24 January 2006

Whole Foods

Blog Hog JVL is an antibiotic-and-hormone-free Bull for Whole Foods.

He e-mailed me his bullish (not bullshit, that's my portion of this post) thesis. Here it is in almost it's full glory:

I'm very, very impressed with the way they've slowly expanded in the DC are--they've picked great, up and coming locations. And they've managed, despite their high-prices, to become a staple for 20-somthings who can't really afford to shop there.
Whole Foods isn't about picking up the staples--milk, eggs, OJ. When you go to Whole Foods, you're not "grocery shopping." You're pampering yourself in a small way--in fact, in such a way that you can convince yourself isn't that much of a luxury; after all, we all need to eat.

I'm as much of a sucker for this as anyone. My favoirte place to shop is a Whole Foods-like place called Balducci's. When I'm there, I like to just walk around the store and feel good about myself. And then I spend $70 on one bag of groceries.

And here I go back to my hobby-horse: The Whole Foods places in DC have all been positioned around areas that are young, developing, and condo-heavy. In a setting where no one can afford what used to be standard for the middle class--a single-family home--people are defining down their expectations for their adult lives. At the same time, they're trying to find other, new ways of indulging themselves to make up for this disappointment. We can't afford a 3BDR, 2Bath Cape Cod, so we buy a bag of $4 potato chips.

Since I think that the American standard of living is on an unavoidable downward spiral--too many people, not enough land--I think this is a trend we're going to continue to see. People are going to look for little luxuries to make up for the big things that they can't have anymore. (The rise of the spa culture among young women is another sign of this, btw.)

Whole Foods.

Jonathan wrote up a nice big-think piece, tying in some sociological musings with a stock idea. And in response, I pounded out the following bit of hackery, using my usual references and resources:

Whole Foods has been on the radar since I started watching Mad Money. Cramer's talked up this stock as "best of breed" for 9 months. And therein lies the problem. WFMI is now a $10B company that has risen 73.6% in the last twelve months, and 206.9% over the last three years. If you check out its chart you will see that the stock has been on a straight line upward trajectory, but is trading considerably higher than its support.

I think we missed the boat (shopping cart?)on this one. Two numbers suggest this: a PEG ratio of 2.69, meaning the price of Whole Foods stock is growing 2.69 times faster than Whole Foods' earnings. Bargain stocks tend to have a PEG of 1.0 or below. Price/Cash Flow is 33.80; a value investor looks for something below 10-12.

So the value investor in me is not finding supportive numbers.

Then I checked out Morningstar's grades: A+ for growth, A- for profitability, A+ for financial health. I haven't seen marks like that since 6th grade, from some very nurturing Quaker teachers.

A momentum investor may want to jump into the arugula for the phenomenal growth of Whole Foods, and its potential for more.

I completely buy into your theory that we spend on small luxuries because so few of us can afford the big ones. Whole Foods fits perfectly into this idea. It's tough to buy into WFMI when you see how much missed opportunity is before you. If only I had plunked down for some shares when Cramer first mentioned the stock, instead of buying those heirloom tomatoes and two-inch-thick porterhouses at Time Warner Center. (Actually, I buy such things through FreshDirect.com, but it is privately held, so allow me some poetic license.)

And in regards to JVL's last point, perhaps I should be looking into public companies that are profiting from spa culture. I'll have to dig around the apartment for the brands and companies behind the lotions, oils, sloughing agents, and perfumes that reside in various drawers, shelves, and nooks.


John Coumarianos said...

How about Estee Lauder (EL) for that "spa culture" play? The brand is a bit stodgy, but they've been expanding their reach with fresher lines, such as "MAC" and "Origins," that appeal to younger women. It's a lot cheaper than WFMI too. Department store consolidation is hurting, however.

John Coumarianos said...
This comment has been removed by a blog administrator.
John Coumarianos said...

Well, it's gone from $79 to under $62 quickly. I still can't square any DCF model with the current price, but I'm tempted. You have to grow free cash flow at over 30% for the next decade to come near the current valuation. That's some serious growth.