Struggling organic foods grocer Whole Foods Market, Inc. (NASDAQ:WFM) received a big lift in late Monday trading on a report that activist investor Jana Partners LLC has dug in for battle with a roughly 9% stake and a few ideas on how to squeeze out more shareholder value. The news sent WFM stock up by more than 10% in quick order.
Whole Foods shares have been roughly halved from their 2013 peak amid increasing competition in the natural-foods space from entrenched competitors including Kroger Co (NYSE:KR) and even Wal-Mart Stores Inc (NYSE:WMT).
Jana Partners, amid disclosing its stake, says it wants the grocery chain to explore everything from operational improvements to a potential sale. Per the Wall Street Journal:
“Jana, Whole Foods’ second-largest shareholder, is planning to press the chain to improve its technology and operations to better compete with larger rivals, shake up its board and find out how much a potential bidder might be willing to pay, according to people familiar with the matter.”
Jana also said that it has already picked a group of potential board nominees, according to the WSJ.
Whole Foods’ growth has slowed to a crawl of late, with 2016 revenues of $15.7 billion up just 2% year-over-year, with no help from comparable-store sales, which actually declined 2.5%. Worse, profitability is slowing down, with net income sliding from $579 million two years ago to $536 million in 2015, and $507 million in 2016.
A report in March by Barclays described traffic declines at Whole Foods as “staggering,” not just thanks to competition from the aforementioned giants, but also smaller organic-focused rivals such as Sprouts Farmers Market Inc (NASDAQ:SFM) and Trader Joe’s.
Barclays analyst Karen Short said “a 3% traffic decline might not seem like much, but this equates to 14 million customers.” She also showed that Kroger is likely a direct beneficiary of Whole Foods’ issues.
“Our conclusion: assuming ~$30-$50 average basket sizes, we estimate ~9M-14M annual transactions left WFM in the last 6 quarters and KR, which has meaningful overlap with WFM, is likely a direct beneficiary of WFM’s share losses as evidenced by: 1) KR at $16 billion in natural and organic sales (vs WFM LTM of $15.8 billion), and 2) RS Metrics data (satellite imagery data) included herein showing both overlap with KR within various trade areas as well as traffic shifts since February 2016.”
In the near-term, WFM stock very well could shed at least a little of today’s quickly gotten gains.
Whole Foods shares have jumped into overbought territory at the same time that WFM’s price is approaching previous price resistance around the $35 level, last reached in June 2016.
That said, Monday’s move did end up cracking all of its major moving averages, and could spark additional bullish signals if its shorter-term MAs begin to cross over their longer-term counterparts.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.