Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Whole Foods Market, Inc. (WFM), Wal-Mart Stores, Inc. (WMT): Are Investors Ignoring These 3 Problems?

Fast growing companies usually develop a following of investors that are willing to pay a premium for the company’s future growth. What’s ironic is, most of these investors defend their choice by quoting how much money they have already made on the stock. The problem is, knowing that someone else made money on a stock tells a new investor absolutely nothing about whether they should be the next to buy shares. While shares of Whole Foods Market, Inc. (NASDAQ:WFM) have been on a tear, buying shares today is a different proposition than years ago.

Whole Foods Market, Inc. (NASDAQ:WFM)

Organic Growth
Fast growing companies normally show good organic growth in sales, and in the case of a grocer like Whole Foods, they show strong same-store sales growth as well. The differentiating factor for Whole Foods is they offer a large selection of organic foods, as opposed to the traditional offerings of a regular grocery store.

While Whole Foods Market, Inc. (NASDAQ:WFM) is a larger company, The Fresh Market Inc (NASDAQ:TFM) is another company looking to capitalize on the strength of the organic foods industry. In addition, companies like The Kroger Co. (NYSE:KR) and Wal-Mart Stores, Inc. (NYSE:WMT) may not offer full organic selections, but they offer just enough organic options to keep shoppers from going elsewhere.

One of the best ways to measure organic growth is by looking at same-store sales. With any retailer, strong same-store sales growth is critical. There is no doubt that Whole Foods Market, Inc. (NASDAQ:WFM) same-store sales growth in the current quarter of 6.9% is excellent. Compared to The Kroger Co. (NYSE:KR)’s same-store sales growth of 3%, The Fresh Market Inc (NASDAQ:TFM)’s growth of 3%, or Wal-Mart Stores, Inc. (NYSE:WMT)’s 1.4% decline, clearly Whole Foods performed better. However, this brings us to the first problem facing Whole Foods. The company’s same-store sales are slowing down.

Have Investors Read The Earnings Report?
Over the last five quarters, Whole Foods Market, Inc. (NASDAQ:WFM) same-store sales grew by 8.9% five quarters ago, to 8.9%, 8.5%, 7.2%, and 6.9% in the current quarter. In case investors expect same-store sales to accelerate in the future, I would suggest looking at the company’s outlook for the third and fourth quarter of this year.

The significant slowdown in earnings growth at Whole Foods Market, Inc. (NASDAQ:WFM) is the second issue that investors might not be prepared for. Whole Foods is expected to grow earnings by nearly 18% over the next few years, but management is projecting just 7% to 10% EPS growth in the last two quarters of the year. Investors don’t like being disappointed. A company that has been growing earnings by 20% or more, that all of a sudden posts just 10% growth, could be a rude awakening for investors expecting more.

The third issue that Whole Foods Market, Inc. (NASDAQ:WFM) is dealing with is, the company’s cash flow isn’t as impressive as their earnings growth. In the current quarter, the company’s EPS grew by 19%, but their core operating cash flow (net income + depreciation) increased by 17.34%. Whenever operating cash flow lags EPS growth, you know there could be trouble if EPS growth slows further. Earnings can be manipulated, but net income plus depreciation, essentially determines how much the company has to spend on expansion, dividends, and share repurchases.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.