Whole Foods Market, Inc. (WFM) Stock Needs a Better Turnaround Plan

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The earnings report out of Whole Foods Market, Inc. (NASDAQ:WFM) was less notable for its numbers than it was for an announcement of a turnaround strategy. However, let’s hit the numbers quickly so we can see why that turnaround has become necessary.

WFM Stock: Whole Foods Market, Inc. (WFM) Stock Needs a Better Turnaround

Sales only grew 1% to $3.74 billion, but net income for WFM stock fell from $142 million to $99 million — a painful 30% decline.

This came because the $40 million in additional sales at Whole Foods Market were more than offset by the $57 million increase in cost of goods, and $29 million increase in SG&A expense. This filtered down to a 37-cent-per-share bottom line for WFM stock, down from 44 cents, and that’s even with a 2% share count reduction from buybacks.

The most important number for WFM stock is comparable store sales, which fell for the seventh consecutive quarter, declining by 2.8%. Given this trend, it’s obvious that competition from organic products being sold at traditional grocery stores was having an impact.

The Failing Power of WFM Stock

I’m the first to admit that I thought this would never happen. My assumption had been that upscale consumers choose to shop at Whole Foods, and would be brand loyal because every single thing in WFM is organic. Traditional grocery stores were offering organic choices, but not nearly as well-stocked as Whole Foods Market is.

I think consumers split into three groups. The core loyalists continue to shop at Whole Foods. Others abandoned it entirely, finding cheaper alternatives and staples at the traditional stores. A third group may continue to buy specialty at WFM but have skewed back to traditional grocery stores for many other items.

So with WFM stock struggling, the company decided to shake things up. Or rather, perhaps 9% Whole Foods owner Jana Partners pushed for a shake-up, and to bring on five new board members. Of the names on the list, two jumped out at me. The first was Sharon McCollam, who led very successful turnaround efforts at Williams-Sonoma, Inc. (NYSE:WSM) and Best Buy Co Inc (NYSE:BBY). The other was Scott Powers, who was top dog at State Street Global Advisors for seven years.

Powers’ appointment strikes me as a potential signal that WFM could be put up for sale once the turnaround takes hold — or even if it doesn’t.

That’s because Whole Foods fits a lot of the holes that private equity like to fill with acquisitions. WFM stock still generates robust cash flow, is not over-levered at all, has plenty of cash on hand, and is a powerful brand. Private equity tends to buy up companies with some of these traits, slash costs, develop efficiencies, re-brand and re-organize, and spin companies back out again.

99 Cents Stores is, according to my sources, going through that process now with owner Ares Capital Corporation (NASDAQ:ARCC). If you’ve been to a P.F. Chang’s in the past two years, you’ve noted significant menu changes, just to name one difference over there.

Still, the strategies outlined in the turnaround plan don’t strike me as revolutionary enough to make a difference. Enhancing the rewards program, restructuring the purchasing program and trimming $300 million in costs is all back-room stuff. Increasing the dividend and buyback is a waste of shareholder capital that is clearly just cosmetic boilerplate nonsense.

No, I’m afraid this new board needs to re-imagine what Whole Foods Market is, and there’s no easy fix to this. The initial concept was itself revolutionary. Adding in-store bakeries, freshly made food, sandwich counters and the like are the kinds of things you do in a turnaround, but these things already exist.

I’m not sure where WFM really goes from here in that regard, and that’s not giving me much confidence in Whole Foods Market stock, which trades at 26x earnings.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/whole-foods-market-inc-wfm-stock-turnaround/.

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