NEW BEARISH Plays

Whole Foods Market, Inc. - WFM - close: 39.15 change: -0.25

Stop Loss: 40.51
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 04, 2015
Time Frame: Exit PRIOR to earnings on July 29th
Average Daily Volume = 4.0 million
New Positions: Yes, see below

Company Description

Trade Description:
The natural foods market (i.e. organic foods) has bloomed from $6 billion annually in 1998 to $48 billion in 2012. Whole Foods Market (WFM) is probably the best known brand for organic groceries. The company has ridden that tidal wave of growth over the years. Unfortunately its rivals have caught on and now WFM is facing every increasing competition.

The grocery business is not a very high-margin game. Organic foods tend to be more expensive and allowed for better margins. A few years ago traditional grocery stores caught on and started expanding their selection of organic foods. Today traditional retail groceries control more than half of the total natural foods market. According to BMO Capital Markets, Costco (COST) actually sells more organic food than WFM.

Just in case you're not familiar with WFM, here's a brief description, "Founded in 1978 in Austin, Texas, Whole Foods Market (wholefoodsmarket.com) is the leading retailer of natural and organic foods, the first national "Certified Organic" grocer, and uniquely positioned as America's Healthiest Grocery Store. In fiscal year 2014, the Company had sales of approximately $14 billion and currently has 422 stores in the United States, Canada, and the United Kingdom."

All this competition has started to hurt WFM's growth but the company is still growing. Q1 results were announced on February 11th. WFM delivered earnings of $0.46 per share while revenues grew +10.2% to $4.67 billion. The EPS number was one cent above estimates while revenues matched estimates.

WFM's Q2 results came out on May 6th. Earnings were only in-line with estimates at $0.43 per share. Revenues were up +9.8% to $3.65 billion, which actually missed estimates. Investors were not happy with WFM's comparable store sales growth, which was below estimates at +3.6% for the quarter. Plus, WFM management lowered their fiscal year 2015 revenue estimate to $15.47 billion compared to Wall Street's estimate at $15.74 billion.

Shares of WFM collapsed the next morning (May 7th) with a plunge from about $47.75 to $41.00 before settling near $43.00. WFM has slowly withered since that earnings report. Management's estimate for +9% sales growth in 2015 doesn't seem to be enough to please investors. Analysts are forecasting earnings growth of +11% in 2015.

Investors seem doubtful about WFM's new store concept too. The company has suffered the "whole paycheck" nickname for years due to their high-price selection. Management has acknowledged that they are more of a luxury retailer. They've decided to try and target younger millennials with a "value" idea. This new value proposition will be smaller stores, cheaper prices, and somehow maintain WFM's reputation for quality products. Critics are worried that this new concept, due to launch in 2016, is a good recipe to cannibalize WFM's higher-margin business.

This past week WFM was snagged by a pricing scandal in New York. The New York Department of Consumer Affairs found that WFM was consistently overcharging consumers. The department tested 80 product categories and found WFM overcharging on several prepackaged items. The differences ranged from 80 cents to $15. Management confessed that they made some mistakes and would do a better job training their staff to fix the issue. WFM promised that if a consumer found they were being overcharged then WFM would give them the product for free. This negative story is probably just a temporary black cloud for WFM. The larger problem for the company is tougher competition.

Before I continue it's worth mentioning that WFM is a popular company for rumors. There have been rumors that WFM might buy some of its smaller competitors, like Sprouts (SFM). There have also been rumors that activist hedge funds or investors might get involved to try and improve the stock's performance. Occasionally these rumors might spark a bump in WFM but the overall trend is down.

WFM has broken down below round-number support near $40.00 and below its early June lows. Thursday's intraday low was $39.10. We're suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to WFM's earnings on July 29th.

Trigger @ $38.85

- Suggested Positions -

Short WFM stock @ $38.85

- (or for more adventurous traders, try this option) -

Buy the AUG $37 PUT (WFM150821P37) current ask $0.87
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart: