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Is Whole Foods Stale?


Supermarket racking up aisles of debt.

You can dig into all the details of Whole Foods' (WFMI) quarter and slice and dice the ".bps" that went up and those that went down. It's necessary I suppose for modeling purposes, but it will only mask or confuse what is really happening at WFMI: "the business model is broken." I put those words in quote because, interestingly enough, the first quote in the press release from CEO Mackey is "Our business model is very successful", as if he knew (and he probably does) that he needs to convince the Street not to jump ship.

WFMI's same-store business is slowing dramatically; this quarter comp-stores and identical-store sales for WFMI stores only were almost as bad as its Wild Oats' stores. The company is trying to compensate for that by opening more and more new stores, which forces it to load up with more and more debt. If you eliminate goodwill and mark down other assets to the value which could actually be realized for them (as opposed to the value carried on the books) a rough guest-imate is that WFMI has $650 million of assets against $1.7 billion of liabilities. This is for a company whose net income this quarter missed some of the most bearish sell side estimates by a mile.

For the fiscal year ending September '09, WFMI will likely show sales of $9.5 billion and will be lucky to make $1.60/share. By then its debt load will probably be well in excess of $2.0 billion. Compare that to Safeway (SWY), with current trailing 12-month sales of $43 billion and total debt of $6.1 billion. SWY trades at a forward P/E of 13.5, WFMI is at 27.6. Since 2Q of 2006, WFMI has generated an average negative free cash flow of $38 million per quarter.

WFMI is a marginal growth story with a growing pile of debt, trading at multiples of halcyon days gone by.
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