Drew Pascarella, a lecturer of finance at the Samuel Curtis Johnson Graduate School of Management at Cornell University explains why Amazon is the perfect suitor for cash flow-challenged Whole Foods Market.
“This is a very smart deal. Whole Foods Market is a great brand and a good business, with a healthy income statement. However, a look at Whole Foods Market’s free cash flow generation tells a different story. Approximately 65 percent of Whole Foods Market’s operating cash flow is spent on capital expenditures; opening new stores. While Whole Foods Market is profitable, they aren’t generating what really matters: significant free cash flow. Whole Foods Market’s growth is fueled entirely by building new stores, which is extremely capital intensive.
“The reason for this is simple: Once the excitement of a new Whole Foods Market store wears off, sales at that store decline. The only way Whole Foods Market can grow is by opening new stores.
“Enter Amazon, who knows more about their customers than anyone else in history. How does Whole Foods Market keep customers coming to their existing stores? Amazon to the rescue.
“Private Equity firms have been swarming around Whole Foods Market for some time, but a leveraged buyout doesn’t work; the company simply does not generate enough cash to generate an attractive return.”
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