastards, or at least that's their schtick.

Being on the front line (as a cashier) at WFM for 4 years, I actually do believe most of their marketing. I mean they were always inviting local brands to the stores to demo products. Lots of artisanal/seasonal products were from local sources. Many of the produce were local as well.  The food cooked in store were pretty good by most standards. They were actually cooking and not just heating up things.

They treat their employees well. Even as a part timer, I had their 401k plan and they match. I could buy subsidized health insurance, PTO/etc. They paid better than their competitors. I was making $10+ while most of the other grocery stores were only paying minimum wage (~$7).
Title: Re: WFM - Whole Foods Market
Post by: Jurgis on April 14, 2017, 10:59:49 AM
I think I posted this in the past, but anyway.
Our (possibly way non average) grocery shopping:
- Stop&Shop < 1 mile. - pretty much all day-to-day shopping. Not great store/selection/etc. but convenient
- WFM ~3 miles, went 2 times or so, don't go there. Nothing special, pricy.
- Target ~4 miles - never go there
- Market Basket ~4 miles - never go there on purpose, sometimes shop when we are there for another reason
- Trader Joes - ~8 miles - go there every month or two or so
- Wegman's - ~8 miles - go there every 4 months or so
- Hmart -  ~8 miles - go there every 4 months or so
- Russian grocery store - ~16 miles - go there every 2 months or so

We do not grocery shop anywhere else.

IMO WFM is worse than Wegman's in every way. If it was within a mile from our place, we might shop there a bit though.

Good luck with your positions.
Title: Re: WFM - Whole Foods Market
Post by: rkbabang on April 14, 2017, 11:01:34 AM
Supermarkets as a general category compete on 4 main areas:

1. Location. Customers shop near home or work and there's a limit to how far they will drive to do it.
2. Price. If the price difference is big, customers drive a little more, if not, then they'll keep shopping where's closer.
3. Selection. There are a few brands or product lines that are not in every supermarket and that's a way supermarkets try to differentiate themselves from the competition.
4. Ambience and company image. Depending on what each company stands for and the ambience of their stores, some customers prefer some supermarkets over others.

Having said that, there are a few segments or categories within the industry and not one company satisfying every customer. Wal-mart is good at availability (one near almost every home) and price (always low prices). Target is good at selection (selected items available just in Target, at least in the format they sell them) and company image and ambience (nicer brand, nicer stores, better shopping experience), plus their other categories are bigger than their grocery line.

Costco targets big families and restaurants (bigger quantities of everything), has good pricing and a great reputation for introducing new products and new lines (lots of customers go to Costco just to see what's new without a clear shopping list). Their image and ambience is much better than that of Sam's and even though they are growing and selling a lot of money per store, many customers that shop at Costco also shop at a regular supermarket like Wal-Mart since both are a need to fulfill customer needs. So Costco and Sam's are not in the same category than Wal-Mart and Target.

Whole Foods is in another category also and competing with other brands as Trader Joe's, even though Trader Joe's isn't really in the exact same category than WFM. WFM has a good reputation as the leading organic seller in the country and even though they may not be the biggest seller of organic food in dollar amounts, they do have the top of mind category. The stores are beautiful and shopping there is an experience, not just going to the supermarket. Trader Joe's has a smaller format and looks more like an indie option that serves well some type of customer but not all, and I don't see Trader Joe's being a real threat to WFM.

So looking at WFM and stating that their basket size is too high to compete with Kroger or Wal-mart or Costco is not looking at this in the correct way. Comparisons aside (since it's clearly not the same), saying that is like saying that McDonald's and Dunkin or 7-eleven are taking Starbucks out of business because their coffee is way cheaper. When you are capable of selling an experience packaged in a good store ambience with a different product that your competition (at least slightly different), you redefine a category or create a new one, and then price is no longer your only KPI.

I'm long WFM.


Thinking about myself.  About 8-10 years ago my wife and I used to drive 35 miles to go to a WFM about once per month.  But today there is one right in the town we live in and we never go.  The reason is that back then you could buy things at WFM that you couldn't find anywhere else.  This is no longer true.  Not only do the other grocery stores in our town have everything we want, but they are cheaper as well.  And the ambiance in the newer Market Baskets and Hannafords are almost as nice as WFM.  Not shopping at WFM doesn't mean that you have to shop at Wal Mart along side the toothless people in their pajamas.
Title: Re: WFM - Whole Foods Market
Post by: roark33 on April 14, 2017, 02:18:53 PM
I have probably looked at WFM 10 different times over the years and each time I look Trader Joe's just haunts me.  As it should Jana....
Title: Re: WFM - Whole Foods Market
Post by: Schwab711 on April 14, 2017, 02:24:50 PM
IMO WFM is worse than Wegman's in every way.

