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Sep 13, 2016

S3 BLACKLIGHT: Whole Foods Short Sellers Coming Back For Seconds

Whole Foods Markets Inc. (WFM US) is down over 16% year to date, hitting its year to date low of $28.15 today, price levels we have not seen since August 2011. Whole Foods is off 57% from its historical high of $65.24 set it October 2013.

While Whole Food’s success has come from its dominance in the natural and organic food niche traditional mega grocers have effectively entered this high margin sector and both cut into Whole Food’s market share and premium product profit margins. With Whole Foods using promotions and a new loyalty program to entice new customers it is very wary of alienating any of their existing upscale customer base. In an attempt to expand into less upscale markets to increase its green footprint, Whole Foods has begun launching its “365” stores, a smaller and lower cost alternative which they hope will lure younger and less affluent shoppers from stores like Trader Joe’s to its brand. Whole Foods continues to look for expansion locales that target their upscale customer base they continue to look over their shoulder as both Kroger (KR US) and Wal-Mart (WMT US) are also getting on the gluten free road to new customer acquisition.

Whole Foods short interest has averaged almost $1.1 billion since 2014 but pulled back, below $1 billion, for most of 2015. After falling below $750 million by midyear 2015, short sellers came back and pushed balances back up to the $1.1 billion level by year end 2015. Short interest climbed steadily in 2016, topping out at $1.47 billion by late June after Whole Foods hit its year to date price high of $35.17 on 6/7. As Whole Foods price dropped, short sellers covered their positions to lock in their profits and short interest dropped below $1 billion by the end of August.

Recently we’ve seen the Blacklight Relative Short Velocity Indicator, a measure of the real-time relative change in shorting activity, begin to trend upward after over two months of a downward trajectory. Whole Foods short interest has once again topped the $1 billion level and has been comfortably over $1.1 billion over the last several days. Whole Foods is still a general collateral borrow, the easiest to borrow securities at the cheapest rates, and there are still millions of shares available to borrow.

Analysts are predicting increased competition, strained margins and a stalled economy to continue to pressure the grocer segment and same store sales for most of the grocers to be flat at best. Whole Foods full year sales are expected to drop and along with it their EPS. Whole Foods short sellers who have tasted the perfectly round unblemished apple are now coming back for another bite. 

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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