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Perishable Pundit
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Whole Foods Exercises Pundit
‘Option Two’ And Sells Preferred Stock

In our piece Can Whole Foods Survive Prolonged Economic Downturn? we said that the company was running out of financial flexibility and we said it had five options:

  1. Muddle through. By paring back capital expenditure and utilizing its credit lines, Whole Foods may make it through but if we are in for a long recession, there is a real risk that the company could eventually run out of money.
  2. Whole Foods may have to sell stock even at this stock price to raise capital and sustain its operational plans.
  3. Whole Foods may find a partner for its British operation that is willing to put in capital to sustain the operating loss and capital expenditures needed to grow the division.
  4. Whole Foods could shutter its UK division and staunch the bleeding.
  5. Perhaps Whole Foods could sell itself to another retailer better able to carry it through the recession.

Well, Whole Foods announced its earnings and simultaneously announced it had chosen option two by accepting an investment from Leonard Green & Partners, L.P.

The quarterly results were tough. Although overall sales were up 13%, identical store sales fell 3.3%.

Total earnings dropped almost 96% to $1.5 million or $0.01 per share.

Although the company identified a number of non-recurring charges that hit profitability hard and thus said the earnings situation wasn’t quite so bad, many of these charges were troublesome for other reasons.

For example, the company paid $5.5 million, or $0.02 a share, to terminate leases on 13 stores in development, which makes you feel they either didn’t have the capital to fixture and inventory the stores or weren’t convinced they would be profitable.

Also the company took a tax hit of $6.1 million, or $0.04 cents a share, to repatriate $60 million in earnings from Canada. Once again, this seems to imply either diminished opportunity — no useful way to invest the money in Canada — or a need for cash down in Austin.

The Wild Oats acquisition seems to be a big loser. The FTC lawsuit against Whole Foods is projected to cost another $15 to $20 million in legal fees in fiscal 2009. Also there are 40 idle Wild Oats stores, and Whole Foods had to increase its reserves associated with these stores, because the downturn in the real estate market means Whole Foods can’t sell or sublease these properties, at least not at what had been the assumed values. This cost $14.7 million, or $0.05 cents per share, in the quarter. The company also estimates that Wild Oats operations lost over $25 million, or $0.09 cents per share, in the quarter. In addition, buying Wild Oats means Whole Foods took on debt at a time when it probably wishes it did not.

Although the company raising $425 million through a preferred stock issue was good news — and the market initially reacted favorably to it before slipping back — it was good news because the company was operating with thin capital. Now, as a better financed company it can probably afford to wait out the recession.

The fact that they sold the issue on the terms they did indicates the company really needed capital. A year ago people were buying stock in Whole Foods for $50 a share; now Whole Foods just sold the right to buy 17% of the company at $14.50 a share and agreed to pay a dividend while the investor holds the preferred. Initially the dividend is 8% and can be lowered after 3 years if the stock price of Whole Foods is sufficiently high.

Interestingly enough, the preferred stock sale contains a PIK, or Payment In Kind, option whereby Whole Foods can pay the dividend due in additional securities. This gives Whole Foods flexibility if earnings are poor and cash is tight — but it also means that Leonard Green & Partners, L.P. could end up owning more than 17% of the company.

For vendors, the investment is great news as it makes the company much stronger financially, though a recent conference call offered this nugget:

We are pleased to announce that Michael Besancon, former president of our Southern Pacific region, has accepted the newly created position of Senior GVP of Purchasing, Distribution and Marketing, reporting to our co-Presidents, Walter and AC. Our goal with this new position is to create a collaborative vision for our purchasing, marketing and distribution teams at the regional and global levels. With over 30 years of experience in purchasing, Michael has created a regional program that has produced strong margins primarily through offering differentiated products and effectively telling the story behind the products within the store. We are excited about Michael spreading his vision and best practices throughout the company.

We read this as saying that Whole Foods, which has always had a very division based procurement system, is going to try and leverage its total buying power to get better deals. Well, why shouldn’t they join the club? Every retailer does this. Though it can be difficult to sustain a focus on "differentiated product" if the focus shifts to reducing costs.

We continue to think that the executives at Whole Foods are attempting to do something that just can’t work. We took this from the same conference call:

The Whole Foods Market brand stands for the highest quality, and over the last several years we have worked hard to increase the value choices within our grocery and Whole Body departments without sacrificing our standards. We believe our efforts have been successful since these departments are continuing to produce positive comps. While we saw a decline in average transactions in grocery, our average basket size was up, which we believe is a reflection that customers are making fewer trips but stocking up with more on each trip.

