What Could Take A Bite Out Of Whole Foods

I don't know about you, but I can't recall when I last saw two employees hugging in a supermarket. I don't mean a phony air-kiss-with-grazing-shoulders thing, but something more, um, full-bodied. The other morning, I witnessed two such hugs. Then, right as I was leaving, I saw a pair of shoppers actually making out.

This was no Winn-Dixie (WIN ), but the Whole Foods Market (WFMI ) in Winter Park, Fla., one of 167 locations run by the Austin (Tex.)-based grocer with a mission. All the lovin' left me feeling good. So did the '70s sounds (Carole King, Brothers Johnson) instead of Muzak; the meats, seafood, and produce (gorgeous berries; nine kinds of peppers); the helpful, smiling clerks; the choice of frozen pizzas (a 9.1-ounce American Flatbread All Natural Pizza Baked in a Primitive Wood-Fired Earthen Oven Organic Tomato and Three-Cheese pizza for $6.79, or a Whole Foods' private label 16.5-ounce spinach and feta pie at $3.69). Best of all was lunch: a big bowl of green split pea with soy bacon bits, one of six choices of soup at the deli, plus a mini baguette, for $4.41.

YES, THERE'S A LOT to like at Whole Foods. So it leaves me feeling more of a killjoy than usual to suggest you think twice before buying the stock. This is not just because it's at record levels. The stock zoomed past 104, or 47 times past earnings, after the company posted 11.4% growth in its latest quarterly comparable-store sales. (Whole Foods is amending its results as it changes accounting for leases.) What really gives me pause is a fresh drag on earnings as Whole Foods strives to justify investors' lofty hopes.

Like other companies, Whole Foods this summer will be required by new accounting rules to deduct from earnings the costs of paying employees with stock or stock options. Unlike most other companies -- especially unlike most other nontechnology companies -- Whole Foods has been a heavy user of stock-based pay. Giving its 32,000 employees or, in Whole Foods-speak, its "team members," a direct stake in the chain's profitability is a key to its guiding philosophy of serving customers, employees, and investors, in that order. This is clicking: Contented customers and employees have made ecstatic shareholders.

Now, however, the new accounting rules have prompted Whole Foods to begin rationing its awards of stock and options so earnings eventually are dented no more than 10%. Whole Foods isn't saying how much this will cut team members' compensation. But we can guesstimate. In the past four quarters, Whole Foods posted earnings of $147.5 million. Had the costs of its stock-based pay been deducted from profits, earnings would have come to $120.4 million, more than 18% less. Had Whole Foods wanted to limit the earnings hit to 10%, it would have had to cut the value of its option awards by perhaps 40% or 50%.

Whole Foods declined to discuss this with me, and it has yet to explain its plan to employees. It told Wall Street analysts that by accelerating the vesting of outstanding options -- forcing a $10 million extraordinary charge this year -- and by paying team members a bit more in cash, it may soften the blow. After calling the accounting rule "stupid," CEO John Mackey on Feb. 9 assured analysts that Whole Foods will be growing so fast, the drag on earnings will barely be felt.

That could happen. Or, if management doesn't balance the hopes of its employees and Wall Street quite right, the team members whom Mackey credits with creating Whole Foods' success won't feel so rich. Then, some on the team might start whistling another of my '70s favorites, the Roberta Flack and Donny Hathaway duet Where Is the Love?

By Robert Barker

    Before it's here, it's on the Bloomberg Terminal.