We have held a long position in Whole Foods Market (WFM) since 1999. We dramatically increased our position in March 2001 when the company had suffered a 25% price decline in its stock in the wake of an earnings miss, concerns over its valuation and as the company was restructuring due to poor “di-worse-ification” investments (Wholepeople.com, Amrion etc.). Our investment in Whole Foods performed very well from 2001-2005. We saw significant headwinds from 2006-2008 when Whole Foods was dealing with a shaky performance, the controversy surrounding Whole Foods buying out Wild Oats and a volatile stock market. Even though the company was growing and its equity exceeded its bonded debt by 62% as of 2008, Whole Foods decided to shore up its capital with a $425M convertible preferred stock offering to Leonard Green & Partners on November 5, 2008. While this deal was very dilutive in that it enabled Green to convert its investment to Whole Foods Market common stock at a price of $14.50/share, we remember that even the “Masters of the Universe” at Goldman Sachs needed to sell preferred stock with warrants to Berkshire Hathaway while the crisis was in full effect in 2008. Since that time, Whole Foods has recovered its momentum and resumed its strong operating performance. What sets Whole Foods Market’s performance apart from this wave of growth versus its performance from 1992-2008 is that it has substantially improved its level of annual free cash flows since FY 2009. This enabled the company to restore its dividend in 2011 and boost it by 40% this year.

We were concerned that Whole Foods would potentially miss its estimates or issue a sour outlook. Granted it would not be the only specialty food and drink retailer to do so. Chipotle Mexican Grill (CMG) had missed its revenue estimates by $17M (2%) and that has helped the stock drop by 27% since July 19. Starbucks (SBUX) reported its EPS two days after Whole Foods and it had missed its EPS targets by $.02 and reduced its outlook. Despite the fact that Whole Foods’ ability to beat and raise estimates has been nothing short of legendary since the 2009 fiscal year, we were concerned that even Whole Foods would be getting dented and dinged by the tough macroeconomic environment. We were concerned even though Whole Foods targeted high-end consumers with premium, all natural/organic foods and personal products.

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