No Easy Fixes for Whole Foods
So this is what progress looks like.
Whole Foods shares popped by about 8 percent Wednesday evening after it reported better first-quarter earnings than Wall Street expected. The company also raised its earnings guidance for the fiscal year and said it would open dozens of new stores -- claiming it has made real progress on a turnaround plan to jump-start its business.
Still, the grocer reported its largest same-store-sales decline since 2009, when the financial crisis ushered in four straight quarters of falling sales. It also reported a 1.6 percent drop in the number of customer transactions and a 0.2 percent fall in basket size. More worrisome is the second straight quarter of double-digit declines in its operating margins -- once Whole Foods' sweet spot.
In other words, there are fewer people coming into Whole Foods stores, and when they do come in, they are spending less. Oh, and when they buy stuff, Whole Foods is making less money on their purchases. That's because the company is trying to lower prices to win back customers after a series of pricing scandals. As I wrote last quarter, Whole Foods and low prices don't seem to be mixing well.
Meanwhile, Whole Foods' answer is: Let's build more stores! Take on more debt to buy back a half-billion dollars' worth of shares and nurse the stock price back to health! Launch digital coupons!
The thing is, there will be no real comeback in Whole Foods until it can get customers back into its stores. And most of the company's turnaround plan -- launching a loyalty program, improving technology, increasing private label and prepared foods, and building out a lower-end line of "365" stores -- are moves that, while significant, will take a while to bear fruit.
At the same time, every retailer from Walmart to Kroger is bolstering its offerings of healthy and organic foods, giving shoppers a reason to stick with their local grocery store rather than make a special trip to Whole Foods.
Perhaps that's why 24 out of 30 analysts tracked by Bloomberg have placed "hold" ratings on the stock (there are also 3 "sell" ratings and 3 "buy" ratings). Because even if you believe Whole Foods' long-term story will have a happy ending, it will take a while to get there.
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