What investors were looking for from the Whole Foods Market, Inc. (NASDAQ:WFM) earnings report simply was something — anything — to make WFM stock move. Well, it’s moving. Just not in the direction WFM stock holders hoped.
Whole Foods entered its earnings report for the fiscal first quarter stuck in a tight trading range.
WFM stock has traded basically between $29 and $35 for almost 18 months now. Essentially, Whole Foods hasn’t been good enough to really stoke turnaround hopes — but it hasn’t been bad enough to push WFM shares lower, either. Coming out of the Whole Foods earnings Wednesday afternoon, that may change, but not in the way WFM stock bulls hoped.
Another quarter of negative comps means turnaround hopes for WFM are pushed out even further. Traffic continues to fall, declining 3.9% year-over-year. And those lower sales are pushing margins down as well. Full-year guidance was pushed down, and WFM stock is declining after-hours.
The bull case isn’t dead coming out of Whole Foods earnings — but at best, it’s delayed. And at some point, investors may run out of patience.
Whole Foods Earnings: Another Disappointing Quarter
Somewhat incredibly, Whole Foods comparable-store sales now have declined for seven consecutive quarters. Even considering the deflation impacting grocery stores as a whole, those declines represent poor performance.
WFM’s Q1 report wasn’t much of an improvement. The broader issue for Whole Foods has been traffic, and a 3.9% decline in that figure represents only a modest improvement from -4.2% in Q4. And it appears that performance weakened as the quarter went on: the company had said in its Q4 release that comps in the first five weeks of the first quarter were down just 1.6%.
Meanwhile, gross margin was pressured, and even improvement in wages — an impressive accomplishment, admittedly — was offset by higher store expense. Adjusted EPS declined to 39 cents from 46 cents as a result. That figure admittedly did match Wall Street consensus. But full-year guidance was reduced to $1.33 “or greater”; analysts headed into the Whole Foods earnings report expecting $1.44 for fiscal 2017.
The quarter is a problem on two fronts: First, the focus will be on sales, rather than earnings, given that WFM is attempting a turnaround. In any turnaround, revenue has to come first. The second is that WFM stock isn’t cheap. At an after-hours price below $29, WFM stock still trades at over 20 times FY17 EPS. That’s a growth multiple, but it won’t last until Whole Foods can show some growth.
Can WFM Stock Turn Around?
The WFM story isn’t over just yet, as there are potential catalysts here. The long-awaited “365” concept, including smaller and low-priced stores, should see more openings in 2017, and Whole Foods still expects to grow its square footage by 5% on a net basis. Other chains like regional player Ingles Markets, Incorporated (NASDAQ:IMKTA) are trying to increase sales of prepared food.
WFM already has a solid business on that front, particularly in its urban locations. Deflation has plagued the entire industry, but three consecutive years of declining farm income imply an end to that trend at some point. And Whole Foods still is working on executing a nine-point turnaround plan announced in late 2015.
But Whole Foods needs to do better before investors can get optimistic toward WFM stock. Competition is tough and getting tougher. ALDI Group continues to expand its reach in the U.S. Kroger Co (NYSE:KR) is having huge success with its private-label Simple Truth organic brand. Those products target Whole Foods’ core demographic and add to its pricing pressure.
As for the nine-point plan, it wasn’t terribly well-received at the time, and its impacts still haven’t shown up in comparable sales or in Whole Foods earnings.
From a “story” standpoint, too, the Whole Foods earnings report will feed the narrative surrounding WFM stock. Whole Foods simply can’t get back on track. The company had a big head start in natural and organic, but competitors are closing the gap. Whether it’s Kroger or even Wal-Mart Stores Inc (NYSE:WMT), getting fresh, organic food is a lot easier than it used to be. Shoppers no longer need to visit “Whole Paycheck,” as Whole Foods has sometimes been called.
And those shoppers are going elsewhere, as seen by the seven straight quarters of declining same-store sales. And until that changes, WFM stock likely isn’t going anywhere either — except maybe further down.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
