Wednesday, May 14, 2008

Whole Foods Market (WFMI) CEO at a Loss of Why Sales are Slowing

If someone could direct the CEO of WFMI to my blog, it might help open his eyes - stock is down 12%, granted I wrote this Sunday and it's a bit frightful to short anything into earnings because people love to play the "the news is terrible but not as bad as expected" but as I wrote

Speaking of which one of my favorite short ideas (although its scary to short these into earnings because of the "hey its a terrible number but we expected abysmal so take this stock up 30%!) of this Walmart nation is Whole Food Markets (WFMI) - I expect economic reality to push people out of healthy organic foods back into junk or lower cost food (read: cheap) so a lot of formerly upper middle income people will be forced out. That's pooring of America 101 - and a threat to WFMI the next 2 years.

I've flagged this name and many others like it since last summer and we did a revisit on all the themes that (once Kool Aid wears off about any 2nd half recovery) are going to once again be good shorts, just like they were in the fall [Apr 14: Holy (Holey?) Crocs!]

I cannot continue to stress enough how wrong analysts are on 2008 estimates and any company with focus on the US consumer is simply going to be blown apart in due time - if not this earnings season - then in the future. We are told daily how "cheap" these stocks are; this is based on the fictional body of work called "analysts 2008 estimates". Don't believe the hype. The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve/global forces, and underemployment if not outright unemployment. [Apr 2: The Underemployment Rate is Rising]

It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. So now it "matters" because that starts cutting into the bottom part of CNBC's audience. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time. Or at least it's certainly not like it's been in a long time...

People were asking me for individual names for shorts - I continue to stress the same themes I've stated since last summer - anything consumer related or based on
American conspicuous consumption - it will all go. I was looking at a chart of Whole Foods (WFMI) and that's a perfect candidate - its held up "ok" because it relies on the upper middle class who can afford to pay $7.00 for organic milk. Well, when economics start to hit, people are going to have to stop being so "healthy" and buy what they can afford. That's just reality. Hence this looks like the prototypical short. As is Harley Davidson (HOG) [Jan 25: I Can't Believe this Pig...err HOG was up Today] [Sep 7: More Retail Tells? Harley Davidson and Office Depot], as is just about every restaurant in America [Sep 19: Tough Times Ahead? Restaurants] - even magical Chipotle Mexican Grill (CMG), as if just about every retailer in America ex-Walmart (WMT), etc.

Nothing has changed... but the CEOs apparently don't seem to understand their own market
  • Shares of Whole Foods Market Inc. tumbled more than 12 percent Wednesday after the organic and natural foods retailer's first-quarter profit fell and missed Wall Street estimates.
  • The company reported higher same-store sales, but growth wasn't as strong as recent years and continued to weaken through early May.
  • Chief Executive John Mackey said he didn't know why sales growth slowed but it could be due to the weakening economy and tougher competition.
  • Edward Aaron, an analyst with RBC Capital Markets, called the same-store numbers disappointing and said they seemed to weaken as the past quarter evolved. He said the results confirmed his belief that traffic in the stores has slowed due to the economy.
  • Goldman Sachs analyst Simeon Gutman said it appeared to be the first time in recent memory that economic trends were hurting Whole Foods sales.

Again folks, full year 2008 estimates for many stocks are simply wrong across the board (much too high on hopes for a recovery coming in 2nd half 2008) - so as stocks prices levitate or even stay FLAT and earnings DEGRADE over the coming quarters, stocks become more expensive. That can continue indefinitely I suppose but at some point people will need to wake up and ask themselves why they are paying MORE for stocks whose earnings are degrading, falling. At that point - the stocks will fall. And I don't believe it will be pretty. But until we reach that tipping point of reality - the Kool aid continues to flow.

I've written as well, I believe discretionary entertainment will also take a hit (ex video games) - RVs, boats, even sporting events ALTHOUGH most sporting events are now populated by the upper 10% whom this slowdown will hit last, and corporations. But I just cannot imagine the average football game where parking is $30, concessions are $50 for a family of 4, and tickets are $150-$200 being at top of mind for the bottom 80% in this country. Things like NASCAR which caters more to middle America will take a hit. [Apr 22: Coach with Interesting Report]

Coach (COH) is a name I always like to watch as a "tell" on the upper middle income US consumer in our conspicuous consumption culture - it is sort of in the same pan as Harley Davidson, speedboats, and Whole Foods (WFMI) - luxuries we don't need but we love our toys/excesses.

The RV story is already coming home to roost per the Wall Street Journal (as are boats) Some more shorts, I would not be surprised to see bankrupt within 2 years.
  • Two of the country's largest recreational-vehicle makers, pummeled by high gasoline prices and the slumping housing market, face serious cash crunches and are taking drastic measures to ease the strain.
  • Coachmen Industries Inc., whose sales have declined 40% over the past three years, is borrowing against the value of life-insurance policies it holds on employees and retirees.
  • Fleetwood Enterprises Inc., which has posted five straight years of losses, recently sold its Riverside, Calif., headquarters and is seeking buyers for other properties, in an effort to raise $100 million to finance a looming bond redemption. In addition to RVs, about 25% to 30% of Fleetwood's business comes from mobile homes, a market that has been skidding even longer.
Conclusion #1: One day when I have a long-short hedge fund I will actually be able to make money off these short ideas. We had some great retail/restaurant short ideas in the fall that went into the ether.

Conclusion #2: Don't worry about anything I typed above or have been typing since last summer. Everything will be fine "in 6 months", and inflation will disappear - no wait, inflation never arrived - so it could not disappear since it was never here. Either way, ignore everything and buy stocks. The hedge fund computers are doing it, so you should too.

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