Please ensure Javascript is enabled for purposes of website accessibility

Whole Foods Grows Earnings Despite Falling Comps

By Dan Caplinger - May 4, 2016 at 6:12PM

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 specialist still hasn't gotten things turned around entirely.

Image: Whole Foods Market.

In the grocery business, Whole Foods Market (WFM) is an icon for the natural-foods and organic-grocery products that have become increasingly popular in recent years. Yet that didn't stop a host of competitors from seeking to reassert their power over the industry, and Whole Foods has recently had to deal with an onslaught of pressure that has held back its growth for a couple of years now. Coming into Wednesday's fiscal second-quarter financial report, Whole Foods investors didn't have high hopes for any earnings growth and were also nervous about sales. The grocery chain's bottom-line results were better than the low expectations that those following the stock had, but weak comparable-store sales still point to ongoing pressure on the company. Let's look more closely at how Whole Foods Market did and whether a full turnaround will take place anytime soon.

Whole Foods keeps struggling
Whole Foods' fiscal second-quarter numbers were mixed, topping expectations in some but not all areas. Revenue grew 1.3% to $3.70 billion, which was about half the growth rate that most investors wanted to see from Whole Foods. Net income also slumped roughly 10% to $142 million, but a comparable drop in share count kept earnings stable at $0.44 per share, which was $0.03 better than the consensus forecast among investors.

Looking more closely at how Whole Foods did, the company's ongoing woes in comparable-store sales didn't let up. For the quarter, comps were down 3%, accelerating from their pace in the previous quarter. A decline in the number of customer transactions accounted for more than two-thirds of the overall hit to comparable-store sales figures, but a decline in basket size also weighed on results. Those drops were partially due to declines in the growth of average price per item. Comparable-store sales continued to be weak as the current quarter started, with Whole Foods reporting a 2.6% decline in the portion of the fiscal third quarter through May 1. Gross margins fell by a percentage point from year-ago levels.

Still, Whole Foods reaccelerated its plans to expand its store network. The company opened eight new stores during the second quarter, with expansion into two new markets. It also recently signed nine new leases, six of which will go for traditional Whole Foods stores and the other three being new 365 concept stores. Three lease conversions will switch Whole Foods locations to 365 stores.

Co-CEO John Mackey accentuated the positives, arguing that "through our improved cost structure and expense disciplines, we delivered strong EBITDA in a challenging sales environment." In Mackey's view, "food retailing is evolving at an incredibly fast pace," and Whole Foods is aiming to be more competitive on price while also enhancing the shopping experience for its customers.

What's ahead for Whole Foods?
Yet the full-year fiscal 2016 guidance that Whole Foods provided earlier has proved insufficient, and so the company had to update its outlook to guide investors to more pessimistic assessments of the future. The grocery chain sees sales growth of no more than 3%, down from the 3% to 5% range previously expected. Comps will likely fall 2% or more, confounding initial projections that could have included flat comps. Nevertheless, Whole Foods kept its earnings guidance for $1.53 per share, although it changed "at least" to "up to" in its explanation, reversing the potential for deviations from expectations.

Still, Whole Foods hasn't given up on expansion. Whole Foods intends to keep boosting its store counts in an effort to reach 1,200 stores in the U.S. even before considering the new 365 store concept. Already in the current third quarter, Whole Foods has opened five stores and expects seven more, including the first 365 store in Silver Lake later this month. The fiscal fourth quarter should bring five more stores, including two 365 locations.

Investors in Whole Foods seemed to take the news in stride, celebrating the earnings beat and sending the stock up almost 2% in after-hours trading following the announcement. Nevertheless, the fundamental news here is still poor, and with the stock still near multi-year lows, Whole Foods needs a more dramatic turnaround to inspire investors in the long run.

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 service.

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 05/24/2022.

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.