Analyst Urges Wild Oats Board to Sell

BOULDER, Colo.—Wild Oats Markets’ (OATS) stock plummeted to its 52-week low Oct. 27 after the company released dismal 3Q00 earnings that led one analyst to urge Wild Oats’ board to sell the company.

“We do not believe Wild Oats will ever be viewed as the growth story it once was. The problems are deep rooted in its store base, its growth strategy and its vulnerability competing against Whole Foods,” wrote Carole Buyers, VP of Tucker Anthony Capital Markets, in a research note released Oct. 30. “We believe more than ever that the board needs to sell the company.”

After reviewing the company’s quarterly report, investment bank Adams, Harkness & Hill (AH&H), in a report issued on Oct. 27, said: “The only near-term catalyst now is the potential sale of the business.”

Wild Oats on Oct. 26 posted a 3Q00 net income of $1.1 million or $.05/share—a 75 percent decrease from the retailer’s 3Q99 net income of $4.5 million or $.21/share. The result: OATS’ stock dropped 55 percent, closing Oct. 27 at $5.03/share.

Everything that could go wrong in 3Q did, Buyers said in the report. “Comps of –3 percent were below our estimate of –2 percent, and all major cost measures were significantly higher than our estimates and historical performance,” Buyers said. “Contribution margins were 6.7 percent compared to our estimate of 9.0 percent, reflecting considerably lower gross margins and high direct store expenses.”

As a result, Buyers downgraded her Buy rating on OATS to Market Perform. Meanwhile, AH&H analyst Scott Van Winkle cut his Market Perform rating to Accumulate; and U.S. Bancorp Piper Jaffray VP Yudi Bahl dropped his Buy rating to Neutral, advising investors “to wait on the sidelines” for the next several quarters.

“We are extremely disappointed with the turn of events at Wild Oats as we believed that the previously announced restructuring and remodeling efforts would be enough to improve store-level performance,” Bahl said in a research note dated Oct. 27. “It is evident now that the store-level problems at Wild Oats are not just acquisition-related but more grass roots.”

Analysts had high hopes in May when Wild Oats announced a strategic repositioning that included the expansion of its average store size and the closing of eight stores that didn’t fit the company’s new format. But hopes were dashed when Wild Oats said it has completed only 14 of the 30 remodels it had promised to have done by year’s end and that it plans to sell or close eight more stores by early 2001 in an effort to improve results.

“Since store remodels will be pushed into FY01, the lower comps associated with store remodeling are likely to persist,” Buyers said.

Also, as a result of recently gathered focus group research (see related story, pg. 3), Wild Oats announced plans to improve its retail service level through an increased sales force and a greater focus on training. This, along with the addition of related management positions, will also increase corporate costs,

Buyers said.

Although he couldn’t be reached for

comment by press time, OATS’ CEO Mike Gilliland told analysts during a conference call that he believes the company is on the right track but that a “much larger scope of work

is needed.”

Bahl is cautiously optimistic. “Sales-building initiatives, including an aggressive marketing program; customer education; and 30 major store remodels should assist comparable sales in [the second half of 2001],” he says. “We believe that the hard decisions that Wild Oats has taken to invest in its infrastructure and reposition the store base are prudent … but these efforts will take time to deliver results.”

Wild Oats closed Oct. 30 at $5.28.