Disappointing Financial Performance
Sales during the quarter ended on April 13 came in at $3.32 billion vs.
expectations of $3.34 billion from Wall Street analysts.
Store contribution margin declined 51 basis points to 10.6% of sales.
Earnings per share were $0.38 versus forecasts of $0.41 per share.
The company reduced its guidance for the third consecutive time.
Management expects sales growth of between 10.5% and 11% in the
coming quarter versus a previous range of 11% to 12%.
Whole Foods is still generating solid growth and profitability, but
performance is clearly under pressure.
Main Problem: Growing Competition
Rapid sales growth and high profit margins are attracting
increased competition in the natural and organic foods
Big traditional players such as Wal-Mart (NYSE:WMT),
Safeway (NYSE:SWY), and Kroger (NYSE:KR) are
increasing their presence in the category and offering
competitively low prices.
Smaller and focused competitors like Sprouts Farmers
Market (NASDAQ:SFM), The Fresh Market
(NASDAQ:TFM), and Natural Grocers Vitamin Cottage
(NYSE:NGVF) are actively expanding their store base.
Management Acknowledges the Problem
“I’d say competition is more intense right
now than possibly we’ve ever experienced
Co-CEO Walter Robb
Reducing prices to keep the competition at
Investments in technology and cost control
Focusing on providing a superior experience
and brand differentiation.
First mover and largest focused player in the organic food
Unparalleled brand recognition.
Reputation for quality and customer trust.
Talented management team with deep industry knowledge
and a track-record of success in the business.
Unique organizational culture and well incentivized
employees providing a high quality service.
The company is still forecasting healthy double-digit sales growth for
the coming quarter.
Management believes Whole Foods has room for 1,200 stores in the
U.S. alone, versus a current store base of 379 locations.
International markets are still practically untapped.
Product prices will likely remain under pressure due to growing
competition and expansion into lower-income areas.
On the other hand, private level penetration bodes well for the
company in terms of both sales growths and profit margins
Growing scale and operational efficiencies should help offset the
negative impact of falling prices on profit margins
Foolish Takeaway: Buying Opportunity
Success attracts competition, and Whole Foods is being a
victim of its own success.
Differentiation and brand recognition provide competitive
strengths for the company.
Whole Foods is still the undisputed leader in an exciting
In spite of the short term challenges, the long term growth
story is pretty much intact.
Our best pick for 2014 is positioned for explosive
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