Whole Foods Investors Applaud Shake-Up, But Jana Isn't Satisfied

  • Organic grocer appoints five new directors, replaces chairman
  • Activist investor Jana announced stake in Whole Foods in April

Where Whole Foods Stands in Its Fight Against Jana

Whole Foods Market Inc. shareholders are cheering the company’s efforts to overhaul its board, cut costs and reignite sales. But Jana Partners, which has been pushing for a shake-up, isn’t yet satisfied.

The activist investor is maintaining a wait-and-see attitude in the wake of the changes, which include the appointment of five independent directors and a new chairman. Whole Foods had hoped to reach a truce with the firm, which announced a 8.3 percent stake in the supermarket chain last month. But Jana rejected the idea, preferring instead to keep its options open.

Whole Foods co-founder John Mackey is under pressure to prove he can mount a turnaround after seven quarters of sliding sales. When it disclosed its holding in the company in April, Jana vowed to push for big changes -- including a possible sale of the business.

“We made these changes because we think they’re in the best interest of our shareholders,” Mackey said in an interview. “Jana is a shareholder, so we think it’s in their best interest too, but they’ll have their own opinions. I can’t speak for them.”

The shares gained as much as 5.6 percent to $38.29, the biggest intraday increase in a month. They had been up 18 percent this year through Wednesday’s close, propelled in part by speculation that Jana would push Whole Foods to put itself up for sale.

The board’s newcomers include Ron Shaich, the chief executive officer of Panera Bread Co., and Joe Mansueto, the founder of Morningstar Inc.

The reshuffling includes naming current director Gabrielle Sulzberger to the chairman job. She will replace John Elstrott, who served in that role since 2009. Whole Foods also hired Kohl’s Corp. executive Keith Manbeck as chief financial officer, effective May 17. The previous CFO, Glenda Flanagan, announced her plan to retire last year.

Lower Forecast

The overhaul coincided with Whole Foods releasing its second-quarter results. Earnings amounted to 37 cents a share in the period, matching analysts’ estimates. Sales came in at $3.74 billion, just above the $3.73 billion estimate.

Whole Foods also trimmed its forecast, saying earnings would be at least $1.30 a share this year. It had previously targeted $1.33. Revenue will climb 1 percent or more, compared with an earlier goal of 1.5 percent.

The bid to revitalize Whole Foods includes an acceleration of its customer-loyalty program. After testing out approaches, the Austin, Texas-based company will roll out the initiative to all U.S. stores by the end of the year. Whole Foods also is cutting $300 million in additional costs by fiscal 2020. Zero-based budgeting -- a form of corporate belt-tightening that forces managers to justify each expense -- will be part of the process, Mackey said.

Whole Foods wants to push sales above $18 billion by fiscal 2020. Along the way, it aims to restore positive same-store sales by the end of fiscal 2018.

In another move to placate investors, the retailer will buy back $1.25 billion in shares and boost its quarterly dividend 29 percent to 18 cents a share.

Wait-and-See Approach

The board changes aren’t part of an agreement with Jana. The grocery chain asked the shareholder to accept a two-year standstill request in exchange for putting some of its proposed candidates on the board, but that deal was rejected. A representative for Jana said it opted instead to keep all its options open, pending further changes at the company.

Sulzberger, Whole Foods’ new chairman, said the company was working to reshape its board and had identified candidates prior to Jana announcing its stake last month. But the two sides discussed the idea of bringing in two Jana-supported directors. She said she was disappointed that the private discussions were shared with the media. Jana denied leaking confidential information.

The directors joining the board include Ken Hicks, the former CEO of Foot Locker; Sharon McCollam, an ex-CFO of Best Buy; and Scott Powers, who worked at State Street Corp. Panera’s Shaich, meanwhile, is taking the director job after announcing the sale of his company to JAB Holding Co. last month.

When it disclosed its stake, Jana assembled a team of retail and food experts to help diagnose and fix what’s ailing the grocery chain. The firm has also lined up board members for a potential proxy fight that would occur next year. The average tenure on the Whole Foods board was roughly 14 years, which had raised alarms among corporate-governance advocates.

Whole Foods hired the boutique investment bank Evercore Partners to help defend itself against Jana, a person familiar with the situation said.

Food Advocate

Mackey faces an uphill battle in trying to turn around Whole Foods. Though the company pioneered the market for organic groceries, it’s losing market share to mainstream supermarkets, which often charge lower prices.

But the executive has taken it upon himself to revitalize the chain he helped start in 1980. After six years of sharing a co-chief executive officer role with Walter Robb, Mackey took the job on a solo basis at the end of 2016.

He’s also pursuing a sideline as an author and food advocate. Mackey’s new book, “The Whole Foods Diet,” makes the case for the health benefits of a vegan lifestyle.

That project, coming at a time of crisis for Whole Foods, has raised eyebrows on Wall Street. A recent research note from Barclays Plc questioned whether Whole Foods management was spread too thin by “non-core initiatives,” mentioning Mackey’s book tour as an example.

In a bid to help shed its image for being overpriced, Whole Foods launched a new store format last year called 365 that is aimed at younger, budget-conscious shoppers. The company opened three locations on the West Coast last year and recently added another in Texas. Whole Foods hasn’t said much about the results, though it acknowledged on Wednesday that two of the four stores are underperforming expectations. It blamed the problems at one location on a “bad” real estate decision.

“The board will continue its comprehensive review of all opportunities to create value,” Mackey said. “We look forward to continuing our dialogue with shareholders.”

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