A quarter ago, when we commented [4]on the latest post-earnings collapse in Whole Foods stock, we said that "Whole Foods Misses, Lowers Guidance, Or What Happens When You Ignore Buybacks At The Expense Of CapEx", and broke down the results as follows:
.. the luxury grocery chain moments ago reported revenues of $3.32 billion, missing the $3.35 billion expected, and EPS which also missed expectations of $0.41, instead printing at $0.38. Adding insult to injury, WFM also cut comp store sales guidance lowering its previous fiscal year comp store guidance from 5.5%-6.2% to 5.0%-5.5%, cutting sales growth from 11-12% to 10.5%-11%, and also cut EBITDA from $1.32-$1.37 billion to $1.29-$1.32 billion.
Ok, the results were horrible, but one key thing was missing.
WFM continues to be a cash cow, generating tremendous amounts of bottom line cash. Which perhaps was its biggest failing as well - WFM reported that "year to date, the Company has produced $619 million in cash flow from operations and invested $362 million in capital expenditures, of which $207 million related to new stores. This resulted in free cash flow of $257 million. In addition, the Company has paid $82 million in quarterly dividends to shareholders and repurchased $117 million of common stock."
The problem was clear: "Alas, this is nowhere near enough shareholder friendly activity to keep investors happy in a New Normal in which buybacks tend to be far greater in amount than CapEx spending."
As expected, the stock promptly collapsed by 10%:
A quarter later, Whole Foods management seems to have read our lament and acted accordingly. On the chart below see if you can figure out which is the company's quarterly stock repurchase and capex activity without peeking at the legend:
[5]
Indeed, that red bar soaring from a negligible $55 million to a whopping $361 million is precisely what happens when a company realizes that its only recourse to "goose" EPS is to go full tilt buying back its stock in the open market.
And sure enough, when WFM reported earnings moments ago, it "magically" beat EPS expectations of $0.39, courtesy of its raging repurchasing activity, printing a $0.41 EPS.
However, that was as far as it went. Unfortunately, while this time Whole Foods remember to repurchase as much stock as it could, it missed the key metrics starting with comp store sales, which were +3.9% on expectations of 4.8%, but the biggest impact was the reduced full year guidance as follows:
- Sales growth: 9.6-9.9%, down from 10.5-11.0%
- Comp store sales growth: 4.1-4.4%, down from 5.0%-5.5%
- Operating margin: 6.4%-6.5%, down from 6.5-6.6%
- EPS growth: 3-4%, down from 3-6%.
And so on. The stock reaction:
[6]
So while we congratulate WFM management on finally figuring out that in the New Normal financial engineering is perhaps the only thing that matters to get the algo momentum ignition boost upon announcing earnings, next quarter it may want to pay some more attention to the underlying business model too.
