Will Whole Foods Market Finally Get Religion on Pricing?

Whole Foods Market's (NASDAQ: WFM  ) second-quarter earnings report yesterday showed that even though the organic produce and natural foods market is expanding and giving consumers many options, it's not growing so fast that everyone can evenly keep pace. The company with the name synonymous with the industry indicated that investors can no longer count on the retailer's reputation to carry it ahead.

Reported sales of $3.3 billion were another record for the supermarket chain, but same-store sales came in weak at just 4.5%, below analyst expectations and a bit short of the 5.4% growth in comps it saw just the quarter before. Even CEO John Mackey could no longer deny the difficulty its many rivals pose to its once-preeminent position and was forced to admit the supermarket was "overly optimistic" of its own strengths.

While obviously still the go-to outlet for high-quality organic produce, the premium it exacts from its customers for the privilege of shopping at its stores is going to need to be reexamined. It may have been on a mission over the past 36 years to change consumers' shopping habits, as Mackey says, but the results speak for themselves and now it needs to turn from evangelizing to ministering the flock.

Whole Foods cut its 2014 guidance for both same-store sales and earnings this quarter, the third time it's been forced to do so, because not only does it face peer pressure from the likes of recent market entrants Sprouts Farmer's Market and The Fresh Market but it also faces challenges from conventional supermarkets as well, like Safeway and Kroger, which has made a special effort to highlight its organic produce offerings.

Even Wal-Mart has stepped up its game by bringing in more organic produce and just recently announced it would offer the Wild Oats brand in 2,000 stores at prices lower than you'd typically find on organic products.

Certainly, Whole Foods realized the landscape was changing before now. In the fourth quarter, it pointed to growing competitive pressures as one reason that comps came in at their slowest rate in four years and that it was pushing its 365 Everyday Value brand, not to mention testing out a discount loyalty card program.

The effect, though, has been the loss of pricing power, even as Whole Foods spins it as showing how it's responding to the new environment. Average price-per-item growth fell 160 basis points, from 3.3% to 1.7%, since just last year's third quarter alone. While Mackey didn't want to dwell too long on how it was taking pricing -- though he did say they were able to cut input costs some so that it wasn't all raising the ticket -- a tough economy, tight competition, and flat inflation on its inputs shows Whole Foods was still extracting a premium from its customers. 

Maybe that's really part of the whole "overly optimistic" thing Mackey referred to, thinking Whole Foods could continue raising prices above its costs and still have customers flock to its stores. With a plethora of alternatives out there, though, customers are pushing back and its actions seem to only reinforce the "Whole Paycheck" nom de guerre it's been saddled with.

That doesn't mean Whole Foods is finished, or that Sprouts and Fresh Market will become the new industry leaders. What it does suggest is that the leader in organic produce will need to become more aggressive than it's already been, and that's likely to impact margins going forward. 

The market whacked Whole Foods' stock today, sending it tumbling almost 20%, perhaps reflecting the pushback analysts were giving Mackey that it was doing all it could to meet the threats in the market. One analyst said it didn't seem management was taking them seriously, and Mackey challenged another who thought they could do more by saying, "It's easy to say 'scorched earth,' if you're not actually running a company and responsible to a variety of stakeholders."

Not that Mackey's not correct, and he said they have their strategy and they're following it, but he sounded a bit defensive -- meaning investors may want to wait to see if Whole Foods management got religion from the current quarter's results before deciding this is a doorbuster sale on its stock.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Read/Post Comments (7) | Recommend This Article (2)

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 May 07, 2014, at 6:28 PM, ScottAtlanta wrote:

    A critical article of WFM? Now?....AFTER the stock crashes? until now Fool's been pumping this stock from the low 50's as a "best buy." Each article I happened to open on Fool.com was pro-WFM....like wide eyed school boys Fool sent to the front lines to defend and sell this loser. One articles main contention was BUY b/c the price used to be higher...lol.