Jurgis knows what's up
Title: Re: WFM - Whole Foods Market
Post by: DTEJD1997 on April 14, 2017, 09:32:37 PM
IMO WFM is worse than Wegman's in every way.

Jurgis knows what's up

Wegmans is the best grocery store I've ever been to...They have nothing to worry about from WFM or just about anybody else.  Their prices aren't the cheapest, but they are reasonable.  Selection is simply unrivaled.  Wegman's also has tremendous prepared food selection, way better than WFM even, and WFM is good.

I shop at Trader Joe's 10 times for every 1 time I go to WFM.  That is going to be the fly in the ointment....
Title: Re: WFM - Whole Foods Market
Post by: fareastwarriors on April 24, 2017, 04:40:37 PM
Whole Foods Rallies on Report That Albertsons Is Mulling Bid

https://www.bloomberg.com/news/articles/2017-04-24/whole-foods-rallies-on-report-that-albertsons-is-exploring-a-bid (https://www.bloomberg.com/news/articles/2017-04-24/whole-foods-rallies-on-report-that-albertsons-is-exploring-a-bid)
Title: Re: WFM - Whole Foods Market
Post by: ebdem on May 16, 2017, 06:26:05 AM
Maybe that's of interest: https://www.gwinvestors.com/2017/05/14/retail-ripe-for-and-resistant-to-disruption/
Title: Re: WFM - Whole Foods Market
Post by: rkbabang on May 16, 2017, 06:55:42 AM
If anyone listens to the How I Built This podcast by NPR, the latest episode featured John Mackey on starting WFM.
Title: Re: WFM - Whole Foods Market
Post by: Liberty on May 16, 2017, 10:09:46 AM
If anyone listens to the How I Built This podcast by NPR, the latest episode featured John Mackey on starting WFM.

Here's a direct link (the NPR page sadly doesn't have direct links, all eps are on the same page):

https://overcast.fm/+HKGG7PQAg
Title: Re: WFM - Whole Foods Market
Post by: atbed on May 18, 2017, 08:36:33 AM
Hey all -

I visited the WFM location in Bryant Park yesterday, and boy was it crowded for dinner. We millennials seem to love paying 10.99 a pound for their hot and cold buffet. The sitting area overlooking the park was full. The margins on that are ridiculous. The chopping station was dead though. But the whole eating at a supermarket or taking food home from a supermarket thing seems muy bueno
Title: Re: WFM - Whole Foods Market
Post by: JayGatsby on May 18, 2017, 12:53:26 PM
Hey all -

I visited the WFM location in Bryant Park yesterday, and boy was it crowded for dinner. We millennials seem to love paying 10.99 a pound for their hot and cold buffet. The sitting area overlooking the park was full. The margins on that are ridiculous. The chopping station was dead though. But the whole eating at a supermarket or taking food home from a supermarket thing seems muy bueno
After living in New York I'd be careful about extrapolating New Yorker food habits across the wider population. Few factors that make it different than the wider population: i) The average household income in that area is significantly above the national average, ii) a lot of millennial types in New York are eating lunch/dinner at work fairly regularly so there really is no need for regular grocery shopping, plus there is more money left over to eat out and a higher premium on the time available outside of work, and iii) the logistics of New York make it a pain to get groceries.

Having said that, I think the WFM prepared foods business is great. If their whole chain was just that I'd be a buyer. I think the 365 concept is a good one. It's the large square footage grocery that concerns me. I like their stores though and wish them the best, so hopefully I'm wrong!
Title: Re: WFM - Whole Foods Market
Post by: atbed on May 18, 2017, 02:51:16 PM
Hey all -

I visited the WFM location in Bryant Park yesterday, and boy was it crowded for dinner. We millennials seem to love paying 10.99 a pound for their hot and cold buffet. The sitting area overlooking the park was full. The margins on that are ridiculous. The chopping station was dead though. But the whole eating at a supermarket or taking food home from a supermarket thing seems muy bueno
After living in New York I'd be careful about extrapolating New Yorker food habits across the wider population. Few factors that make it different than the wider population: i) The average household income in that area is significantly above the national average, ii) a lot of millennial types in New York are eating lunch/dinner at work fairly regularly so there really is no need for regular grocery shopping, plus there is more money left over to eat out and a higher premium on the time available outside of work, and iii) the logistics of New York make it a pain to get groceries.

Having said that, I think the WFM prepared foods business is great. If their whole chain was just that I'd be a buyer. I think the 365 concept is a good one. It's the large square footage grocery that concerns me. I like their stores though and wish them the best, so hopefully I'm wrong!

