Bank of America cuts Whole Foods to sell on shrinking margins, slashes forecast to $25

Published Fri, Nov 4 201610:58 AM EDT

Bank of America Merrill Lynch on Friday slashed its 12-month price target for Whole Foods by 26 percent to $25 from $34, telling clients to sell the stock on shrinking margins and increased competition. "We are downgrading WFM from neutral to underperform as we see increased risks to WFM's comp and margin outlook from a more challenging operating environment," wrote equity analyst Robert Ohmes. "We also believe WFM's multiple will re-rate lower as comps and margins continue to come under pressure." In the past year, shares of Whole Foods have whipsawed, stuck in a trading range between $35 and $28. The stock currently sits at around $28, down 15 percent in 2016. Whole Foods, 1 Year Source: Whole Foods Bank of America believes customer traffic at Whole Foods has decelerated "dramatically," as increased competition in the organic food space developed into a price war, in turn impacting margins across the board. "As nat/org [natural/organic] food proliferates in the conventional channel, we think WFM will continue to be disintermediated by more convenient and lower-priced competitors, particularly given WFM's large trade area relative to other food retailers," said Ohmes. He points to trends in the latest earnings release, which showed same-store traffic fell by 4.2 percent, a 1.5 percentage point deceleration from the previous quarter. "We believe comps could remain negative into F18 [fiscal 2018] as headwinds from increased promotions at competitors, WFM's value efforts, plans to streamline selection, and deflation are likely to offset the benefits from easier comparisons and ongoing sales initiatives," wrote Ohmes. Whole Foods' efforts to reduce expenses by $300 million by fiscal 2017 could be offset by increased marketing expenses, rising health-care costs, increased promotions and other fixed costs, according to the analyst. Given the bearish outlook ahead, Bank of America says Whole Foods' current multiple of 20 times is too high. "We believe the stock should trade closer to the group average of 16x (which was also WFM's avg. 2-yr. fwd. P/E multiple when it faced similar comp and EBIT [earnings before interest and taxes] margin declines in 2008)," said Ohmes. In the next 12 months, Bank of America believes shares of Whole Foods could trade as low as $25, or 12 percent lower from where they closed Thursday. —CNBC's Michael Bloom contributed to this story.

A customer checks out of a Whole Foods Market in Washington, D.C.

Andrew Councill | Bloomberg | Getty Images

"We are downgrading WFM from neutral to underperform as we see increased risks to WFM's comp and margin outlook from a more challenging operating environment," wrote equity analyst Robert Ohmes. "We also believe WFM's multiple will re-rate lower as comps and margins continue to come under pressure."

In the past year, shares of Whole Foods have whipsawed, stuck in a trading range between $35 and $28. The stock currently sits at around $28, down 15 percent in 2016.