Please ensure Javascript is enabled for purposes of website accessibility

Whole Foods' Results Improve Slightly as Its Merger With Amazon Looms

By Asit Sharma - Updated Jul 27, 2017 at 11:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The natural and organic foods retailer showed a sliver of improvement in a key area when it released fiscal third-quarter results on Wednesday.

Whole Foods Market (WFM) issued what may be its final earnings report as an independent publicly traded corporation on Wednesday. In the run-up to its $13.7 billion merger with (NASDAQ: AMZN), slated to close during the second half of this year, the natural and organic foods grocer reported a fiscal third-quarter 2017 top-line increase of 0.6%, to $3.7 billion.

Comparable same-store sales, or "comps," are still stuck in a multiquarter descent, but in the last three months, comps showed modest improvement, declining 1.9% versus a trend of negative 2.6% in the first six months of the fiscal year.

Exterior of a New York City Whole Foods store

Whole Foods' new 40,000 square-foot store located in Central Harlem, New York City. Image source: Whole Foods Market. 

Quarterly comps numbers tend to be focal points in the cutthroat grocery industry, so even this marginal improvement is a positive sign for the company. As I had discussed in my earnings preview, in light of its impending merger, Whole Foods had little reason to present more than the minimum amount of required information in this filing. Thus, some of the customary detail shareholders are used to seeing, both comps-related and in general, was omitted.

We don't know, for example, whether higher traffic or a larger "basket size" (i.e., average purchase per shopper) drove the healthier comps result; typically, management provides this breakdown. 

However, in the company's press release, CEO John Mackey noted the following: "Our comparable store sales improved sequentially on a one- and two-year basis in the third quarter, and that momentum has accelerated 220 basis points in the fourth quarter, resulting in positive overall comps for the first three weeks."

In other words, it's still very early in the fourth quarter, but it's possible Whole Foods could see its first comps increase in a very long while to close out the fiscal year, if the momentum Mackey refers to holds up. Incidentally, Whole Foods closed nine underperforming stores in the fiscal second quarter, and their removal from the "comps" cohort may also be helping the revitalization of this key metric.

What else can we glean from the minimalist report? The big picture is that there will be few surprises for Amazon as it folds in the organic foods pioneer within a few months. Whole Foods' net income of $106 million during the quarter represents a net profit margin of 2.8%, which is roughly half of a percentage point below the prior-year quarter's profit percentage, though ahead of the 2.2% net profit margin earned during the first half of 2017.

Similarly, another closely followed number, Whole Foods' gross profit margin, hit 34%, in line with the 33.8% gross profit margin of the previous two sequential quarters.

Store development has slowed in the current fiscal year as the company works on better comps and higher profitability. Whole Foods opened six stores during the quarter, including one relocation, and it plans to open another six in the fiscal fourth quarter of the year, also including one relocation. The grocer's post-merger store expansion in fiscal 2018 will be of immense interest, but we'll have to wait for this information, which will be Amazon's prerogative to disclose.

Scanning what may be the last set of financial statements Whole Foods will issue to shareholders, it's clear that despite the prolonged struggle to lift comps, which has compressed the stock price for the last two years, Whole Foods is a sharply run company that's functioning quite well as of late.

For example, the organization produced $901 million in operating cash flow this quarter, an impressive amount to wring from $3.7 billion in revenue. Ample operating cash, and free cash flow, for that matter, have long been hallmarks of Whole Foods' operations.

To illustrate, even though it borrowed nearly $1.0 billion for a massive share repurchase last year, Whole Foods has already pushed its unrestricted cash and investment balances back up, from less than $400 million at the beginning of fiscal 2016 to the $1 billion mark as of this most recent quarter end. Jeff Bezos and company at Amazon must be delighted with the balance sheet they're acquiring. As for Whole Foods co-founder and CEO John Mackey, as his company heads into its next great adventure, he can feel confident that he's got it in fighting trim. 

John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of Whole Foods Market. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.