Investors Take a Bite Out of Whole Foods

Thu Jul 29, 2004
By Ellis Mnyandu

NEW YORK (Reuters) - Shares of Whole Foods Market Inc. fell 7 percent on Thursday, the day after the top U.S. natural and organic food chain said costs tied to its aggressive expansion were crimping profit growth even as sales rise.

Whole Foods, based in Austin, Texas, commands the No. 1 spot in the fastest-growing segment of food retailing. Its history of flawless execution had made investors optimistic about its prospects.

But the bullishness soured after the stock market closed on Wednesday, as the chain reported a fiscal third-quarter profit short of Wall Street forecasts, partly blaming costs tied to store openings.

In addition, Whole Foods said earnings per share growth in the fiscal year ending September 2005 could be lower than sales growth because it plans to boost its average square footage by 15 percent, up from the current rate of about 10 percent.

According to Whole Foods, upstart stores generally have lower gross margins and higher direct store expenses than more mature outlets, resulting in a drag on earnings growth even as sales rise.

In early afternoon, Whole Foods shares were down $6.22, or more than 7 percent, at $79.79, on Nasdaq, where they registered their biggest one-day percentage drop in 14 months to $78.54.

Stephen Chick, an analyst at JP Morgan said the disconnect between sales and earnings growth was "concerning" and fiscal 2005 may be an uphill. Even so, he added in a research note, that Whole Food was a good company, one of the few consumer retail growth stocks.

Robert Campagnino, a Prudential analyst, said he expected the market to treat the grocer's earnings miss "harshly" as its stock had been priced to perfection.

But still, the latest quarter, he added that, it does not in anyway move Whole Foods into the category of "broken" growth stocks.

"With the company entering a more aggressive growth profile," he said in a research note, "there are necessarily some growing pains that may be associated with that growth," and a dip in the shares could be a buying opportunity.

The Whole Foods' earnings growth drag comes just as the company is working on its initial foray into Britain, where it recently bought Fresh & Wild Holdings Ltd.

The U.K. market, analysts say, may also require the company to spend more to expand Fresh & Wild's 5,000 to 6,000 square-foot stores. A typical Whole Foods store averages 47,800 square feet.

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