No arguments here on extrapolating NY and CA. The WFM prepared food biz is great, and others seem to be doing similar thing. The entire grocery industry is exploring a shift toward more prepared foods. No bone in this one. Just an interested consumer, who was a bit surprised by the new Bryant Park location. It seemed more like a food court, with a supermarket attached than the other way around.

http://www.duffandphelps.com/assets/pdfs/publications/mergers-and-acquisitions/industry-insights/consumer/food-retail-industry-insights-2016.pdf
Title: Re: WFM - Whole Foods Market
Post by: ebdem on May 22, 2017, 05:33:44 AM
Some more insights by GreenWood on WFM: https://www.youtube.com/watch?v=OObvMn-enjM (there are also more videos from valuespania on the channel).
Title: Re: WFM - Whole Foods Market
Post by: Liberty on June 16, 2017, 06:35:10 AM
https://www.bloomberg.com/news/articles/2017-06-16/amazon-to-acquire-whole-foods-in-13-7-billion-bet-on-groceries
Title: Re: WFM - Whole Foods Market
Post by: johnny on June 16, 2017, 06:37:26 AM
Should have known from the absolute temper-tantrum Mackey was throwing last week that things were progressing well.
Title: Re: WFM - Whole Foods Market
Post by: pau_ on June 16, 2017, 10:18:20 AM
Strange the market price shot above the offer price, isn't it? Are people expecting a bidding war? Sudden negative interest rates? Is it dumb algo &/ retail trading?
Title: Re: WFM - Whole Foods Market
Post by: HJ on June 16, 2017, 10:40:19 AM
Somebody was espousing a theory that Walmart or Kroger may counter bid to forestall Amazon from entering the space so dramatically and quickly.  The deal seemed like a pure financial one with activist pushing it behind the scene, who probably would be happy taking higher dollar bids regardless of where it's coming from.
Title: Re: WFM - Whole Foods Market
Post by: pau_ on June 16, 2017, 11:17:07 AM
Thanks HJ, makes sense.
Title: Re: WFM - Whole Foods Market
Post by: johnny on June 16, 2017, 02:31:20 PM
Somebody was espousing a theory that Walmart or Kroger may counter bid to forestall Amazon from entering the space so dramatically and quickly.  The deal seemed like a pure financial one with activist pushing it behind the scene, who probably would be happy taking higher dollar bids regardless of where it's coming from.

I don't really understand the rationale. They're all going to share the theoretical benefits of blocking Amazon, and I don't think any single player has enough share to justify absorbing the entire cost for that. Also, Amazon already has a delivery relationship Sprouts, which isn't quite Whole-Foods-sized but is close enough that it's hard to see what would stop Amazon from just buying Sprouts, doubling their storecount, and being in essentially the exact same position (except with Kroger now shouldering twice the debt-load).

But who knows!
Title: Re: WFM - Whole Foods Market
Post by: Liberty on June 19, 2017, 04:16:55 AM
http://features.texasmonthly.com/editorial/shelf-life-john-mackey/
Title: Re: WFM - Whole Foods Market
Post by: Steven B on June 19, 2017, 07:41:15 PM
To be clear, I'm not judging anyone. I just honestly want to know the position of the Whole Food Bulls. If they were honest with themselves, did they nail the investment or do they get lucky ala' wuphf.com from The Office?
Title: Re: WFM - Whole Foods Market
Post by: johnny on June 20, 2017, 03:04:54 PM
Whole Foods markets have always had an "above it all" feel to them which makes the experience of shopping at them better than competitors. This was a difficult-to-value advantage, and they obviously were having some trouble turning that into exploding earnings, but it's clearly the value Amazon saw in the company, so I don't know why any bull wouldn't think Amazon validates their position (super-alien genius Bezos agrees that Whole Foods is the best?).

Even though I was just suggesting Amazon -could- buy Sprouts if blocked here, there is a reason they didn't--even though it's less than a third of the price, cheaper per-store, etc.
Title: Re: WFM - Whole Foods Market
Post by: Liberty on July 07, 2017, 07:01:44 AM
Merger prelim proxy:

https://www.sec.gov/Archives/edgar/data/865436/000157104917006539/t1702003-prem14a.htm
Title: Re: WFM - Whole Foods Market
Post by: peridotcapital on July 07, 2017, 09:07:17 AM
Merger prelim proxy:

https://www.sec.gov/Archives/edgar/data/865436/000157104917006539/t1702003-prem14a.htm

Interesting, the door is definitely open if PE or strategic buyers want this asset. From reading the background it does not seem likely that Amazon would get into a bidding war. $44 or $45 could probably get it done.