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Why Did Wall Street Freak Over Whole Foods Earnings?

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By many accounts, Whole Foods (NASDAQ: WFM  ) just had a record quarter. Heck, even CEO John Mackey has said as much. The high end grocery store raked in its highest quarterly revenue to date, and saw a number of critical financial metrics grow promisingly along with it.

All that said, you'd think Wall Street had heard a much different story, based on how Whole Foods stock performed immediately following its earnings release. The stock dipped 11% on Nov. 6th, after reaching a new record high of $65.24 on Oct. 25. Why did Mr. Market turn tail and run so fast? And what does that mean for Foolish investors?

Admitting difficulty
Mackey expressed particular pride over the fact that Whole Foods had "raised the bar even higher on standards of transparency" this quarter. Following in Chipotle's headline-making footsteps, Whole Foods became the first and only public food retailer in the U.S. to commit to labeling genetically modified organisms (GMO's) in its products.

That transparency went a bit further than vowing to be clear about ingredients. On its last earnings call, Mackey and several other Whole Foods executives frankly admitted that their company was not immune to the still-sluggish economy. Mackey specifically said that overall consumer confidence had dropped to a six month low, although Whole Foods core customers remained "fairly resilient."

 Whole Foods execs also explained that their latest crop of six new stores in Boston (an unusually high number by their own admission) had been cannibalizing itself. They expected this happening to be a temporary phenomenon, and that the next quarter would be "great." That kind of stark honesty, however, combined with implications that industry competition is increasing, might have been a little too much for the market to handle at once.

Sizing up the stats
There might be a lot of factors challenging Whole Foods' room for growth, but the numbers on its quarterly report don't lie. Revenue reached $2.98 billion, same-store sales went up 5.9%, and Mackey also applauded the company's "record gross margin performance" of 35.6%.

Whole Foods' operating margin also went up, from 6% to 6.4%. That increase might seem slight, but for a grocery store to actually boost the amount of money it retains after paying operational expenses (especially during a quarter where it opened 12 new stores) is an impressive feat.

Additionally, Whole Foods continues to hold a solid chunk of market share within the enormous grocery store industry, even as a supposed niche company. According to the National Grocers Association, the industry has generated $129.5 billion in annual sales, and at $12.9 billion trailing twelve months, Whole Foods' revenue makes up about 10% of that. Grocery store juggernaut Kroger (NYSE: KR  ) holds a much higher percentage of market share (approximately 76%), but only retained $317 million (or 1.3%) of last quarter's $22.7 billion, while Whole Foods held on to $121 million of $2.98 billion. Whole Foods also has more cash on its balance sheet, at $290 million compared to Kroger's $226 million .

Is this stock still fresh?
The market might have acted a little melodramatically when Whole Foods stock dropped so sharply after its earnings report. There will always be concerns about stiffening competition and market share owndership, but those are typical to the public food retailer industry (and honestly, pretty much every other industry, too). After detailing its last quarter's growth story, Whole Foods shows no signs of slowing at the moment, and its core customers' loyalty is keeping it going strong, even during a difficult economic climate.

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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2013, at 2:42 PM, PRODOD wrote:

    You understate the hazards disclosed by WFM in the most recent report. If you parse the conference call more carefully, it is clear that the poor results of the Boston expansion throws WFM's growth projections in their business plan into question, in that, if their new stores in major MSA's flop they will be forced to rely on less productive MSA's to reach their growth targets of about 700 additional stores by 2025. In other words, future growth my be tougher to come by & margins may shrink. Taken together with WFM's lofty multiple and the new interest of Kroger, Walmart & Safeway in WFM's 'organic' market niche it is not at all suprising that the smart money has been selling the stock. Near term support is at about $52-53 and any move below that level could take WFM much lower.

  • Report this Comment On November 20, 2013, at 5:40 AM, lisalisarose wrote:

    I live near a Whole Foods and I never want to live away from one again!!! Such nonsense about it being too expensive, it's like any other shop with pricey items and great bargains if you look. Every cold cut, all the prepared foods - all chemical free. Love!!!! Yes, I own the stock :)

  • Report this Comment On November 20, 2013, at 5:45 AM, lisalisarose wrote:

    Oh, and Walmart's weepy little organic section is competition? Right... I'll believe that like I believe I"ll be able to pick up WFM for $53.00 any time soon - hey, if I"m wrong I'm buying Whole hog.....

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9/30/2016 11:33 AM
KR $29.89 Up +0.39 +1.31%
Kroger CAPS Rating: ****
WFM $28.47 Up +0.46 +1.64%
Whole Foods Market CAPS Rating: ****