Organic food grocer Whole Foods Market (NASDAQ:WFM) posted its second quarter earnings, which failed to meet the Street’s expectations. This led to a sharp decline in its stock price. Also, the company lowered its outlook for the year, which further disheartened its investors. Let us dig deeper.
Although revenue stood at $3.32 billion, a surge of 10% over last year, it failed to meet the estimate of $3.34 billion. The top line was affected by a number of factors such as, colder than usual weather which kept customers at home, a shift in the Easter to the next quarter and stiff competition from a large number of players. Also, same store sales grew by 4.5%, whereas analysts were expecting it to be more than 5%.
One of the key points of focus for Whole Foods is price. Since the grocer used to offer its products at a higher price previously, other competitors attracted cost-conscious customers by selling similar products at a lower price. Hence, Whole Foods also resorted to a strategy of offering lower prices. It slashed its product prices in order to win back lost customers. However, this strategy will take time to translate into growth in sales.
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Earnings for the quarter were $0.38 per share, almost flat over the prior year’s quarter. The bottom line was also below the expectation of $0.41 per share. Lowering product prices weighed on the company’s bottom line. Also, higher promotions in order to make customers aware of the food retailer’s lower prices led to lower earnings.
Nonetheless, Whole Foods has been taking initiatives to grow. The management declared its plans to open new stores with a target of 400 stores by the end of this fiscal year and a total of 500 stores at the end of FY 2017. However, store growth does not necessarily mean growth in revenue as it can lead to a shift of customers from the existing stores to the new ones with not much effect on the top line.
Whole Foods Market also lowered its guidance for the year, which disheartened its investors. Because of increased competition and lowered prices, the company expects its numbers to be affected in the coming months. As a result, it now expects same store sales to increase by 5.5% as against earlier estimates of 5.5% to 6.2%. Also, earnings outlook is in the range of $1.52 per share and $1.56 per share, whereas it was $1.58 per share to $1.65 per share, earlier.
Summing it up
Whole Foods Market is undergoing a difficult phase as evident from its lackluster numbers. Also, it faces stiff competition from other players who provide similar products at a cheaper price, forcing budget constrained customers to shift to from Whole Foods. Lowering its product prices has affected Whole Foods’ top line, enabling the company to lower its guidance. However, it is possible that the customers come back to the retailer and higher volumes offset the effect of a decrease in price, resulting in revenue growth. Hence, investors should wait till the specialty grocer shows signs of improvement.