Our Whole Deal program, launched in July, has helped to highlight the values we offer within perishables. The program includes a quarterly in-store guide providing specially priced product discounts, money-saving coupons and tips, as well as budget recipes. For the July through September period, we saw a lift on all items included in the Whole Deal program with perishables driving a significant majority of the sales lift.

There are some signs of customers trading down within the store as evidenced by sales in our own brands growing three to four times that of branded product.

While we realize we are not going to change perceptions overnight, our efforts are gaining some traction in the media, which we hope will help positively reinforce to our existing customers that we are offering great values in terms of high quality at a competitive price, as well as helping to educate and entice prospective new customers as well.

They really think there is a ”perception problem” that needs to be “changed,” but we think that any change in “perception” will alienate the core customer base. As we said in our earlier piece:

Whatever Whole Foods does, as we mentioned here, there is a real danger to its attempting to shake its image as high-priced. The core of the clientele at Whole Foods values shopping there because of a conviction that high prices enable Whole Foods to offer better quality, better food safety and to buy and operate more justly and more sustainably. If tomorrow Whole Foods lowered its prices to match Wal-Mart, it would alienate its core customers as they would assume that paying Wal-Mart prices means that Whole Foods bargained its suppliers down to what they presume to be Wal-Mart standards.

That seems every bit as true today as before Whole Foods issued its earnings. Its only choice is to batten the hatches and live to fight another day.




Will Tesco Pay Wild Rocket’s Bills?

Our extensive coverage of Tesco’s Fresh & Easy operation has mostly dealt with the concept and operations. Yet our piece — Is Fresh & Easy Departing From Private Label? — brought an outpouring of anger at Tesco, the main complaint: That Tesco, which the produce vendors would like to work with, requires produce vendors to sell to Wild Rocket.

Now we had mentioned this discontent in our piece:

We continue, however, to hear of vendors who have walked away from “category captain” status with Fresh & Easy. The low volume is part of the problem but many report unhappiness not with Tesco but with Wild Rocket.

These complaints range from allegations of slow pay to clipping of bills and a failure to protect category exclusivity.

Most of the top vendors are used to working directly with retailers and find an intermediary at best an annoyance.

The financial crisis is, however, causing not so much anger as clear-eyed analytics to take over. One shipper sent this simple note:

Did you see the Blue Book rating of Wild Rocket Foods?

(86) F … Not Good.

He didn’t ask for anonymity but we’ll give it to him anyway since he might need to sell them one day.

To call a Blue Book rating of (86) F not good is a very kind way of putting it.

F is the worst pay description that the Blue Book gives. It means the company is paying its produce bills in 60+ days. (86) means that “Financial considerations and/or trade reports prohibit the reporting of a definite rating. Detailed special report available.”

Wild Rocket has not even been given a Credit Worth score or a Moral Responsibility score.

Back when the Pundit was working on Hunts Point, the Pundit Poppa would have killed him if he ever sold to a company with this kind of Blue Book rating. We wanted to deal with Blue Book Trading Members.

We also checked Wild Rocket out on Dun & Bradstreet and found a few interesting things:

First, they didn’t give D&B financial information, so it couldn’t do a complete report. Presumably this is why the Blue Book didn’t assign a Credit Worth limit as well.

Second, we notice that General Electric had filed a number of UCC (Uniform Commercial Code) filings, noting a lien against Wild Rocket’s assets. General Electric includes as security the following items:

Negotiable instruments including proceeds and products — Inventory including proceeds and products — Account(s) including proceeds and products — General intangibles(s) including proceeds and products — and OTHERS

Of course, most of this will be inventory or proceeds that are already committed by the PACA trust to produce vendors. One wonders how knowledgeable GE is about the PACA trust and if, when it comes to fully understand, it might not call its loan?

Third, we see that Tesco itself filed a UCC against Wild Rocket LLC on May 27, 2008. What were they going to use as security? Read on:

Inventory and proceeds — Accounts receivable and proceeds — Account(s) and proceeds

Once again, these are items that are virtually 100% required to satisfy the PACA trust. Wonder if Tesco fully understands the implications of the trust?

The public filings don’t tell us what led Tesco to file in May, but with volume running significantly below projections it is reasonable to think that Wild Rocket LLC may be under financial stress — thus the 60+ day payment terms. Could Tesco have stepped in to bail them out?

Now, of course, this is Wild Rocket, not Tesco. But Tesco compels produce companies to deal with Wild Rocket and Tesco is, for practical purposes, its only customer. So it seems like we would be letting Tesco off a little easy by saying that Tesco isn’t responsible for this situation.

If Wild Rocket LLC goes broke, will Tesco protect vendors? That UCC filing makes one think Tesco is trying to protect itself.

We think if it were us, we would tell Tesco that we won’t bill Wild Rocket LLC, as it doesn’t meet our credit standards. If Tesco wanted our product, the company would have to accept the billing directly and would have to pay within normal commercial terms.

