As I first wrote back in May 2004, Wild Oats (NASDAQ:OATS) has long been plagued by poor execution. The natural foods industry is highly attractive, as the sustained growth and profitability of industry leader Whole Foods (NASDAQ:WFMI) has consistently demonstrated. But until this year, Wild Oats had turned in a string of disappointing results, many of which were due to a lack of focus on store operations.
That may have changed. In December, Wild Oats brought on Robert Miller as non-executive chairman. Miller has a long background in retail, having served as chief operating officer of Kroger (NYSE:KR), and he has a track record of restructuring ailing businesses.
It appears that over the last couple of months, Miller has used his Kroger contacts to bring some new blood into the ranks of senior management. In April, Robert Dimond was brought in to be the new CFO, and in July, Dan Bolstad was brought in to be senior vice president of operations. They both bring deep experience in food retailing -- both have spent significant time with Kroger, and Bolstad comes directly from ShopKo (NYSE:SKO).
These new additions will hopefully bring some fresh ideas and a renewed focus on driving operational results. In addition, when the company brought Dimond on board as the new CFO, it also introduced an equity-based incentive plan, which significantly improves the alignment between shareholder returns and senior manager compensation. All of these are encouraging moves.
Financial results are also starting to improve. Stronger than expected second-quarter financial results were announced yesterday. Sales were up 13% compared with the second quarter of 2004, and comparable store sales were up a healthy 5.4% over last year.
Interestingly, the growth in comparable store sales was driven primarily by increased average transaction size per customer (versus increased numbers of customers). To me, this indicates that there has been some real focus on in-store operations such as merchandizing and promotions -- all the things that make us pick up additional items when we are in a grocery store. As a result, direct store contribution margin increased from 6.6% to 7.7% of sales.
But there is still a lot more work to do. As I have pointed out, the business model has a long way to go before it can reach the level of profitability that Whole Foods has achieved, both in terms of gross profit and operating profit margins. And while Wild Oats' growth numbers are nice to see, they still lag well behind the second-quarter growth numbers recently put up by Whole Foods, where comparable store sales increased 12.6% in the most recent quarter, after an increase of 15.2% last year.
At an enterprise value-to-sales ratio of 0.45, the stock remains cheap, especially compared with Whole Foods, which is trading at almost two times sales. The key question is whether these recent improvements are the first step in a fundamental turnaround in the business or only short-term effects from the infusion of new people. Though I'm encouraged, it's still too early to tell, and results in the next few quarters will be critical to watch before coming to any conclusions.
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Fool contributor Salim Haji is a Denver-based management consultant. He does not own shares in any of the companies mentioned.
