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Subject: wfmi thoughts Date: 7/28/2007 8:11 PM
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Mark asked me to repost this on this board. I first posted it on the Stock Advisor board. It is just some thoughts about the recent events that affect the company.

I own them, so perhaps I can explain my plan, answer some questions, and defend the "Next American Superbrand".

The organic and natural food retail and production represents a very relevant and growing industry and its emerging importance is a relatively recent event. Whole Foods Market greatly attributed to the increasing significance of natural and organic foods. They didn't invent organic food and/or organic production; they adopted the organic movement and stamped their brand on it. Our perception and awareness of organic and natural foods have at least partially been formed by Whole Foods Market's presence and subsequent domination of the industry.

Has Mackey hurt them as an investment?

No! In my opinion, this will not hurt Whole Foods Market at all. When Whole Foods Market was just starting out, Mackey was the driving force that made them successful. But I don't think anyone would say it was Mackey business savvy that caused Whole Foods Market to succeed. He started out with his girlfriend opening up Safer-way, a vegetarian health food store, and it didn't do well, until he convinced the owner of a natural food store to merge with Safer-way. The combined entity became Whole Foods Market Natural Market. It was the first supermarket- style natural foods store in the country with 10,000 square feet of space and a staff of 19 people. It was an immediate success.

The United States since the 1950's relied on an industrial style of agriculture heavily dependent on pesticides. In the 1970's the organic movement was a potential alternative to the use of pesticides. It was not a new concept. In 1942, the Organic gardening magazine was first published and was very popular in the 1960's and 1970's.

Mackey was influenced by the hippie generation, proudly discussing his hippie roots in an early 1990's IBD article where he stated he wasn't planning on being the CEO of Whole Foods Market forever. It is not what he wanted to do. If memory serves me correctly he was predicting he would be in the business for about five years. It was one of the reasons that kept me from investing in them because at the time, I thought Mackey was the driving force for the company and essential to their continued success.

Perhaps in the beginning he was needed. He wasn't the stereotypical CEO. He really acted as if he didn't care about the business end. But I believed he was very sincere about improving the environment, healthy eating and promoting the hippie cause. Basically he started what society was craving a switch from assembly line, pesticide grown food to healthier fare. It also played on the growing organic gardening movement. Organic gardening was very popular long before anyone was selling organic foods on any significant scale.


Does it surprise me that Mackey posted on Yahoo boards under an assumed name RAHODEB?

Not really, it sorta what I have come to expect from him. He was never strictly by the book kind of guy. But he was charismatic and his enthusiasm to bring healthier foods to people caught on and he was starting the right business at the right time. Organic gardening was a very popular concept and Mackey sorta lucked into it. His vegetarian health food store was his beginning and it was about to flop. The merger with a natural food business is what started things moving in the right direction for him. Was it business genius, a lucky move born out of desperation and a need to grow and/or a combination of both? Who really knows?

Do I like Mackey?

Yes, and I would like to see him stay with Whole Foods Market, but I don't think he is essential to their continued success. Not any more.

Sam Walton was probably one of the greatest CEO's of all time. He tried to reward his employees, even sales clearks and stock people, with a healthy position in the company. He held on to his stock. He visited all the stores in an attempt to boost moral. He drove an old truck when he could have afforded any type of vehicle. He was not one to live an extravagant lifestyle.

When Sam Walton died, Walmart continued to grow; it did not miss a beat. Few people could have created Walmart basically from scratch as Sam Walton did, but when he died he handed over an established business model and his successor who trained under him kept them moving forward.

Will Mackey be forced to step down?

It is very possible.

Will it be damaging to Whole Foods Market?

Not in the long-term. The corporate culture is fairly established now. They are no longer a start up. They are an established business capitalizing on a very popular trend. The trend began with organic gardening by amateur gardeners, branded into a business by Whole Foods Market and it will be sustained by baby-boomers as they get older and strive to eat healthier.

Will the stock drop because of this?