Tesco should be ashamed of itself. How can it justify putting farmers in this kind of situation? Tesco is a company that preaches sustainability day and night… asking farmers to wait over 60 days for their money and making them sweat out every day whether the purchasing organization is solvent is not representative of the kind of stakeholder engagement that sustainability requires.

If Tesco doesn’t fix this, it shows that all the solar panels and polar bear photos are just green washing PR. Reprehensible.




Great Expectations For
President Obama

If you are an American patriot, you ought to wish President-elect Barack Obama well. John McCain’s gracious concession speech said it well:

I urge all Americans who supported me to join me in not just congratulating him, but offering our next president our goodwill and earnest effort to find ways to come together to find the necessary compromises to bridge our differences and help restore our prosperity, defend our security in a dangerous world, and leave our children and grandchildren a stronger, better country than we inherited.

Whatever our differences, we are fellow Americans.

Indeed we are, and only a fool wishes an incoming President ill or prays for the failure of his administration. In the United Kingdom they refer to Her Majesty’s Loyal Opposition, which basically means one accepts the legitimacy of the system and the right of the person to hold office — though one may choose to battle over policy choices. Indeed there is the implication in the concept that an important role of the party out of power is to analyze and critique policies lest the party in power become lazy or corrupt.

Republicans who are despondent and Democrats who feel that history has turned ought both to reflect on the fluidity of public opinion. In 1964, the Republican candidate, Barry Goldwater, lost in a landslide that makes the Obama win seem like a squeaker. Goldwater lost 16 states more than McCain and received 122 fewer electoral votes. Goldwater won only 38.5% whereas McCain won about 46% of the popular vote.

Just four short years later, Richard Milhous Nixon, the Republican candidate, was elected President.

Completely beyond the policies that Barack Obama might implement, we had two concerns about the campaign:

First, we felt that Barack Obama’s lack of a record was actually a big part of his appeal. Over a third of the people who voted for him did so because they were in favor of “change” — a concept without real content. Obviously, change can be good or bad. What this really means is that Senator Obama’s lack of a record provided an opportunity for Americans to project onto him whatever change they, personally, would like to see in America.

This is worrisome because it reminded us of what has happened in the area of Supreme Court nominations. Antonin Scalia, well known as a conservative jurist at the time he was nominated, was confirmed by the senate virtually unanimously. He was thought of as a brilliant scholar and a good lawyer and a fair man.

Today he would not be confirmed. In a career as a University Professor and appellate court judge, he had simply expressed too many thoughts on divisive issues. So now, when any President nominates someone to the Supreme Court, the President is somehow supposed to find brilliant scholars on constitutional issues who have never written a word or ever discussed or even thought about the great constitutional questions of our time, issues such as abortion.

The problem extends to ambitious law school students and young attorneys. Instead of engaging on these crucial issues, they remain silent.

Senator Obama’s willingness to, say, cut taxes for 95% of Americans or invade Pakistan would have come across differently if we had 30 years of voting records in the Senate so that those claims could be measured against his actual votes on real tax-cut proposals or authorizations for real military action.

It may work out great in this particular case and, perhaps, Senator Obama will be a great President. We hope so. Yet, if young politicians start voting “present” and begin seeing their lack of experience and a record as a big advantage — will the nation really benefit?

Will it produce better leaders or simply less predictable ones?

Is that a win for the country?

Second, because so much of the campaign focused on this inchoate vision of hope and change, we are afraid that expectations have been raised that can’t and won’t be realized. There has been a video floating around the internet that a local NBC affiliate filmed at an Obama rally. In the video a young mother named Peggy Joseph took her children out of school to attend an Obama rally and her emotional connection with and enthusiasm for Senator Obama was astounding. Here is how she expressed her thoughts after hearing Senator Obama speak:

“It was the most memorable time of my life. It was a touching moment. Because I never thought this day would ever happen. I won’t have to worry about putting gas in my car. I won’t have to worry about paying my mortgage. You know, if I help him, he’s gonna help me.”

You can watch the video below:

We are reminded of the campaign of Daniel O’Connell, who was known as the Liberator of Ireland. O’Connell delivered a famous speech calling for equal justice for Ireland, by which he meant that the Catholic population of Ireland — then a part of the United Kingdom — should be allowed full equality with the Protestant populations of Scotland and England in all matters.

In 1829, when he was running as an Emancipation candidate for parliament in a place called Clare, the election had concluded but the results had not reached the area. As Mr. O’Connell traveled in his carriage to Dublin where he would learn he had won in a landslide, the carriage came upon a road crew breaking rocks. When one of the workmen spied the great man, he became exceedingly excited and enthusiastic, perhaps a bit like Ms. Joseph in the video. It is said the laborer called out to Mr. O’Connell with enthusiasm: “Did you win, Mr. O’Connell, did you win?”

