Zeev's Turnips Patch-No Politics (ZEEV)

[ItsAllCyclical]

WFMI (pig valuation stock) finally getting more (bad) attention.

http://online.barrons.com/article_email/SB111947338322466829-lMyQjAxMDE1MTI5MjQyNzIzWj.html

TA wise breaking down on daily and hourly.


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Whole Foods May Get Trimmed

By DIMITRA DEFOTIS

LATELY THE STOCK OF Whole Foods Market is looking a bit like an over-baked soufflé.

Shares in the growing natural and organic foods retailer are up a whopping 165% since Barron's Online wrote favorably about the company in August 2002.

In the past 12 months alone, the stock has outdone the Standard & Poor's 500 Index by roughly 25 percentage points.

But its lofty valuation may encourage investors to get out of the kitchen.

Valuation is the primary reason UBS Investment Research downgraded Whole Foods earlier this month. But it may not be the only problem.

Whole Foods has a reputation for high quality and commensurately high prices. Yet its plan to sell lower-priced house brands might not draw customers who are worried about reconciling high food prices with mounting fuel bills.

At a Glance
Whole Foods Market (WFMI)


Stock Price: $117.82
52-Wk High: $122.92
52-Wk Low: $73.21
Market Cap: $7.7 billion
Earnings Est. FY 2005* $2.42 per share
Forward P/E: 45x
Projected Long-Term EPS growth rate: 20%
Projected EPS growth ('05/'04: 15%
Sales (FY 2004): $3.86 billion
Div Yield: 0.62%
Chairman, CEO: John P. Mackey
Headquarters: Austin, TX

*Whole Foods fiscal 2005 year ends September 30.

Sources: Thomson First Call, S&P; Data by Commodity Systems Inc., Reuters.com and Thomson Financial Network provided through Yahoo! Finance.



Meanwhile, Whole Foods' aggressive expansion plans include building larger, more costly stores that may prove tougher to open and staff, possibly pinching margins.

"The valuation is high and if they stumble, the stock could get hurt," says Noah Blackstein, who owns the stock in the Dynamic Power American Growth Fund.

Whole Foods' bright aisles and deep selection provide a fantasy land for Americans fixated on healthy eating. Retail sales of natural foods rose nearly 12% to $20.4 billion last year, according to Smith Barney Citigroup research.

If all goes as planned this year, Whole Foods projects same-store sales will increase by 9% to 11%. Analysts expect earnings to rise 15% (see At a Glance).

Whole Foods' cash cow is perishable items, which comprise 67% of sales.

It's no wonder company officials compare Whole Foods' presentation to theater. A New York store displays fruits including Pluots, a cross between plums and apricots, in a bin lined with pineapple tops. It also offers 28 kinds of fresh sausage.

But that costs money. A typical supermarket might sell 85%-lean ground chuck for $3.50 per pound. Whole Foods' equivalent is hormone- and antibiotic-free and is $4.29 per pound in New York.

"One of the single biggest limitations of our growth, even though our growth is phenomenal, is the perception that we're too expensive, and our prices are too high," Chief Executive Officer John Mackey told analysts in May.

Are they ever! So, Whole Foods (which has been widely dubbed "Whole Paycheck") is expanding its lower-priced, private-label offerings. It plans to use its discount "365 Every Day Value" label and others to drive sales.

Yet customers can just as easily pick up well-priced, branded household necessities like tomato sauce or canned beans at a membership club, Wal-Mart or the local grocery. And while they're there, they might find organic carrots and many other products that are comparable to Whole Foods' offerings.

Mass-market stores had roughly 40% of natural food sales last year, estimates Gregory Badishkanian, an analyst at Smith Barney. Whole Foods' share was around 16%.

Meanwhile, Whole Foods is building larger stores in an effort to nearly double its store count, to 300, by 2010.

Store size has increased 22% and average weekly sales per store have risen 64% in the past five years, says Cindy McCann, vice president of investor relations.

The chain racks up sales per square foot of $862, she says, nearly twice the industry average.

But good locations can be tough to find in key urban or suburban affluent markets. And new stores initially have higher costs and lower margins than mature outlets do.

"Whole Foods still needs dense population, high income and a well-educated consumer," says Jason Whitmer, an analyst at FTN Midwest Securities.

Staffing stores with exceptionally food-savvy and motivated employees may prove more challenging, too. Without "that knowledgeable and turned-on work force, they will have a problem growing," says Andrew Wolf, an analyst at BB&T Capital Markets.

And investors must pay dearly for the privilege of owning the shares. Fetching 45x projected earnings for the next four quarters, Whole Foods easily surpasses the P/E ratios of fast-growing retail peers including Starbucks and Wal-Mart, argues Neil Currie, an analyst at UBS Research who downgraded the shares.

The stock also trades at a premium to its median P/E of nearly 32x forward earnings over the past five years, and at a hefty premium to the S&P 500's P/E relative to its history, according to Thomson Financial Baseline.

"We think it would be an opportune time to take profits on…an outstanding investment," Currie writes.

Of course, betting against Whole Foods' growth story has proved wrong again and again.

The company is far from market saturation in the U.S., and this year announced a foray into Europe with the acquisition of several small stores in London.

But the shares could tumble if sales or earnings growth falters. Sometimes it's best for investors to take hot stocks out of the oven before they get burned.

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Yes I'm short w/basis around 118.5. It should fill the gap around 105 in the next 1-3 months (or maybe in the next 1-2 weeks). Pig stock.