No! The stock may drop with a PE ratio of 30 and analysts will blame it on Mackey or try to pin some excuse to the drop. However, if it does drop, I would bet it is more of a short-term valuation problem than anything else. Even if Mackey departs, not a certainty, it is not going to hurt Whole Foods Market. I don't believe at this point earnings growth depends on him.

Will the merger with Wild Oats go through? If it doesn't will it hurt the stock price?

Mackey's exploits may have made it easier for the FTC to block the merger. They could argue his comments against Wild Oats under his assumed name was done to lower the price of Wild Oats making it cheaper for WFMI to buy them. This obviously has some ethical, perhaps illegal implications. But he did stop posting long before the merger was announced. But it certainly didn't help the situation.

If the merger fails to go through, yes it is likely to hurt the stock price in the short-term, but in the long-term, they should still do well. They have been competing with Wild Oats almost from the beginning. I would love to see the merger go through, but it may not and they would be no worse five years from now than before they made the offer. However, if it fails there will be charges that will affect earnings in the short-term. There are often expenses associated with an attempt to merge and when that attempt fails, they may have charges against earnings with nothing to show for it. It is a short-term problem only.

My viewpoint has not changed

I believe Whole Foods Market is a stable growth company that exploits a trend toward healthier eating that will be sustainable. And the market is large enough to accommodate two large players. They are not a fast growth company but should grow modestly for decades.

Is Walmart a threat?

At one point in time, I believed Walmart was a threat to all retail business. I no longer hold that belief. I watched them fail against Netflix. Amazon after a long struggle seems to be winning its battle for online retail dominance. Helped by higher gas prices, and a powerful trend toward online shopping, it appears Amazon has finally come of age.

It would be better if Wild Oats was not a competitor. It would be better if Walmart and other groceries were not competitors, but they are and they have always been. Walmart may continue to increase their shelf space for organic products. But I am not convinced that Walmart has the type of reputation that would make them the go-to guy for organic foods. Organic foods tend to have a premium price and Walmart is considered a cheap food retailer and it is my opinion that cheapness as it applies to organic food will be associated more with an inferior, less healthful product.

Walmart will never have the variety of organic and natural foods that are sold at Whole Foods Market. They will provide a cheaper alternative and it may act as advertisement for Whole Foods market by introducing another demographic to organic foods. As they try products from Walmart, they may occasional travel to Whole Foods Market to check out the much wider variety of products offered there. It may lead them to become loyal Whole Foods Market customer.

Mackey is a nut obviously; shouldn't I sell Whole Foods Market on principle?

I prefer eccentric; I don't have a clue why he did what he did or what itch of his it scratched. Pressure can do weird things to people – But I won't attempt to explain his actions. I know people who sold IIG on principle and it provided investors with one of the best comeback stories I have ever seen.

DHB – A CEO (Brooks) that was self-enriching personified. I sold them on principle. They then fired Brooks and created a new management team and they are up 72% since. We are not investing in Mackey, but Whole Foods Market. If he has crossed the line, he will be replaced and Whole Foods Market should be just fine.

huddaman asked a good question in this post.
http://boards.fool.com/Message.asp?mid=25683400


If buying at today's price gets you a 13.51% return if the stick touches $73, then I don't see why one should bother buying this stock today, especially since this great company will grow slower and could suffer P/E contraction further.

That is a good question. The reason I am buying them; no, the reason I am accumulating them is because I think Whole Foods Market is a stable and sustainable business – the next 'American Super Brand'. They are the undisputed leader in a fast growing organic and natural food market. They are so much the leader that the Federal Trade commission wants to block the merger with their only sizable competitor. In the long-term, Wild Oats may not be able to compete with them, although, they had made great strides to turn things around before the proposed merger. Regardless, the next best thing to a monopoly is a duopoly and it is even better if you are the undisputed Number one player – Just ask Ctrip. They enjoy a duopoly with a very weak competitor – Elong. Their stock price has soared.


The price target for 2011 is $49 to $73.50 based on a PE ratio of 20 to 30.
http://boards.fool.com/Message.asp?mid=25575825&so...

