WHOLE FOODS: TIME TO SOW ITS WILD OATS?

Implications: 1. Whole Foods has enjoyed dynamic growth since it was founded in 1980. An "enlightened" and admired company that appeals to the most desirable customer segments, WFMI has been agile and fleet footed and full of surprises (always something up the sleeve) over the years.

2. Acquisitions have played a role in the WFMI growth strategy; in fact there have been 18 acquisitions, over the years. Frequently, key management from the acquired operations were retained to facilitate the assimilation process.

3. However, natural and organic foods competition has increased as has, importantly, the contest for the take home, prepared foods business that WFMI has successfully leveraged. Earnings dropped slightly in the most current quarter and, over the past year, share prices have been hit hard.


Analysis:

The question is: has Whole Foods, in acquiring Wild Oats (OATS) swallowed more than it can chew?

WFMI has made 18 acquisitions in the past. However, these were considerably smaller than the OATS deal. Most involved fewer than 10 stores and were well below $100 million.

The average per-door sales productivity of Wild Oats is about $11.0 million versus $30.0 million for WFMI and sales per square foot at OATS are about half those of WFMI. Wow! That's a daunting challenge.

Of course, OATS opens new markets for WFMI and strengthens existing market positioning. However, let's look at the new markets: Arkansas, Indiana, Oklahoma, Tennessee, and Utah. Ummm. OK. And the markets in which WFMI positioning has been reinforced?  California will have 74 doors versus the present 40 (29 under the Henry's banner) and should become a powerhouse; Texas will add 8 doors, bringing the total to 21 (not quite a powerhouse); the Colorado door count will increase from 7 to 20; Oregon will add 6 doors to the current single location. No additional markets will grow by more than 5 stores.

WFMI is a savvy, innovative operator that has done many more things right than wrong. However, this current development is a big surprise and makes us wonder whether a take charge offensive player has suddenly switched to defense.