After reporting an ugly third quarter on Wednesday, Jim Cramer wasn't sure what to say about Whole Foods.
On the positive side, Cramer loves to go to the Whole Foods near his home. He considers it to be gorgeous, fun and loves to eat lunch on the rooftop and enjoy a Saturday afternoon.
But either Cramer is alone in that experience, or there is a clear disconnect between what customers expect and what management of Whole Foods is providing.
Comparable stores dropped 0.2 percent in the third quarter, fell an additional 2.1 percent in the month of October. Additionally, gross margins declined 96 basis points because of the cost of goods sold. Sales declined and expenses went up.
Whole Foods dominates its industry in cash generation, with $970 of sales per square foot and $132 million in total for the last quarter. It responded to declining sales and increasing expenses by taking that cash and using it to buy back $1 billion in stock, and then borrow up to $1 billion more to repurchase even more shares.
It is also eager to invest in technology to convert its online presence and scrap its legacy platforms, including the point of sale. The company admitted it is behind the curve in investing in the cloud, and talked also about improving customer loyalty.
"To which I say, do you really think buying back tons of stock is a great use of capital when you have underinvested and need to get back to basics?" Cramer said.
Whole Foods openly admitted on its conference call that it needed to get back to basics. Analysts then questioned what the heck the company has been doing that is not basics. One analyst even pointed out that the new attempts to fix point of sale systems and loyalty programs just two years ago and it hasn't succeeded. Yet the stock remains more expensive than most of its competition, except for Amazon.
Cramer couldn't help but to be reminded of Walmart, which also used the approach of announcing a buyback to gain investor loyalty. He wondered if announcing a buyback is really a good use of capital at a time when the company should be using every penny to fend off competition and reinvent itself. He also suggested that the money could be used to help lower prices at Whole Foods.
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"Let me bookend this segment with good news: I think Whole Foods can figure this out. The company can get back on track," Cramer said.
But can it both turn itself around and also spend a couple billion dollars to buy back stock?
"Sadly, the answer is, I don't think so," Cramer said.
Whole Foods, which was once the mighty dominant player in the food space needs all the money it can scrounge right now to turn around those same store sales numbers. Because that is the one number that is a true sign of profitable growth that all investors are looking for, including Cramer.