Earnings-Palooza: Fewer Whole Paychecks Getting Spent at Whole Foods

In this segment of theMarketFoolerypodcast, ChrisHill,Jason Moser, Matt Argersinger and Simon Ericsson talk about why a company that the Fool used to praise may no longer deserve the high P/E ratio it used to carry.

A full transcript follows the video.

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This podcast was recorded on July 29, 2016.

Chris Hill: Another disappointing quarter for Whole Foods (NASDAQ: WFM); co-CEO John Mackey also sits on the Board of Directors here at The Motley Fool. Same store sales for the third quarter fell even more than expected, and not surprisingly, Matty, the stock down ten percent this week.

Matt Argersinger: This is a tough one, I think, for Foolish investors, especially, because this is a company I think we've talked about, and loved, for many years. I do think now, there's enough evidence to suggest that the company now is in a position where they might just be another premium grocery chain. As an investor, you have to be worried about that, because that means that the high price of sales, or high-priced earnings multiple that Whole Foods has gotten for most of its history, it probably shouldn't get that anymore. I saw nothing in the results from last quarter or in the guidance going forward that suggests that there is any kind of big turnaround ...

They've launched the 365 Stores; they opened their first one last quarter, they opened another one just recently, and they're going to be focusing on that. They are opening about a dozen new stores through the remainder of the year ... They still think they can get 1,200 stores from a base of roughly 450 today ... There are a few silver linings here in the story, but I have to say, I am probably the least confident I have ever been in Whole Foods as an investment, and my only personal silver lining in that is that, maybe I'm just way pessimistic right now, and that's usually the time a stock can turn around, but I have to say, there's not a lot to like about this company for now.

Jason Moser: I tend to look at this the way you are, Matty. I'm trying to sort of take my pessimism, and turn it around, and try to identify the catalyst that brings this story back. The problem is, they've been caught going down this rabbit hole of value, discounts, cutting costs, price investments ... That was the theme of that call, really ... You could tell that they were really getting hit on the pricing side of things now. Once you go down that rabbit hole, there really is no coming back, because that is, in fact, the proof that you don't have any pricing power.

Matt: Right.

Jason: They used to have that, when they were a bit more differentiated than their competitors out there. Their competitors have quickly caught up, and even tougher, really, is that Whole Foods doesn't have the scale that some of their competitors out there have today. A good example would be seen in Kroger, which made that acquisition of Harris Teeter, which now looking back was extremely shrewd, because that gave them that upper clientele there, that typically shops at the Harris Teeter over other places ... But there are so many other competitors out there, really doing the same thing ... Just a tough position.

Matt: Right, and even in spite of all the focus on value and pricing that they've done, transactions were still down very sharply; average price per item was down. They did get a small increase in basket size so, of course, cheaper prices, people are generally buying more, but the fact that comparable store sales were still down shows you that traffic's not going to Whole Foods stores, it's going elsewhere, and that's clear evidence of that.

Jason: A big challenge there, I think, is the crossover consumer. Whole Foods is just not the place for the crossover consumer. I want to get my Diet Coke and my organic oatmeal at the same place, and I can't do it there.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors.The Motley Fool owns shares of and recommends Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.