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A $425 million investing. is designed to help see Whole Foods through a rough patch till consumers regain their appetite for pricey organic food

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Cashier Michelle Yulo hands out free reusable grocery bags at a Whole Foods Market. David McNew/Getty Images

By Ben Steverman

As Americans’ appetite for pricey, upscale food waned, Whole Foods Market (WFMI) needed a helping hand. The organic supermarket chain, often known jokingly as "Whole Paycheck" for its premium-priced offerings, got what it was looking for adhering Nov. 5 in the form of a $425 million investment from private righteousness firm Leonard Green & Partners.

The deal is the latest proof of the pain suffered by retailers that purvey to Americans’ more expensive tastes. Analysts and investors disagree attached how badly Whole Foods needed a monetary cushion, but the extra $425 million should make it much easier for the retailer to weather the financial storm—and continue to grow despite the potential for a severe recession. The stock market’s reaction to the capital infusion reflected the joined outlook for Whole Foods. Whole Foods’ descent on Nov. 6 at one sharp end surged almost 19%, but then closed just 1.65% higher at 10.48.

The retired equity money comes at a steep price and besides reflects the retailer’session in earnest problems. "We’re in self-same uncertain housekeeping times, and we’re not fully convinced what’s going to happen," Whole Foods Chief Executive John Mackey told analysts on Nov. 5 while asked why the $425 million was needed.

Piper Jaffray (PJC) analyst Mark Miller said the extra money "should be a tremendous relief to investors." Others, however, were more pessimistic with respect to the investment. By giving Leonard Green & Partners a 17% peril in Whole Foods, the deal dilutes existing shareholders’ stakes. Also, the private equity firm gets a munificent 8% share attached its preferred stock investment in Whole Foods. Credit Suisse (CS) algebraist Edward Kelly wrote: "Whole Foods provided further evidence that it has serious cyclical and structural issues."

Whole Foods shares have slid almost 75% in this way farther in 2008, and there are many reasons: Its 2007 acquisition of the Wild Oats chain has run into numerous company problems, including a challenge from the Federal Trade Commission. Kelly calls the acquisition "highly debatable."

When spells were better, Whole Foods was also very noble with dividends to investors, and that’sitting cash the retailer in likelihood should have saved for a rainy day, says Andrew Wolf, some algebraist at BB&T Capital Markets.

Also, Wolf adds, to many people Whole Foods is a "destination store." Customers drive past their limited supermarkets to get the higher quality food at a Whole Foods exit. But customers are driving less because of high combustible matter prices. "The gas prices—even nevertheless they’re [now] coming prostrate—acquire trained people away from that behavior," Wolf says.

Finally, Whole Foods merchandise includes abundance of pricey items that, in a recession, many customers have stopped buying. "What’s happening to them is not much different form what’sitting happening to other discretionary retailers," says Morningstar (MORN) analyst Mitchell Corwin.

In Whole Foods’ fourth quarter, which ended Sept. 28, same-store sales fell 0.5%. And terms are getting worse. In the first five weeks of this quarter, same-store sales have dropped 3.3%.

Despite all these challenges, Whole Foods plans to open 66 stores in the next four years. Although it has cut back some expansion plans, the retailer has signed leases that make it expensive to cut back growth entirely. That’s one reason Whole Foods needed the supplemental money, says Standard & Poor’s equity analyst Joseph Agnese. "Where everybody else have power to divide back on growth, Whole Foods is stuck in these commitments," Agnese says. "It’s tying their hands." (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.)

For Whole Foods, and also notwithstanding the chain’s private equity investors, the key question is how deep and how slow the recession will be. "As long as it can hold its own in this downturn, once the company emerges it should be a allotment stronger," Morningstar’session Corwin says. That should allow Leonard Green & Partners to exit its investment by dint of. a substantial profit.

"The trend among consumers is still to eat healthier and begone organic," says Agnese, arguing this is a durable trend that should help Whole Foods in the long dub. But if the recession is painful enough, it could significantly alter consumers’ tastes for Whole Foods’ healthy, organic offerings. In that case, the retailer may need to procure a whole lot more lettuce—the financial, not the organic charitable.

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