Mr. O’Connell is said to have replied: “I do not know. But you ought to temper your enthusiasm. Whether I win or lose, you will still be breaking stones next week.”

And so, alas, Ms. Joseph will almost surely still have to worry about paying her mortgage and buying her gas.

Which raises the question of what happens next.

The hope and perhaps one reason Senator Obama won is that with racism removed as a good explanation for her problems, Ms. Joseph and others like her will realize she is responsible for her life and that the way to not “worry about” various financial obligations is through thrift, education, hard work and not taking on responsibilities you can’t handle. If this is the consequence of his presidency, Barack Obama will go down in history as one of the greatest presidents America has ever known.

Of course, there are other possibilities and some may not be particularly good for America. The dream Ms. Joseph expresses of a worry-free life, in which others somehow take on one’s burdens, may be a dream with staying power. There is a play — the very first play written by a black woman to appear on Broadway — entitled A Raisin in the Sun. The name was taken from a line in a poem called Harlem, by Langston Hughes. The poem is a meditation on what can happen when the realization of a dream is frustrated:

Harlem
By Langston Hughes

What happens to a dream deferred?

Does it dry up
like a raisin in the sun?
Or fester like a sore —
And then run?
Does it stink like rotten meat?
Or crust and sugar over —
like a syrupy sweet?

Maybe it just sags
like a heavy load.

Or does it explode?

President Obama will need all our help and everyone would be wise to give it to him.




Perishable Thoughts — Actions
Speak Louder Than Words

Scott Danner, Chief Operating Officer of Liberty Fruit Co., Inc., has been a frequent contributor to the Pundit. A few examples of the many contributions he has shared with the industry can be found in these pieces:

Pundit’s Mailbag — Traceability Precision

Perishable Thoughts — Resolve To Succeed

Today Scott is kind enough to send a quote that is perfect to spark a discussion of relevant leadership qualities in politics, business and all areas of life:

“The superior man is modest in his speech, but exceeds in his actions.”

Confucian Analects
Book XIV. Hsien Wan, Chapter XXIX
By Confucius

The Confucian Analects are what are typically quoted in America as Confucius. In reality they were probably written over a half century or so by disciples of Confucius and students of those disciples.

The centerpiece of the Imperial Examination for 2,000 years, one could not be an educated man in China if he had not studied the thoughts of Confucius.

We first were drawn to the quote because, of course, Barack Obama is thought of as a great orator. Many times he was dismissed as being all eloquence and no substance.

Yet we always thought that this particular critique was unfair. An ability to speak and write well is not irrelevant to the politician’s calling. It strikes us as essential.

Constitutionally the Presidency is a weak office. It is, though, as Teddy Roosevelt said, a “Bully Pulpit” — put another way, the President is powerful in proportion to his ability to persuade.

Persuade Congress, the media, foreign governments, the people at large. Indeed the power of eloquence can amplify a President’s power so, for example, a foreign government may not be persuaded itself, but it may fear a President who can persuade the Congress and the American citizenry to back military action against that country.

Of course, another way of looking at this quote is an echo of another Theodore Roosevelt quote: “Speak softly and carry a big stick.” Roosevelt popularized this phrase when he was looking to expand the Navy, and he meant that a nation should not be threatening or belligerent but should always have the capacity to take care of itself if it must.

We confess we have found almost unbearable the way George W. Bush has reversed this phrase in dealings with both North Korea and Iran. After countless speeches and demands explaining that it will not be tolerated for these countries to have nuclear weapons, it appears the Bush administration is prepared to tolerate exactly that.

In line with this quote, this is to us much worse than if the Bush administration had never expressed an opinion on the matter as it makes a shambles of American credibility.

All these principles seem to apply to business as well. An ability to speak and write clearly — to persuade — is important and a crucial arrow in the quiver of managerial skills. Yet with employees, vendors and customers, it does seem that speaking softly — under-promising in managerial lingo — while over delivering is perhaps the most reliable way of building a strong reputation. That reputation is often the key to building a strong business.

Many thanks to Scott Danner and Liberty Fruit Co., Inc., for passing on this quotation.

The quote can be viewed here:

The Chinese Classics (Download the entire book from Google Books)
By James Legge, Confucius, Mencius, Ming Zuoqiu
Published by The author, Oxford, Clarendon Press 1893
Original from the University of Michigan
502 pages, Pg. 286

The quote can be purchased here:

Confucian Analects
By Confucius, translated by James Legge
Kessinger Publishing (June 30, 2004)
137 Pages

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