You asked why buy now?

I would never buy if I were restricted to buying at one price point with a large amount of money. I am under no such restrictions, so I want to own some, and I do. I now want to buy more at better value points because I believe they will grow modestly for decades. They are targeting the right demographic and meeting a demand for a healthier lifestyle.

I did not buy them because they are a fast grower, or because they were a value play. I did not buy them because I felt they would be problem free company that would grow earnings in a straight-line for the next twenty years.

I bought them as part of a diversified portfolio because I wanted a long-term stable company that I could hold for twenty years and that I believed could continue to meet the demand for organic and natural food products.

I bought them because conventional food industry growth was growing at about 2% to 3% a year compared to 17% to 20% growth for the organic industry. And Whole Foods Market is the undisputed champ. Will this shift toward healthier eating continue? I am betting it will. But I won't and never will bet at one price point.

The higher the PE, generally the smaller amount I invest, even in great growth companies. The more the stock prices fall, earnings rise, and the PE drops, the more I will invest in them. In 20 years – I am confident I will be satisfied. But my best positions will be those I bought the cheapest.

So, if you believe there is a chance it will go down, why buy any?

The reason is I don't know for sure. The only thing I know for sure is that I want to own them, even if it's just a small position for at least the next twenty years. And my goal is to own more at better and better value points. The PE ratio sometimes doesn't contract, they maintain for years and sometimes for decades until growth prospects slow significantly. A PE can expand then contract, then expand again based on the economy and the general financial health of the stock market.

Whole Foods Markets small store base can be expanded for many years and decades. Organic food growth projections bode well for them. U.S. sales of organic food have seen double-digit growth annually since 1997. While organics only made up about 2.5% of total food sales in 2005, that's up from less than 1 percent nine years ago. The U.S. Department of Agriculture expects organic food sales to hit $23.8 billion by 2010, up 72% from 2005. Again they are the undisputed leader.

The other objection I often hear is that grocery stores generally have low PE ratios well under 15. This is true of conventional grocery retailers. However, Whole Foods Market is not a conventional grocer. Their food is sold at a premium and unlike conventional grocers that are growing at 2% to 3%, organic food growth is growing at 17% to 20%. And that is the difference.

It has been argued that Whole Foods Market could never place as many stores in the U.S as Kroger's. Although, that is probably true, if organic food growth continues to outpace conventional grocers and comprise only about 3% of total grocery sales, it is hard to forecast exactly how many stores they could develop. I am certain they can build far more than the 171 now in existence.

Who is to say what Whole Foods Market will look like in twenty years? Will they be totally dependent on organic grocery sales or will they look more like a restaurant stock as they continue to expand their in-house dining with a variety of healthy organic food dishes and drinks.

I am highly confident that Whole Foods Market will be a much larger company in 2025 and I want to accumulate at better and better value points. I have years to accumulate them and short-term news, like an eccentric CEO, a fight with the Federal Trade Commission is likely to do nothing but allow me to accumulate at better values – these things will not affect their long-term business. The merger with Wild Oats offered them access to new markets, new suppliers and yes the elimination of a sizable competitor, but they were doing fine as the ring-leader of the organic duopoly. If the merger fails, growth will be slower, but the same growth that would have been expected before the merger was proposed.

My goal will never be to beat anyone in the short-term. I set my portfolio up to beat everyone in the long-term. While investors sell on bad news to go to greener pastures and avoid controversy; I prefer to locate sustainable business models and then accumulate shares in them on bad news and think long-term. The only negative is the high PE ratio and controversy can often lower the PE ratio quickly giving me that chance to accelerate my purchases.

Mackey focused on improving the environment and Whole Foods Markets participated in many local projects to that end. This helped promote Whole Foods Markets. His hippie background is the perfect image for organic foods. His entry on the Yahoo boards borders on weird – but being accused of being a bit eccentric myself; I don't feel I am able to judge him. But I am highly confident that Whole Foods Markets is established to the degree they are long past the stage where the future relies solely on one man.

tom e
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