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Can Whole Foods Market Succeed in Making a Turnaround?

September 26, 2014 | About:

Whole Foods Market (NASDAQ:WFM) reported relatively lower earnings in the second quarter of 2014. Its net income came in at $142 million that were flat as compared to the same period a year earlier, but fell short of consensus estimates of $0.41 earnings per share. However, its top line increased about 10% year over year to a record $3.32 billion.

But Whole Foods' same-store sales have been sliding for quite some time now. It reported comp store growth of 4.5% that was below the 6.9% growth the company had registered a year before. Moreover, it has reduced its sales and earnings outlook for the current financial year that led its stock to decline about 20%.

However, all was not bad for the shareholders, as Whole Food paid $45 million to its investors in the form of quarterly dividend and repurchased approximately $55 million of the total outstanding shares. Whole Foods reported $282 million in cash from operation during the quarter and invested about $143 million in CapEx, of which $85 million in new stores.

Improvements expected

Whole Food remains confident in its ability to gain market share and expects to increase its sales by $11 billion, to approach $25 billion over the next five years. The company is investing heavily to get the maximum out of the unmatched growth opportunity it has ahead. Whole Food has signed nearly 56 new leases and has a record 114 stores in its development pipeline. Whole Food expects to end the year approaching 400 stores in the region and cross the 500-store mark by the end of 2017. In addition, the company sees a demand of about 1,200 WFM stores in the U.S alone.

Whole Food has increased its operational square footage 8% to $14.2 million, expanding its reach to 374 stores across 41 states in three countries. The company had opened eight stores in six new markets at the end of the first quarter, and during the second quarter it inaugurated three more stores. Whole Foods has experienced strong sales momentum in these new stores, and averaged approximately $743,000 per week, which translates to $1,000 in sales per square foot.

Its new stores now have the productivity level of 86% and a contributing margin of 4%, which is a great sign for the company, and should improve its overall margins in the upcoming quarters.

Aggressive moves

In addition, Whole food is aggressively reducing its costs through initiatives such as cannibalization that helped the company to reduce its store expenses drastically. Whole Food's value strategy has helped the company achieve significant improvement in its relative pricing position, with improvements of about 400 basis points in some cases. Whole Food further expects that these crucial investments will translate into higher sales growth going forward.

Apart from this, the company sees tremendous opportunity ahead as it offers thousands of items to its customers that can only be found at Whole Food Markets.

The company continues to build exclusive partnerships through efforts like its local producer loan program, through which the company has provided over $12 million in loans. This has also helped the company to build relationships with more than 176 suppliers that should gear-up its growth in the future.

Whole Food is also investing aggressively in the digital technologies to better meet and connect with its customers, both physically and digitally. The company has various plans such as click and collect, direct delivery, payment at food venue using Square, a mobile app, and affinity programs that should enhance its sales going forward. It has also expanded access to its e-store from that of the holidays to full year that will attract more customers to its stores.

Conclusion

Whole Food currently trades at the trailing P/E of 24.51 and forward P/E of 21.51, with PEG ratio of 1.80 for the next five years indicating tremendous growth prospects for the company in the future. It has profit and operating margins of 4.14% and 6.75% respectively, while return on investment looks solid with the yield of 14.68%. Its operating cash flow is robust with $1.04 billion at its disposal to cover its total debt of $62 million. Moreover, the analysts have forecasted CAGR of 13.51% for the next five years; signify potential prospects for the company going forward.


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