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Is Whole Foods Junk Food?

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Is Whole Foods a victim of its own success? The Austin, Texas-based supermarket chain is famed for helping spread the organic food.

craze throughout the land. But at UBS, analyst Michael Lasser initiated coverage on the stock earlier today by telling investors to sell the sharesWhy? As reported by CNBC, Lasser says the days of wine and roses are over for Whole Foods, which is struggling, and failing, to fend off rivals like Trader Joe’s and Sprouts Farmers Market. He argues that a return to double-digit sales and earnings growth is unlikely, at least for now, and Whole Foods’ share price has yet to reflect that new reality.

At a recent $29.57, the shares fell 1.1% in recent market action.

It’s a scenario that Barron’s warned investors about for years. Amid intensifying competition, slowing sales and falling profit, Whole Foods’s stock price has fallen 54% since October 2013 when it hit a multi-year high $65.31 a share. Valuations have deflated as well. In 2013, the stock fetched 38 times forward earnings, but now trades at 22.4, well below its historical average of 28.5 times earnings.

Granted, that price-to-earnings ratio hardly looks cheap. But at 7.4 times enterprise value to Ebitda, or earnings before interest, taxes, depreciation, and amortization, Whole Foods not only sits just above a five-year low, but in-line with the broader supermarket industry.

That valuation was one of several reasons that Barron’s Vito Racannelli favored the stock back in September.HP_WFM-Front_1

Others share his optimism. Russell Piazza at the Tarkio Fund cited Whole Foods as a top stock pick in a recent interview withBarron’s Crystal Kim. And, in December Jerome Dodson, who manages the index-beating Parnassus Endeavor Fund, included the supermarket chain supermarket chainamong amongs his pick.

To be sure, recent news hasn’t been good, and forecasts for the current fiscal year are dismal. Same-store sales have fallen for six straight quarters, and now Wall Street expects per-share profit, which fell 5% last year, to drop another 15% to $1.32 in the current fiscal year ending in September.

Whole Foods has promised investors it will not cut prices. It has, however, taken other drastic measures, such as abandoning its goal to eventually open 1,200 stores. In fact,the company is shrinking its store count to get expenses under control and is now focused on jumpstarting same-store sales.

In the meantime, Whole Foods is investing in marketing and technology, and continues with the new store concept introduced last year — dubbed 365 — aimed at younger, budget-conscious consumers.

There is a light at the end of the tunnel. The Street expects per-share profit to start growing again next year.

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