Whole Foods Misses, Lowers Guidance, Or What Happens When You Ignore Buybacks At The Expense Of CapEx (Hint: -10%)

While we recently roasted IBM for engaging in an unsustainable debt-funded buyback program, in which IBM has used every dollar of debt issued since 2012 to buyback its stock, moments ago another company showed why management teams would much rather buyback their stock than invest in CapEx in a market that only reward instant gratification in the form of shareholder friendly activity and furiously punishes any attempts to grow for the future.

Presenting Whole Foolds: the luxury grocery chain moments ago reported revenues of $3.32 billion, missing the $3.35 billion expected, and EPS which also missed expectations of $0.41, instead printing at $0.38. Adding insult to injury, WFM also cut comp store sales guidance lowering its previous fiscal year comp store guidance from 5.5%-6.2% to 5.0%-5.5%, cutting sales growth from 11-12% to 10.5%-11%, and also cut EBITDA from $1.32-$1.37 billion to $1.29-$1.32 billion.

So yes – sadly for WFM, unlike every other company, it took no charges, and had no add-backs to add to give a far rosier non-GAAP EPS number, which in itself is admirable. And while we commiserate with having a weaker consumer to sell to, that too was perfectly expected now that the economy now only ground to a halt but in Q1 declined.

That said, WFM continues to be a cash cow, generating tremendous amounts of bottom line cash.

Which perhaps was its biggest failing as well – WFM reported that “year to date, the Company has produced $619 million in cash flow from operations and invested $362 million in capital expenditures, of which $207 million related to new stores. This resulted in free cash flow of $257 million. In addition, the Company has paid $82 million in quarterly dividends to shareholders and repurchased $117 million of common stock.”

Alas, this is nowhere near enough shareholder friendly activity to keep investors happy in a New Normal in which buybacks tend to be far greater in amount than CapEx spending. What’s worse, in order to make up for organic growth, WFM would have no choice but to expand its stores and not only is projecting that the number of new stores would rise from 33-38 to 36-39, but is also expecting a $75 million increase in CapEx from a prior guidance of $600-$650 million to $675-$725 million.

Which simply means that between lower EBITDA and higher growth CapEx, Whole Foods will have far less cash for even more buybacks in the future.

End result: the stock is now -10% after hours.