Whole Foods Market (WFM, Financial) recently released impressive results for the second quarter 2015. The company cheered the investors with solid sales growth and healthy returns. However, the revenue fell short of consensus estimates marginally, which it thinks will recover in the upcoming quarters. The results are solid and the past stock performance also indicates that the investors are taking these results positively, and, on the back of it, it is expected to gain market share in future. But, things doesn’t seem so easy for Whole Foods Market as it is facing stiff competition with the low price retailers.
To fight this, Whole Foods Market is undertaking several strategies which will we discuss in detail later. Let us have a look at the overall business and can it be a good investment option as compared to its competitors such as Kroger and Wal-Mart which also moving impressively in the market.
Trying to execute a comeback
During the second quarter, Whole Foods Market posted a revenue of $3.65 billion which fell short of consensus estimates of $3.7 billion. On the other hand, it saw a solid 10% growth in sales which clearly indicates good customer loyalty. The company also gained market share on the back of its solid performance on the earnings front as well. It ended second quarter with an impressive 14% improvement in the EPS.
There is a solid growth around Whole Foods Market’s camp. The company is in solid position, and, it is now trying to improve its profitability further, and, for this, it is focusing on various initiatives. Whole Foods Market has a good brand image in the market and the company wants to retain this image for future as well; so for this, it is now trying to shift the customer’s focus towards fresh and healthy food by offering highest quality, broadest selection and best in class customer service. This is not only a short term but also a long term initiative by the retailer.
The demand for the organic and healthy food is increasing day by day as the customers are becoming more health conscious in the U.S. To meet this growing need, Whole Foods Market is coming up with various new concepts to grow the customer engagement to its stores. For this, it is planning to launch a new and unique branded store concept, featuring a modern streamlined design, innovative technology and a curated selection. This is expected to attract the customers which are specially looking for high quality food at great prices.
But, as the organic food market is growing, there are other peers such as Kroger and Wal-Mart which are a threat to Whole Foods Market, as these are providing the same products at attractive prices than Whole Foods Market. To remain in that space, Whole Foods Market has been focusing in introducing a new store concept, which is mainly targeted at the millennials.
This is a big reason to worry for Whole Foods Market. It is now trying to change its reputation as a high priced store, as it is now focusing on opening a separate chain of lower priced store. This will also be wise move as it will be now be competing with its rivals at same price levels. This new format will help Whole Foods Market to expand its footprints while also diversifying its business.
Conclusion
Looking at the fundamentals, the stock is reasonable with a trailing P/E of 26.65 while the forward P/E of 22.30 indicates smooth earnings growth in the near term. The organic market is growing and a solid profit margin of 4.02% will help it to gain much market share in future. Also, considering the industry growth and initiatives that it is taking, the stock can also be a solid long term holding. I would like to suggest the investors that Whole Foods Market is definitely a good pick.
