My latest column is up at RealMoney.
An article in Sunday’s New York Times (NYT) said consumers are tightening their belts — perhaps literally as well as figuratively — when it comes to food buying. The Times quoted retail consultant Burt Flickinger, who drew parallels to the 1970s, when people switched “from red meat to pork to poultry to pasta — then to peanut butter and jelly.”
Like any good investor, my thoughts immediately turned to how I might profit from this trend. The first thing that came to my mind was shorting luxury grocer Whole Foods (WFMI - Annual Report). The next was buying Campbell’s Soup (CPB).
Campbell’s has been cementing its recession-resistant cred by divesting Godiva chocolate and maintaining steady earnings estimates. Whole Foods, meanwhile, has seen estimates slashed. Although Whole Foods is forecast to grow faster over the next five years, doing so would mark a sharp contrast from either the past five years or the potential sustainable growth rate based on company fundamentals.
I’m also concerned that Whole Foods management announced on its conference call that “we’ve introduced an updated version of EBITDA that we are calling EBITANCE or earnings before interest, taxes and non-cash expenses. We believe this measure better reflects the current accounting reality of significant non-cash expenses beyond depreciation and amortization such as share based compensation, deferred rent, and LIFO.”
In particular, I’m worried about this decision to adjust for LIFO. Since when are inventory purchases not conducted in cash? While it’s true that the LIFO method results in higher reported costs than the FIFO method, it is also a better approximation of current costs. Adjusting it out just as price inflation is starting to bite seems suspicious to me.
Disclosure: At time of publication, William Trent holds no position in the companies mentioned in this article.
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