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Can Whole Foods Bounce Back From Last Week's 11% Drop?

By Rick Munarriz – Jun 20, 2016 at 3:06AM

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The leading organic grocery store operator stumbles after a food safety scare.

Image source: Elvis Fool on Flickr.

Whole Foods Market (WFM) investors took another hit last week. Shares of the leading organic supermarket chain moved 11% lower after food safety concerns emerged at one of its production facilities. 

The Food and Drug Administration cited Whole Foods Market's North Atlantic Kitchen food prep facility for several issues. From Listeria bacteria to exposed items placed under ceiling joints where condensate was dripping, the regulators made several visits in February to the production hub -- and it wasn't pretty.

Whole Foods Market insists that it has addressed the facility's shortcomings, but the FDA initially rejected the grocer's March response. It now wants a more acceptable response to the FDA concerns.

Whole Foods Market is smart enough to do the right thing, but we've seen what happens to an endearing brand when its "food with integrity" mantra fails safety concerns. Even if Whole Foods Market has corrected all of the issues, folks already know that at some point there was pesto salad, couscous, and mushroom quesadillas resting under a dripping condenser. How do you erase images of an employee's unprotected upper sleeves frequently touching ready to eat leafy salad greens or another worker packaging egg salad without washing hands of changing gloves between tasks? 

Whole in wan 

These have been hard times for Whole Foods Market. Comparable-store sales have turned negative. Net income has declined in each of the past three quarters. Shoppers aren't as eager to pay a premium for organic groceries, and if they are there are now too many traditional supermarket and department store operators doing the same. 

Shareholders are feeling the pain. Whole Foods Market was trading slightly higher in 2016 when last week began, but now it's sporting an 8% decline year-to-date. Tack that on to double-digit percentage declines in 2014 and 2015, and we're eyeing a 45% plunge in Whole Foods Market stock since the end of 2013. 

Last year was rough with price manipulation accusations, negative trends at the store level, and a lukewarm market reaction to the chain's plans to discount organics with the 365 concept it eventually rolled out earlier this year. 

It's a bad time to be tackling food safety allegations. Analysts see the negative earnings trend continuing through at least the next two quarters. It will take a long time for 365 to move the needle, even if it's successful. Now Whole Fools Market has a brand to restore, and that's become a bigger challenge in these social media-aware times where bad news spreads viciously fast. 

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