Whole Foods Market: Has the Long-Term Story Changed?

Whole Foods Market  (NASDAQ: WFM  )  has entered 2014 with much of its typical momentum, yet its forward guidance is fraught with uncertainty. During last week's conference call with analysts, management tried to explain its ambivalence regarding the company's revenue prospects. On one hand, the outlook has never been better, as Whole Foods has a record 107 stores in its development pipeline.

And yet co-CEO John Mackey was frank when asked about the recent trend of comparable-store sales growth. Mackey communicated that comparables have declined because of a number of factors, implying that there is no single point of execution available for a quick fix. While Whole Foods reported a brisk 5.4% comparable-store sales increase for the quarter, this mark falls below the baseline of roughly 7%, which the company has come to think of as a long-term benchmark. Management cited the inclement weather, which has plagued the country this winter, while acknowledging that competitive pressures may also be hindering sales increases. It also offered that some short-term cannibalization is likely occurring in urban markets such as Boston, where Whole Foods has opened multiple locations in close proximity. 

As a tactic to shore up revenue growth, it's possible that we may see Whole Foods shift its emphasis somewhat in the near term to its new store pipeline. Accelerating stores in development may be a relatively painless way to ensure that the company's long-term growth story remains intact.

Below is a table of Whole Foods' store count at the end of the first quarter during each of the last four years, as well as the number of stores in the company's development pipeline. Whole Foods counts a store as part of its development pipeline when it has signed a building lease (or ground lease when the company will build its own structure). 

Source: Company SEC filings.

It took Whole Foods 30 years to reach the 289-store mark, in quarter one of 2010. But in the last four years, the company has added nearly a third more stores. Both the growth rate of new stores under development and growth rate of total stores have picked up aggressively over this period.

The development pipeline is also growing in relation to existing stores, as can be seen in the table. In 2010, the pipeline of stores was equal to 17.6% of the company's total base. In 2014, the pipeline relative to total stores now is equal to 28.6% of operating locations. A larger pipeline relative to existing stores gives management more flexibility when it projects financial performance. Management can look two to four years ahead and either accelerate or diminish the pace of new square footage as it sees fit to meet revenue goals.

Whole Foods North Miami. Source: Ines Hegedus-Garcia under Creative Commons License.

If Whole Foods shifts its emphasis, will this affect profit?
Should Whole Foods choose to speed up the introduction of new retail square footage, it will have to keep a tight rein on costs. The company has excelled in recent years in controlling pre-opening expenses. Five years ago, in fiscal year 2009, Whole Foods spent $3 million in pre-opening expenses, including rent, for each new store. By fiscal year 2013, it had decreased this average expense by nearly 50% to $1.7 million per store. Management will need to continue its high performance regardless of its new store opening pace. Current investments in price throughout the Whole Foods store base (discounting to gain new customers) will leave little room for the development team to err as it handles an ever-increasing number of store openings each year. 

Another metric related to profit that may be affected if new store openings climb is the company's return on invested capital, or ROIC. As I've discussed previously, management may decide to incur a modest amount of debt in 2014. This will become more likely should management choose to shift to a faster store opening schedule. New debt combined with higher fixed asset depreciation numbers (a function of a recent trend toward larger stores) may stall or slightly decrease the company's current ROIC of 13.3%. However, over the long run, the investment in new stores should equalize ROIC and eventually send it higher. 

Whole Foods' potential market keeps expanding
At a current count of 373 stores, Whole Foods keeps finding new opportunities to branch out, in part because its target demographics keep expanding. David Lannon, executive vice president of operations, mentioned on the earnings call the encouraging first week sales of a new store in Jackson, Miss., "a place we never thought we'd have a store 10 years ago." With each passing year, the grocery category of natural and organic foods continues to race ahead and create market opportunity. For Whole Foods, which just expanded its total potential opportunity from 1,000 stores in the U.S. to 1,200 based on a study of metropolitan markets, ramping up on those glistening new locations may be the best course of action.

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  • Report this Comment On February 19, 2014, at 3:09 PM, todamo13 wrote:

    You nailed it when you said the target demographic for Whole Foods is expanding.

    The target demographic for Whole Foods is people who care about their health, who don't want to be eaten alive by medical expenses, who care about their food being humanely raised and sustainably grown, who care about supporting sustainable, organic, family farming, who care about avoiding the disastrous toxic chemical industrial agriculture system, who care about avoiding the disastrous low-quality industrial food system, who care about avoiding Monsanto and GMOs....

    Everyone who has one or more of those concerns is a possible Whole Foods customer, and the ranks of people with those concerns are growing every day.

  • Report this Comment On February 22, 2014, at 2:35 PM, cmalek wrote:

    How many of the WFM store locations are in the white/well to do neighborhoods, and how many are in the Inner City? The very people that need healthy food the most are the ones that WFM excludes from its target demographic. The very people who need healthy food the most have no access to WFM stores and even if they do, they cannot afford to shop in those stores for that healthy food. WFM is an elitist, covertly racist company.

  • Report this Comment On February 23, 2014, at 9:39 AM, TMFfinosus wrote:

    cmalek,

    I don't agree with you at all on this. I appreciate your comments on my articles even though we rarely agree. I think you have a sharp mind. But I also think you present a dyspeptic, bitter attitude that sometimes negates the value of your comments. Whole Foods is not racist overtly or covertly. You are utterly uninformed on this one my friend; please see at least the following two articles:

    http://www.retailwire.com/discussion/16817/will-whole-foods-...

    If you have time, read this one too:

    http://reason.com/archives/2011/04/19/a-whole-foods-fight-in...

    Clearly, Whole Foods has generated massive profits from setting up shop in affluent locations. But they are walking the walk, from investing in inner city locations, to providing a livelihood for thousands of small scale suppliers in the U.S. and around the world (many of them quite poor in Africa and Latin America), to employing a very diverse employee base and providing excellent benefits. Can you name for me just one corporation the size of Whole Foods that is doing the same or better? I eagerly await your response.

    Best,

    Asit

  • Report this Comment On February 25, 2014, at 9:57 AM, cmalek wrote:

    @asit:

    When Whole Foods is as plentiful as A&P, C-Town or Key Foods in the Inner City, then you'll have a case. Until then the stores in Midtown Detroit and Jamaica Plains are just token n.....s that are supposed to show how egalitarian WF is.

    I just checked the WF official site. Of the 60 or so Whole Foods within 200 miles of my house, all but three are located in some of the most affluent towns in the country. Of the three stores not in high income areas, only one is located in what can be called a working class neighborhood.

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