Organic and fresh food retailer Whole Foods Market (WFM) announced fiscal first quarter earnings earlier this month. Earnings per share came in at $0.46, up 9.5% from the year-ago quarter, and a penny more than Wall Street estimates. The company reported record total sales of $4.7 billion, up 10% year-over-year and in line with estimates.
Digital initiatives and experimenting with price cuts on a range of products helped boost numbers for the quarter. Here are three key insights for investors.
Whole Foods Market in New Orleans. Source: Whole Foods Market
Comps growth accelerates ... at last
Comparable-store sales for the quarter grew 4.5% -- 2.3% from increased transactions and 2.2% from basket size. The comps growth, though lower than the year-ago 5.4%, nipped the sliding trend seen during the whole of fiscal 2014.
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Whole Foods has been making considerable efforts to shed its "Whole Paycheck" image by lowering prices in many markets across the country. Co-CEO Walter Robb said during the earnings call, "We continue to see unit lift from the lower produce pricing we are testing in several markets."
Lowering prices can be tricky, as the company sacrifices margins. However, Whole Foods is simultaneously working on lowering its cost structure to maintain profitability levels. During the quarter, gross margins fell 0.2% to 34.8%, which was partially offset by a 0.04% improvement in SG&A. What is important is that if we exclude marketing costs (a $13 million national ad campaign), SG&A would have improved 0.33% and more than offset the margin squeeze.
Data Source: Whole Foods. Chart by Author
Strong cash flows to support expansion
In the quarter, net operating cash flow increased 14.8% year-over-year to $387 million, driven by an approximately 6% increase in net profit.
The strong cash position gives Whole Foods the confidence to launch new store openings and expand its digital footprint in tandem. The company opened nine new stores during the quarter and currently operates 408 outlets. It expects to open 38 to 42 stores during the current fiscal year and has a target of surpassing 500 by 2017. In the quarter, Whole Foods spent $252 million on capital expenditures, which left free cash flows of $135 million.
The company also returned capital to shareholders, paying dividends of $43 million ($0.13 per share) during the quarter and buying back shares of an equal amount.
Source: Whole Foods Earnings Press Releases. Chart by Author
Host of initiatives under way
Apart from the growing store count, Whole Foods has undertaken some key marketing and digital growth initiatives. The company dedicated $13 million to its first national advertising campaign, called "Values Matter," to make people aware of what differentiates it from other organic retailers. Going by the initial results, it has achieved a 100% increase in target group awareness.
Whole Foods was one of the earliest to adopt Apple Pay, and the company has become the largest Apple Pay retailer both in number of transactions and sales. Apple Pay accounted for 2% of sales, and management expects the share to increase with the launch of Apple Watch in 2015. During the quarter, Whole Foods also overhauled its mobile app and saw close to 600,000 downloads. It now plans to upgrade the app throughout 2015 with new features.
The company partnership with grocery delivery app, Instacart, in 15 cities has been well-received by shoppers. Since joining efforts in September, average online delivery sales per week have passed the $1 million mark, according to Robb. In some stores, online sales accounted for as much as 5% of total sales. Encouraged by these prospects, management plans to expand the program to more markets with more products.
Whole Foods has finally reassured jittery investors of its ability to overcome short-term challenges. With more price reductions on the way, comps growth could get even better. This is accompanied by healthy cash generation to support growth initiatives and the capital return program. Marketing and e-commerce efforts logged early signs of success, which again will add to sales. For Whole Foods investors, there is much to celebrate this quarter.
