Here’s What Everyone Has Missed About WFM Stock
Whole Foods Market, Inc. (NASDAQ:WFM), the largest organic grocery store chain in the United States, saw quarterly profits of $0.44 per share reaching beyond expectations of $0.41. The achievement is all the better because Whole Foods managed to control costs while lowering its prices. WFM stock gained over five percent to resume trading in the $30.00 zone.
It hasn’t been all cherries in Whole Foods’ basket. Whole Foods stock has dropped 30% over the past year. The Whole Foods brand, the very definition of “organic” in North America, has been very successful. The company’s focus on healthier, and no doubt more delicious, food products has educated more than one generation in the importance of eating better. So much so that it has spawned competitors.
That it has taken this long for others to catch up is the real surprise. Whole Foods has been to retail organic and quality food what Ford Motor Company was to the automobile. Like all successful companies, Whole Foods has also reached a period of relative stagnation. The rate of innovation of service or product can no longer match the hype surrounding the brand.
Whole Foods started amid local hype in 1980 in Austin, Texas. It promoted the then-forgotten concept of healthy eating and the innovative social credo of fair trade. Now, the company may be suffering from the start of disaffection from its customers. Still, Whole Foods managed to beat expectations in some key parameters in the second quarter of 2016.
Whole Foods had adjusted earnings of $0.44 per share on revenue of $3.7 billion (+1.3%). Earnings per share beat expectations of $0.41 and revenue of $3.74 billion. (Source: “Whole Foods Market up after it beats on earnings per share,” CNBC, May 4, 2016.)
The scarier indicator was same-store sales dropping three percent—a bigger loss than Wall Street had predicted. The fact that Whole Foods opened 16 new stores in 2016 makes those statistics harder for analysts to swallow. (Source: “One number in Whole Foods’ earnings report should terrify investors,” Business Insider, May 5, 2016.)
Still, Whole Foods can find ways to win more customers and considering it sells admittedly higher-priced food, the retailer is even more relevant today than when it started almost 40 years ago. The awareness and demand to eat better has become ubiquitous in North American society. Moreover, the 18- to 29-year-old crowd has grown up bombarded by healthy eating and environmental activism. As more enter the workforce, they will contribute to Whole Foods’ sales.
The Whole Foods model has been so successful that even McDonald’s has decided to switch to healthier chickens. Chipotle, a restaurant chain that goes out of its way to source organic ingredients, owes much of its success to the healthy-food culture that Whole Foods has helped move from fringe to mainstream.
Whole Foods has gotten the message from its customers that some of the products might be too highly priced. The company’s next major move should aim to reduce costs to customers, who are increasingly finding more organic food bargains at retailers such as Wal-Mart, Kroger, or Target. Whole Foods’ “365” line is a step in this direction and it is supposed to expand to a whole (no pun intended) new brand. The first such store will open in Los Angeles later this year. (Source: “Whole Foods Sets Opening Date for New ‘365’ Store Chain,” Fortune, April 7, 2016.)
Investors should consider Whole Foods rather cheap, considering it traded at almost $54.00 per share a year ago. The company has a plan to address what its customers consider the chain’s main fault—high prices.