Natural foods retail chain Whole Foods Market, Inc. (WFM) has been under the microscope in recent months as investors began to worry that the firm’s business model was struggling to change with the times.
WFM has lost nearly 40% over the past year due to concerns about increased competition and declining sales figures.
While those concerns are valid, WFM stock could be a worthwhile long-term play, as the company’s future is looking bright.
In an effort to keep the brand relevant, Whole Foods Market’s management has come up with a comprehensive plan aimed at driving more store traffic, increasing sales and improving margins. This makes the company attractive from a long-term investor’s perspective, but the share price is unlikely to rise dramatically in the coming months.
On May 4, Whole Foods stock is set to release its second-quarter earnings, which will give investors a glimpse into how the chain is coping with the rising pressures.
The figures are expected to show a soft second quarter with EPS of $0.41. But even if it posts disappointing earnings, the stock is still a buy when the current share price is weighed against the firm’s long-term potential.
WFM Vs the Competition
One of the biggest problems that Whole Foods Market faces is increasing competition.
When the specialty grocery store first opened, it attracted a great deal of attention and aligned perfectly with consumers’ shifting preferences. However, now that natural, organic foods have become more mainstream, other grocers have begun to offer their own selection at much lower prices.
Worries about competition have been the major driver behind Whole Foods stock’s slide — but this has created a buying opportunity for long-term investors.
WFM shares are currently trading for about 20 times earnings, relatively low if you believe that the company’s turnaround plan has potential.
Speaking of their plan, to combat the pricing issue, the retailer is planning to offer more discounts via coupons and customer loyalty promotions.
Whole Foods stock is also launching a chain of smaller, lower-cost stores around the country in an effort to capture the attention of millennials. The new stores are called 365 by Whole Foods and they will offer shoppers a smaller, more specialized selection of foods.
Expanding Strategic Partnerships, Improving Margins
Not only is the firm looking to open up a new chain of low-cost stores, but Whole Foods is also hoping to expand its online offerings as well.
The company recently deepened its relationship with Instacart, a grocery delivery service. WFM has also partnered with Alphabet Inc‘s (GOOG, GOOGL) Google Express in some areas.
Another big part of WFM’s turnaround plan is cost-cutting. Earlier this year the company announced plans to cut 2,000 jobs and save $300 million per year. The grocer has also begun automating some of its processes in order to cope with a smaller workforce.
Perhaps the most important change the company is making, though, is centralizing orders for nonperishable items for stores around the country. Historically, regional managers were responsible for choosing which products would be stocked in their area. However, a more centralized approach will give WFM more leverage with suppliers and will help with cost cutting.
Whole Foods Stock Has Strong Financials
Whole Foods Market is in a good financial position as well. The company has a healthy cash flow that can be used to support expansion plans and deliver shareholder value. For investors who are willing to wait for the firm’s turnaround, the company pays a 1.8% dividend yield, which is unlikely to decline in the coming year.
Buying WFM stock isn’t without any risk — it’s certainly possible that the company’s plans could fall through or that growing competition in the natural foods space will further dent the grocery chain’s sales.
However, with share prices around $30, WFM appears to be a good choice in the consumer product space, as there is a lot of potential for the stock to deliver sizable gains in the coming years.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
