Whole Foods Market Inc. (WFMI) has a reputation as a premium grocery store with premium prices, hence the unflattering nickname “Whole Paycheck”. Its airy stores are beautifully fancy, the food selection is unique and diverse and its pre-packaged meals are more often than not a healthy alternative to other “fast food” options. This formula had been working well for the Austin, TX-based company and WFMI investors had profited from its success as its share price advanced almost uninterrupted from the late 1990’s through 2005. During that time, the Whole Foods brand had been sweeping the nation and the company aggressively opened stores and acquired rivals–most recently grocer Wild Oats. However, the company’s fiscal third quarter results would seem to indicate that the heady days of roaring expansion are in the past.

WFMI experienced a 31% decrease in net income to 24 cents a share from 35 cents a year ago. (Analysts’ estimates had called for earnings of 31 per share.) Overall revenues grew by 22% but sales growth will be much harder to come by in the coming quarters. WFMI slashed its sales growth target range from 25%-30% all the way down to 6% -10%. Likewise, the company revised its same-store sales growth forecast from 7.5%-9.5% to 1%-5%. In the quarter just ended, same-store sales growth was around 3%, which was a disappointment.

WFMI is getting crushed today as the stock is down more than 15% at the time of posting, which extends the more than 50% decline endured thus far in 2008. This has caused WFMI management to reassess its break-neck growth targets. For starters, the company is scaling back store openings to just 15 in the next year, whereas they had previously planned for 25 to 30 new stores. In addition, discretionary capital expenditures on existing stores are going to be halved in the year ahead. Also, Whole Foods is temporarily suspending its dividend, which had offered a fairly attractive 3.7% yield.

One of Whole Foods’ strengths was that it offered grocery shoppers a luxurious and distinctive shopping experience. However, it appears that many consumers consider shopping at Whole Foods an extravagance during rockier economic times. The company deliberately branded itself as a purveyor of premium quality groceries and this has recently become more of a stigma than a benefit in the eyes of value-seeking shoppers. When you combine this shift in consumer preferences with management’s staggering reduction in its prior growth plans, you have ideal conditions for a brutal bear market for WFMI.

At Ockham Research, we rate WFMI a Strong Buy as the valuation is too compelling to overlook. To demonstrate the stock’s attractive valuation, we use two common valuation metrics: price-to-cash earnings and price-to-sales. Whole Foods has historically traded between 13.3 and 24.6 times cash earnings, while the current measure is 65% below the average of 18.95x. Whole Foods’ price-to-sales is normally between .78x and 1.42x and the current level is only .31x — 72% below the average. So, for Whole Foods to return to these historically normal ranges the price would need to rise to over $45. When a stock has dropped as much as Whole Foods has, it is probably either a great long term buy or a falling knife. We believe that Whole Foods has a business that is viable and will survive this downturn. We also take some comfort in the company’s recent efforts to lure back value-oriented shoppers.