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Whole Foods Market Looks to Get Its Momentum Back

By Dan Caplinger - May 4, 2015 at 2:00PM

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The natural-foods specialist has seen its shares fall back after a big jump. What's next for Whole Foods?


Source: Whole Foods

Shareholders in Whole Foods Market (WFM) have endured plenty of ups and downs recently, as concerns about sluggish growth throughout much of 2014 gave way late last year to optimism about a potential turnaround. With Whole Foods coming out with a key marketing campaign emphasizing its leadership role in the natural and organic foods industry, investors believed that the company had finally turned the corner. Yet with the company slated to release its fiscal second-quarter financial report on Wednesday afternoon, Whole Foods has seen its stock lose ground over the past few months, making some wonder if a return to gloomier news is ahead. Let's look more closely at what Whole Foods has experienced during the past quarter and whether investors should look for a rebound or further share-price weakness following the report.

Stats on Whole Foods Market

Current Quarter Analyst EPS Estimate

$0.43

Change From Year-Ago EPS

13.2%

Current Quarter Revenue Estimate

$3.71 billion

Change From Year-Ago Revenue

11.5%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance

What's next for Whole Foods' earnings?
Investors have been somewhat optimistic in recent months about Whole Foods earnings, adding a penny to their fiscal second-quarter projections and about 1% to their full-year fiscal 2015 expectations. The stock, though, has given back some of its past gains, falling about 8% since late January.

Whole Foods came into the quarter on a positive note, with the company's fiscal first-quarter results continuing the string of solid performance from the grocery chain. Growth in comparable-store sales accelerated to 4.5%, and while net income only managed to climb by about 6%, healthy levels of returns on invested capital pointed to the discipline that Whole Foods management has about investing in the company's internal growth. Combined with ongoing expansion of store counts, Whole Foods is using all the means at its disposal to try to recover from its slump last year.

Source: Elvert Barnes via Flickr

Whole Foods has returned to its grassroots to help get itself back on firmer footing. The company has made a number of strategic initiatives to reestablish its position as "America's Healthiest Grocery Store," and co-CEO Walter Robb told investors in February that he "attributes our broad-based sales momentum to our customers' positive response to our many strategic initiatives, along with improving consumer confidence." Certainly, economic prosperity is helpful for Whole Foods, as it allows customers who might have to forego shopping there during tougher times to have enough disposable income to afford higher-quality food offerings at the natural and organic grocery specialist.

The real question that Whole Foods faces is whether its marketing efforts will be enough to help it keep its gross margins as high as possible. Until recently, Whole Foods largely had the organic and natural foods market to itself, and that allowed the company to charge high markups on products that customers largely couldn't get anywhere else. Now that mass-market grocery chains have jumped onto the organic bandwagon, Whole Foods competitors have made pushes to secure their own share of the lucrative organic and natural market, and that in turn has put suppliers in a better position to demand better pricing that in turn could lead to ongoing margin compression in the future.

In the Whole Foods earnings report, it'll be important for the company to demonstrate how its push to be America's Healthiest Grocery Store is paying off with increased traffic and comps. As part of the company's long-term strategy to differentiate itself from other grocery chains, Whole Foods really needs to see evidence that its customers are sticking with it and will continue to do so even as selection becomes more readily available elsewhere. Unless Whole Foods can reestablish its competitive moat, it'll be hard for the stock to regain the ground it has lost over the past couple of months.

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