    I didn't buy it....no moat, over priced....a P/E in low 20's puts price into low 30's....that's enough of a premium to own this "leader." but I wouldn't bother....the "conscious capitalism" is self-absorbed and self-satisfying spin...

  • Report this Comment On May 07, 2014, at 8:42 PM, AEMMnyc wrote:

    With regard to the dramatic drop in the stock price of WFM, I think the Fool's rule about only buying what one can keep track of should apply to the Fool's own recommendations. Can the Fool keep its research apace with its recommendations? Are mechanical trades a factor, now, such that the Fool should be disclaiming its research and considering the impact on the market of its recommendations? So the challenge for the Fool will be whether it can establish a more rational basis for picking a stock, other than as a synonym for "go long!"

  • Report this Comment On May 07, 2014, at 9:20 PM, Nando15 wrote:

    Growth in average price per item was 1.7%. As per motley fools 10% Promise the analyst states that they still believe in the long term future and would like to see average price per item pick up to 3%. However, having read the transcript of the earnings call the entire focus of the strategy going forward seems to be increasing competitiveness and "price investment." I don't understand how the motley fool expects a rise in average price per item while at the same time focusing on increasing value?

  • Report this Comment On May 08, 2014, at 5:26 AM, TMFCop wrote:

    Nando15,

    Each author is allowed to view a situation independently of another with no corporate line to hew, so I won't take on anyone else's viewpoint, but I think seeing average price per item nearly double is going to be hard in the immediate future at least.

    As Mackey sort of explained in the conference call, there are a couple of components to API, including cutting prices, which everyone seemed to think needed to be more aggressive, and cost cutting. If all things were in stasis, a company just cutting costs could see API rise. Mackey's point seemed to be that they were aggressive in their cuts in this low inflation period, but they also cut costs so API wasn't down as much as it might appear it should be.

    Since you can only do so much cost-cutting before you've trimmed all the fat and are digging into muscle, the more it promotes its 365 Everyday Value brand the the less we'll see API rise. And with competition particularly from supermarkets and niche rivals not abating, it will crimp its pricing power going forward. I just find it difficult to see them sustaining API at 3%.

    Moreover, falling API is going to cut into same store sales too. If you're selling the same amount of product at a lower price your comps are going to come down. I think there is the very real possibility WFM becomes commoditized at some point.

    They have the premier name in the space, so they'll likely be above Wal-Mart's pricing, but I don't think the premium they've been able to exact from their customers before will be nearly the same going forward.

    Thanks for reading,

    Rich

  • Report this Comment On May 08, 2014, at 7:06 AM, Drdoug165 wrote:

    The fools with John Mackey on their board have continued to push this stock which has been crashing since I purchased it

    The fact that Mackey publicly compared obamacare to Nazi policies, thereby offending obama largest demographic group, "women" and his largest customer base is suicidal. The fools if they have any integrity should get rid of this man and his obsession with Alleged Nazi policies by our elected president

  • Report this Comment On May 08, 2014, at 5:23 PM, Fooledagaintoo wrote:

    I agree with the above post.The Fool lost a lot of credibility when it put the CEO of WFM on their board, particularly given Mackey's previous problems of self promoting WFM stock while bashing a competitor under an alias name on a blog. This ended up getting him in trouble with the SEC. This coupled with the Strong Buy and "CORE Portfolio" status that Motley has rated this stock causes one to question the wisdom of the entire Motley investment team, particularly in light of the reality of this stock being down over 30% for the year and the company continuing to revise downward unrealistic earnings estimates. If one were not so connected to past predictions and influences from the board, I suspect the Fool would be stating. "We blew it, time to bail on this over-priced stock as the earnings growth potential simply is not what it used to be".

  • Report this Comment On May 10, 2014, at 9:20 AM, lpv wrote:

    I agree with the above article particularly "causes one to question the wisdom of the entire Motley investment team". How Motley could promote this deceptive position on WFM as a core and best buy now leads me to lose a lot of respect for the organization.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2948405, ~/Articles/ArticleHandler.aspx, 11/27/2014 6:08:27 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement