Private Equity Firm Buys 17% of Whole Foods
By ANDREW MARTIN
Published: November 5, 2008
A private equity firm is buying a 17 percent stake in Whole Foods Market, a much-needed vote of confidence for a chain that is being battered by increased competition and a weak economy.
The news came as the company announced a huge drop in fourth-quarter earnings amid sputtering sales.
Under the terms of the agreement, Green Equity Investors, an affiliate of Los Angeles-based Leonard Green & Partners, will invest $425 million in the company.
“We view it as a strong vote of confidence in our business model and our long-term growth prospects despite the tough current economic environment,” said John P. Mackey, co-founder and chief executive of Whole Foods, in a call with investors on Wednesday. “This equity infusion, combined with our strong cash flow from operations, gives us the financial flexibility to manage through these difficult economic times.”
The announcement, made after the close of trading Wednesday, sent Whole Foods stock up nearly 20 percent in after-hours trading to more than $12. The company’s stock is down by more than 70 percent since the first of the year.
It was not too long ago that Whole Foods, based in Austin, Tex., was a darling of Wall Street and routinely registered double-digit growth in comparable store sales, a common industry measure of the health of stores.
But the company has been battered by competition from traditional grocery stores that have expanded their offerings of organic and natural foods. It is also offering more discounts and private-label merchandise. At the same time, consumers are trading down to cheaper products and discount stores.
As part of the agreement, which is expected to close within 30 days, Jonathan D. Sokoloff, a managing partner of the private equity firm and a colleague, Jonathan A. Seiffer, intend to join Whole Foods’ board.
Mr. Mackey said comparable store sales increased 0.4 percent in the quarter, which ended Sept. 28, compared with 8.2 percent for the same period a year ago. The trend worsened in the next five weeks, with comparable store sales down 2.1 percent through Sunday.
Profit for the quarter was $1.5 million, compared with $34 million a year ago. The drop was partly related to costs associated with its merger with Wild Oats Markets, lease terminations and other charges.
“We believe our core customers remain committed to Whole Foods,” Mr. Mackey said. “However, the unrelenting negative economic news appears to be shifting buying behavior to making fewer trips and to making more value-conscious decisions.”
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