Whole Foods Market, Inc. (WFM) reported its third-quarter earnings on Wednesday after the bell. The firm’s EPS of 37 cents met analysts’ expectations but WFM stock fell in after-hours trading as investors worried about the company’s ability to grow in such a competitive environment.
Whole Foods struggled with declining comparable store sales growth for yet another quarter, disappointing investors. Comps decreased by 2.6%, but co-CEO Walter Robb pointed out that the company also posted record sales of $3.7 billion this quarter.
While the decline in same-store sales was disappointing, there was a bit of a silver lining. Comps improved from the previous quarter, and basket sizes increased — meaning that some of the effects of lower-priced items was offset by shoppers buying more items.
Whole Foods has opened two of its lower-cost 365 by Whole Foods Market stores so far, and co-CEO John Mackey said that the response to the new locations has been “overwhelmingly positive.”
Lower overheads at these locations have given WFM the ability to offer deeper discounts, and the firm is testing out new cost-cutting methods like centralized buying that may eventually help the grocer increase margins at its traditional stores as well.
It remains to be seen whether or not the 365 stores will draw traffic away from traditional Whole Foods locations, but management has said the demand for the new store format is strong and that it is unlikely to disrupt sales at existing locations.
Overcoming an Overpriced Label
One of the reasons WFM has been struggling is customers’ perception that the specialty grocer is overpriced. With traditional grocery stores like The Kroger Co (KR) now offering their own organic lines at much lower prices, Whole Foods has found it difficult to hold on to customers and compete on prices.
Some of that stigma is expected to fall away as the company continues to roll out loyalty programs and discount schemes, but profit margins are suffering as a result.
At the moment, Whole Foods is in the middle of a transition, and it will likely take time to get customers to buy in to the store’s new image.
Moving Forward for WFM Stock
WFM stock has certainly fallen out of favor with investors, but now is a good time to buy — before the store makes its way back into the market’s good graces. In the coming quarters, Whole Foods is likely to make a comeback as the chain’s efforts to turn things around become more apparent.
The firm’s same-store sales figures will probably begin to look much rosier as easier comps cycle through and the 365 store openings bring in new business.
Long-term, WFM stock is a buy, as the firm has made significant changes in order to set itself up for the future. The grocer has a strong brand identity, and its lower-cost structure is likely to draw in more millennials and cost-conscious urban shoppers.
While Whole Foods is currently battling some operational challenges, the stock is poised to continue rising as the brand evolves.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.