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Why Shares of Whole Foods Market Inc. Slumped on Thursday

By Timothy Green – Jul 30, 2015 at 6:08AM

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12:30 p.m. ET: The high-end grocery store missed analyst estimates, with an overcharging scandal driving customers away. Investors pushed the stock down 11% by 12:30 p.m.

What's happening: Shares of Whole Foods Market (WFM) slumped on Thursday after the company reported its fiscal-third-quarter results. Whole Foods came up short of analyst estimates for both revenue and earnings, sending the stock down 11% by 12:30 p.m. Thursday.

Whole Foods reported quarterly revenue of $3.6 billion, up 8% year over year but about $60 million shy of the average analyst estimate. Earnings per share came in at $0.43, up from $0.41 during the same period last year, and two cents short of analyst expectations.

Why it's happening: Much of Whole Foods' growth during the third quarter came from new stores, with 30 new stores opened so far in fiscal 2015. Comparable-store sales grew by just 2.2% during the third quarter, driven by a 0.5% increase in transactions and a 1.7% increase in basket size. Media attention following allegations that Whole Foods stores in New York City overcharged customers led to a sharp slowdown in growth during the last two weeks of the quarter, with comparable-store sales growing by just 0.4% during that time.

Gross margin declined to 35.6%, down from 35.9% during the same period last year. Whole Foods' efforts to improve its price competitiveness, as well as an increase in shrink during the last two weeks of the quarter due to lower-than-expected sales, led to this decline. The eventual opening of the new 365 by Whole Foods stores could further pressure gross margin going forward.

Whole Foods expects sales to grow by 7% year over year during the fourth quarter, assuming that the current sales trends continue. EPS is expected to be between $0.34 and $0.35, flat compared to the fourth quarter of 2014. For the full year, sales are expected to grow by 9%, with low single-digit comparable-store sales growth.

Whole Foods' earnings growth slowed down during the third quarter, with sales growth from new stores being balanced by declining margins. The overcharging incident had a serious negative impact on the company's sales, and it's unclear how long that impact will persist. Regardless, investors are right to be disappointed by Whole Foods' results.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Timothy Green has no position in any stocks mentioned. The Motley Fool recommends and owns shares of 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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