Whole Foods Sale May Provide Best Investor Outcome

We do not plan to change our $31 per share valuation for narrow-moat

Wall Street Journal

report indicates the fund will press the natural foods purveyor’s management team to make operational improvements and investigate the potential for a sale of the company. While we believe the news suggests upside potential, we do not anticipate altering our long-term outlook (which calls for mid-single-digit top-line growth and 9% adjusted EBITDA margins, on average, over the next 10 years) until any improvement plans become more concrete.

Amid intensifying competition, we contend Whole Foods will have to rely on operational execution to a greater degree to drive returns versus its past top-line driven results. As availability of natural and organic products in conventional grocers increases and as those retailers improve their shopping experience, Whole Foods should find it hard to return to the high-single to low-double-digit top-line growth it enjoyed as recently as fiscal 2015. In this vein, Jana’s focus on operational improvement should help position Whole Foods for a world in which its distinctive shopping experience and product assortment are at greater risk of duplication by lower-cost rivals. That said, our forecast already embeds about 110 basis points of adjusted EBITDA margin expansion from fiscal 2017 to 2026, attributable to cost leverage and improved efficiency. With Whole Foods’ profitability well ahead of the 5% average adjusted EBITDA margin we expect from Kroger and given new-to-the-category natural food shoppers’ price sensitivity, we suspect opportunities for significant incremental improvement may be limited.

As a result, a sale may provide the best investor outcome. Using a 9-11 times adjusted EBITDA theoretical acquisition multiple range (at the high end of recent grocery M&A activity), we suspect the chain could garner a takeout price in the mid-$30s to mid-$40s.

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