WFMI Says No Sale on OATS Buyout Rumor, Beats Street’s FY98 EPS Estimates by $.13/share
Published: Tuesday, December 01, 1998
Indeed, WFMI told analysts it had beaten the Street’s FY98 estimates of $1.54/share by a full $.13.
The nation’s number one natural foods retailer reported FY98 pro forma net income of $46.5 million on sales of $1.39 billion and pro forma diluted earnings per share of $1.67. Those figures represent an increase in sales of 24% and an increase in earnings of 55%. FY98 comp store sales increased 11%.
Grocery-store sales chainwide average about $670 per sq. ft., a number WFMI believes is the highest in the industry.
Breaking company precedent, WFMI Chairman and CEO John Mackey denied the OATS buyout rumors.
“In general, our policy is not to comment [on mergers and acquisitions],” Mackey said. “However, we believe recent press necessitates a response. Whole Foods is not currently in negotiations to buy Wild Oats.”
Rumors of the buyout came as a result of comments to Business Week by First Albany Managing Director Gary Giblen to the effect that, despite the intense rivalry between OATS and WFMI, WFMI might be interested in buying OATS “for practical business considerations.”
Giblen told Natural Business his views were overstated in the Business Week story.
“Long term, the logic is compelling. But in the short or intermediate term it’s not going to happen,” he says. “Until business reasons become overwhelming to do it—like, for example, overlapping stores—it would be hard financially. To do the deal, Whole Foods would have to make heroic assumptions to make it additive rather than dilutive per share.
“Just gluing the companies together with no synergies would be about 12% dilutive to WFMI’s calendarized 1999 EPS,” Giblen says.
During the conference call, Mackey also told analysts a buyout of OATS would cause too much shareholder hardship, considering the company’s current valuation. During the past year, WFMI has traded as high as $70.12/share and as low as $32/share. Following the news of the company’s record financials, WFMI stock ended the Nov. 12 trading day at $40.06/share, up more than 20% from its opening price of $33.25/share. It has continued its upward drift since then, closing Nov. 25 at $49/share.
However, Mackey also told analysts that of the record 29 stores currently in WFMI’s development pipeline, seven will be in locations that pit WFMI in direct competition with OATS. Among those locations are Los Angeles, Chicago, Denver, and Santa Fe, NM.
Mackey said WFMI plans to open 10 stores in FY99, and in a long-term lease agreement with San Francisco-based, privately held Jamba Juice, the company plans to open 75 Jamba outlets within its stores over the next five years.
Mackey said that WFMI’s acquisition strategy is ongoing, noting the company had made at least one acquisition in each of the past seven years. “There are a number out there that we’re considering,” he said.
WFMI also plans to open its on-line shopping arm, at www.wholefoods.com, in spring 1999. The site will offer about 6,000 SKUs, primarily supplements to start, and up to 10,000 SKUs of nonperishable items over the next 12 months.
Throughout the conference call, WFMI’s CEO was emphatic about what he believes is the Street’s misguided tendency to group his natural foods retail company with supplements makers and retailers such as Rexall Sundown (RXSD) and General Nutrition Cos. (GNCI). Both RXSD and GNCI have seen their stocks tumble due to price cuts announced by GNCI and recent negative press about product quality-control issues at RXSD, and, many observers say, analysts’ tendency to group WFMI in with the two has helped drive its stock down.
WFMI does own a supplements company, Boulder, CO-based Amrion, but Amrion isn’t experiencing sales weakness or margin pressure, according to Mackey. He told analysts he expects Amrion’s net margins to be higher in FY99 than they were in FY98.
“Supplements are important in our business, but they are not dominant,” Mackey said, noting that 50% of WFMI’s sales are derived from perishables. “We haven’t had to cut prices. [Wall Street’s concern] is much ado about nothing.”