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Whole Foods Shows It Still Has Some Brand Magic

By Jeremy Bowman – Aug 3, 2016 at 11:18AM

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New store openings have been promising even as same-store sales continue to slide.

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Whole Foods Market (WFM) has been testing investors' patience for some time now. The company just reported its fourth straight decline in same-stores sales, and the stock is down more than 50% from its all-time high a few years ago.

But even as the company has struggled to adapt to new competition, there's at least one sign that the brand continues to flourish. New store openings continue to draw crowds in a way rivals like Kroger (KR 2.51%) just can't compete with.

Last week, the company opened its second store in Brooklyn, a flagship location in the gentrified Williamsburg neighborhood. New York Magazine said more than 200 people were in line before the grand opening despite oppressive heat. One woman described her efforts to be there when she found out it was opening that day: "I jumped up really early and ran over here. I just love Whole Foods!"

The new store includes a food hall with local, "up-and-coming favorites," a restaurant with an all-natural take on the traditional Jewish delicatessen, and a first-of-its-kind "Forager Center", where customers can sample and order exotic fare like baby pineapple and mangosteen.

Co-CEO John Mackey underscored the success of the new stores on the recent earnings call, saying, "I mean, one thing that probably continues to be underreported is we keep opening a lot of great stores. Just yesterday, we opened up two flagship stores that are just kicking butt. They're just amazing stores. They're awesome stores that are doing huge sales and they're going to be very profitable for us." He was referring to the Brooklyn opening and another one in Santa Clara, Calif.

Media sources also reported big crowds recently at store openings in Bedford, NH, Wauwatosa, WI, and Newport News, VA. At Wauwatosa, a crowd of over 1,000 waited before outside the store before opening. 

Meanwhile, the new 365 chain is off to a good start, with the two openings so far well received. Mackey said, "We're very happy with the initial start of the first couple of stores. We're very happy with the way it came out. We think we've created a very successful new business model, which we're going to expand rapidly. And we'll have more information about that next quarter."

The enduring value of brand equity

While Whole Foods has fallen out of favor with investors, the market seems to forget that its brand equity and operating performance are still significantly better than those of its rivals. 

Though Kroger's stock has outperformed Whole Foods in recent years, as of their latest quarters Whole Foods' profit margin was still much better, at 3.3% to 2%, and Whole Foods is much more efficient with its real estate. The organic grocer has registered $935 in sales per square foot so far this fiscal year. Kroger, on the other hand, had sales per square foot of $672 in its last fiscal year.

The strong response to Whole Foods' recent store openings indicates that the company has the brand equity to grow into management's projection of 1,200 stores nationwide, or even more with the 365 banner. Same-store sales, though they get much of the market's attention, are temporary, fluctuating from quarter to quarter, while the brand equity that leads to large crowds at openings, and stronger profit margins and sales per square foot, is more stable. Whole Foods will eventually emerge from its current swoon, and its focus on bifurcating its stores with 365 and flagship Whole Foods Market stores should make the company stronger when it does.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Whole Foods Market. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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