Another Rotten Quarter for Whole Foods

 | Jul 31, 2014 | 9:00 AM EDT
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Does anybody follow Whole Foods (WFM) any longer? I mean, why bother? I stopped counting how many rotten quarters these guys have reported. Just last month I said you shouldn't add Whole Foods to your cart. Turns out I was right.

Last night Whole Foods reported another disaster. According to my count, this company has missed four quarters in a row. It's a total roach motel: Investors get in, but they can't get out. Year to date, the stock is down 31.5%, and it fell another 4% after hours. Yuck! Neither the stock nor the company is showing signs of turning around any time soon.

For the third quarter of fiscal 2014, Whole Foods reported revenue of $3.38 billion, up 10% from the prior year. The company earned $0.41 a share. While that was basically in line with most expectations, the company also cut guidance for the fourth quarter.

Management said it expects fourth-quarter earnings of $0.31 to $0.33 per share, which is $0.02 below most estimates. The company also projected revenue to rise between 8.5% and 9.5%. That's down from this quarter's 10% rise. If that isn't enough, same-store sales are expected to rise between 2.5% and 3.5%.

While these seem like slight disappointments, this is a big change from the days when Whole Foods was able to consistently produce an 8% same-store-sales figure. With the current guidance, it'll be a wonder if the company is able to get to 10.3% revenue growth this year.

Since management hasn't been able to find a way to boost same-store sales, estimates of 12% and 12.5% revenue growth for fiscal 2015 and 2016, respectively, are increasingly unlikely. Analysts have to chop top-line estimates for the next two years in order to get their figures down to a more realistic level. I would suggest they cut their growth estimates down to 10% and be done with it. The company is not building enough stores to grow its top line more than 10% -- and with same-store sales stuck between 2% and 3%, gross margin has to come down.

Whole Foods has double the gross margin (35.5%) of other grocery chains (15% to 19%). While management doesn't have to chop margins in half, they do have to respond to the competition with lower prices. Customers are staying away from the stores because they are afraid of spending their entire paycheck on organic pizza and heirloom asparagus.

On the conference call, management talked about how competitive the marketplace has become. They said that one competing store opens each day somewhere in the U.S. Management's best idea to drive traffic through the stores constituted some TV commercials that are planned to run in the fall.  Maybe that will work? Who knows?

To make it seem as if earnings are growing, the board of directors voted to blow another $1 billion on share buybacks. (I would suggest to them that they hold off on buying the stock -- they'll be able to buy it lower.)

I think Whole Foods is headed to $30.

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