Whole Foods Market (WFM, Financial) disappointed the Street with its second quarter results as its revenue failed to match the analyst’s consensus. The company is facing stiff competition from its peers and is therefore struggling to increase its market share.
Smart initiatives
Taking note of this situation, the retailer has planned to open a new store concept to woo the young crowd--mainly the millennials. But analysts are skeptic about its new plan. Therefore, the big question is whether this new strategy will work as intended. Starting with its numbers, let's see in detail.
Its revenue for the quarter rose 10% from a year ago period to $3.65 billion, while earnings increased to $0.44 a share compared to $0.38 last year. Although its year over year growth is good; but analysts were expecting an EPS of 44 cents on revenue of $3.7 billion. Also, its comps growth slowed down to 3.6% during the quarter from a growth of 4.5% in the first quarter, which again is sign of weakness.
Overcoming the negatives
The management attributes this lag to intense competition and bad weather conditions. The latter is not a matter of much concern as weather is only seasonal and will not hamper its long term growth. Competition from peers on the other hand is a serious issue, which could hamper its growth going forward. In this direction, Whole Foods has planned to start a new store chain, keep in mind the young consumer population.
In addition, its digital platform could also boost its growth as improving trend has been seen in the past quarters. For example its average weekly Instacart sales increased to $1.5 million in the second quarter and continue to be the leading Apple Pay retailer with more than 3.3 million transactions. In the light of these positive results it will continue with such initiatives in the days to come. Along with this, new store addition will also be a significant factor as it translates into its top line.
Conclusion
However, if its above initiative actually works then it could provide the company with sufficient boost to take its business to the next level. The company has a forward P/E of 22.3, compared to a trailing P/E of 26.65, indicating further improvement in its earnings. But its P/S ratio of 1.06 is more than double the industry average of 0.44, which reflects that the current prices are a bit over valued. But its strong cash position of $738 million compared to a debt of $68 million is outstanding, which makes its long term prospects lucrative. Therefore considering the above factors, investors should perhaps avoid this stock for the moment as it might a bit over valued at current levels, but as discussed above it could provide a much better entry point in the future.
