Image by Robert Banh under Creative Commons license.
For years, Whole Foods Market (WFM) rode the wave of excitement over organic and natural foods to impressive growth, and shareholders benefited from the optimism about the grocery chain's future prospects. Yet coming into its fiscal fourth-quarter financial report Wednesday afternoon, the stock had dropped by 30% since February as nervousness about the sustainability of the company's growth made some risk-averse investors see Whole Foods as less of a sure bet. Despite rising competition from conventional grocers such as Kroger (KR -0.28%) and specialty chains including Sprouts Farmers Market (SFM 0.11%), Whole Foods restored investors' confidence in its growth prospects, and bullish shareholders hope that the worst is now behind them. Let's look at how Whole Foods did last quarter and whether it can sustain its winning streak.
Whole Foods brings in more green
Just from the company's headline numbers, Whole Foods reassured doubtful investors about its ability to produce solid growth. Overall revenue gained about 9% to a record $3.26 billion, resulting from a combination of organic growth and expansion efforts. Whole Foods opened a record 13 new stores during the quarter, establishing a new presence in seven markets that it had previously left untouched. Same-store sales growth of 3.1% wasn't as strong as Whole Foods has managed in the past, but coming off a fairly tough comparison in the year-ago quarter, the number didn't throw cold water on investors' enthusiasm.
On the income side of the financial statements, net earnings per share of $0.35 were also up about 9% from the year-ago level. Given that most investors had resigned themselves to flat earnings numbers from Whole Foods, the better than expected results were quite welcome. Return on invested capital of 14% remained near its highest levels in recent years, showing the fruits of Whole Foods' efforts to be as efficient as possible.
New Whole Foods location in Albany, N.Y. Source: Whole Foods.
Co-founder and co-CEO John Mackey noted his pleasure with the gains Whole Foods saw in market share and its record operating earnings, and he pointed to the company's efforts to ramp up its growth. "[w]e opened a record number of new stores and launched several strategic initiatives," Mackey said, "expanding choices for our customers and reinforcing our values as America's Healthiest Grocery Store."
How Whole Foods can get even healthier
Looking forward, Whole Foods saw signs of strength as the 2015 fiscal year began, with same-store sales in the first five weeks of the current quarter climbing at a faster 4.6% rate. For the full fiscal year, Whole Foods expects sales growth of greater than 9%, with comparable-store sales coming in at low- to mid-single-digit percentages and further expansion via about 40 stores. Whole Foods also expects pre-tax operating margin and return on invested capital to remain at their current healthy levels, and it will continue with its marketing, technology, and cost-containment strategies to reap the greatest possible benefit for the company.
Source: Whole Foods.
Moreover, Whole Foods continues to have confidence in its future growth to share more capital with its investors. The company boosted its quarterly dividend by a penny per share to $0.13, and while that represents a relatively minimal 1.3% yield at current prices, it nevertheless shows Whole Foods' commitment to its shareholders. Moreover, combined with spending $578 million to buy back 13.9 million shares in fiscal 2014, Whole Foods clearly believes that it doesn't need all of its capital to reinvest into its business.
The best part of Whole Foods Market's results is that the company has gotten some positive momentum at what was shaping up to be a critical time for the grocery chain. Competition from Kroger, Sprouts, and several other players in the food space isn't going to disappear anytime soon, and Whole Foods needed to establish that it was ready to face more serious challenges from its rivals. With initiatives like its Responsibly Grown program, its first-ever national branding campaign, and its status as the first supermarket chain to accept the Apple Pay mobile-payment system, Whole Foods has once again established itself as the company to beat in the upscale grocery space.
Whole Foods investors applauded its results, sending shares 7% higher immediately after the announcement in after-hours trading. The stock will have to climb more to make up for its losses earlier in 2014, but for now, Whole Foods has many investors looking up in their assessment of its future.
