All is good in the land of organic milk and honey once again.
Whole Foods Market (NASDAQ: WFM) stock has returned with a vengeance, climbing to near all-time highs after turning in its second strong earnings report in a row last Wednesday. Earnings per share of $0.46 beat expectations by a penny, and sales improved 10% to $4.67 billion as same-stores sales rose 4.5%, better than 3.1% in the previous period. To date in the current quarter, comps are up 5.1% as the momentum seems to be gaining.
Just a few months ago, analysts were decrying the end of Whole Foods' organic empire due to competition from the likes of Trader Joe's, Wal-Mart, and Kroger, all of which have expanded into Whole Foods' territory. The retailer is no longer alone in the organic food space it pioneered, but it's found a way to get back to stable growth once again. Let's take a look at what the high-end grocer is doing right.
Facing competition from the low-priced big-box chains, the company long mocked as "Whole Paycheck" has responded as you might think it would. It lowered prices, primarily on produce, showing off its curb appeal. Whole Foods has generally rejected the standard supermarket strategy of luring customers in with discounts or a "loss leader," but cutting prices on produce, a staple product and a key differentiator against companies like Wal-Mart, seems like a smart way to drive traffic. Once in the store, those customers are more likely to spend on higher-margin items like prepared foods and luxury brands.
Founder and co-CEO John Mackey explained the strategy, saying, "Our value focus is on perishables, where we see opportunities to broaden our selection of products at entry-level price points. We are encouraged by the pricing experiments we are running in several markets, and if results continue to be positive, we expect to expand our test to more markets during the year."
The numbers proved that the decision to lower prices, which the company made last year, is helping to boost sales without sacrificing margins too much, as profits improved 5.7% in the quarter.
Reinforcing the brand
Whole Foods launched its first national advertising campaign last year, called "Values Matter." The company ran TV commercials and ads on magazines and billboards showing images of livestock and bucolic farms in an attempt to reinforce the brand's commitment to humanely and sustainably raised food, local farms, and fair labor practices.
The underlying message seems to be that Wal-Mart may be selling organic food, but the retail giant is vastly different from Whole Foods, which has been committed to natural and organic food since its inception. That's what it does because that's who it is, not because that's what consumers are demanding suddenly. In fact, the organic movement exists in large part because of Whole Foods. Co-CEO Walter Robb explained, "Natural and organic products are increasingly available, yet no one offers the shopping experience we offer. We hold the idea of 'food' to a higher standard."
While it's difficult to directly connect the improved performance with the ad campaign, as it often is with any form of marketing, the social media response to the campaign was strong, and it seemed to remind viewers how Whole Foods is different from would-be competitors.
Competition hasn't just arrived on the organic front. Grocery delivery is also becoming an increasingly available option thanks to providers like AmazonFresh, Google Express, Instacart, Sidecar, and a host of other start-ups. Jumping onto the trend, Whole Foods has partnered with Instacart at 15 of its markets, starting in September, and expects to expand the program. Robb said that online deliveries now total more than $1 million a week for the company, and they contribute more than 5% of sales at some stores. Considering the promising early results, expanding the program should bring increased sales, especially at a time when grocery delivery is becoming more popular. Similarly, the company is also testing a customer loyalty program, a further sign that it is doing more to retain and reward its customers.
There's at least one other trend outside of the company's control that it seems to be benefiting from. During the fourth quarter, the job market exploded while gas prices tumbled, lifting disposable income to a higher level than it's been since the recession. That development would figure to be a boon for a company like Whole Foods, a high-end seller of staple goods that benefits when consumers have the ability to trade up to a higher-quality product. The trend should also give a lift to the company's performance through the year, just as the other adjustments it's made are providing tailwind.
As the numbers show, Whole Foods may no longer be alone on the organic mountain, but it's still the king.
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 recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. 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.