Whole Foods gets brutalized

Shares off sharply for upscale grocer on earnings news. Should you stay away?

By InvestorPlace Nov 4, 2009 7:03PM
By Jim Woods

“We believe our sales have stabilized and officially turned the corner.” That was the word from Whole Foods Market (WFMI) chief executive John Mackey about Wednesday’s quarterly earnings results.

Profit jumped to $28.7 million, or 20 cents a share, from $1.5 million, or a penny a share, a year ago. Sales also rose, climbing 2.3% to $1.83 billion. 
Consensus Wall Street estimates were for earnings of just 18 cents a share on sales of $1.84 billion. And though Whole Foods did manage to beat bottom-line estimates, it fell short on the all-important same-store sales metric.

Same-store sales fell 2.3% compared to a drop of 0.5% in the same period last year.

To be certain, same-store sales declines aren’t new to Whole Foods. The company has grappled with sharp sales declines over the past several quarters. But like Mackey said in today’s earnings statement, he now thinks the company has turned the corner.

Unfortunately, traders didn’t see it that way in the after-hours. The stock was brutalized in after-hours trade, gapping down more than 8% right after earnings came out. 

Interestingly, news of this pending selloff was already all over the financial blogosphere, thanks to my friend Jon Najarian and his OptionsMonster service. 

Jon’s OptionMonster’s tracking systems detected large purchasing activity in November 31 puts for $1.60, and the sale of November 27 puts for $0.42, and November 37 calls for $0.40. The trade was executed on 7,836 contracts, and the options volume was well above open interest.

Obviously, many players consider WFMI shares overcooked, and I suspect it was almost a self-fulfilling prophecy to see the shares gap down on anything less than a blowout earnings report.  And while Whole Foods earnings weren’t bad, they weren’t exactly a big upside surprise.

In my opinion, I think the selling here in the shares could be a good opportunity to pick up some WFMI stock at an attractive price. But if you do buy WFMI here, be careful. Make sure you set a stop loss no more than 10% below your purchase price. 

If the options players are right, you’ll have limited downside.  But if they’re wrong, you could be getting whole lot of bang for your buck in WFMI.

At the time of this writing, Jim Woods did not own shares of WFMI.

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