Quality Earnings, Quality Food: Whole Foods Market (WFM)

whole foods sign on a building facade

In May, WFM reported disappointing same-store-sales growth of less than 3% (down from the historical average of 7.1% between 2010 and 2014), and the stock was hit hard. In July the company reported lower-than-expected earnings and flat same-store growth, causing the shares to drop 10%. And in the most recent quarter, WFM missed guidance on all metrics, including sales, earnings, and same-store sales.
However, Clean Yield has not lost confidence in WFM. While we may be selling (and later repurchasing) WFM for tax loss purposes in some accounts, we continue to believe in the long term prospects of the company. Historically the company has been well managed and generated good returns on shareholder capital. This is not the first time WFM has been through a challenging period, and each time, it has adjusted its strategy and pulled through. This time, WFM has laid out a plan to turn itself around through expense reductions, as well as investments in lower prices, marketing, communication, and technology. The company is also implementing a $1-billion share repurchase program (about 10% of its shares outstanding at today’s levels), which should support the stock price.
Despite an overall drop in same-store sales, new stores’ sales are doing well. And this year, WFM introduced a new, smaller store format similar to Trader Joe’s and called 365 by WFM, targeting millennials in urban markets. Other companies with the same idea include Target with its CityTarget stores, Wal-Mart with its Neighborhood Market, and Ahold’s foodie-focused bfresh™ stores. It remains to be seen whether the new stores will drive growth or erode sales in existing WFM stores.

While there are no quick fixes for the company’s challenges, WFM is financially solid and has one of the best balance sheets in the industry. Continued secular growth of the organics segment should support the company’s recovery and long-term health.

Whole Foods
Price: $30.00
Stock 52-week Low–High: $28.73-$57.57
Market Capitalization: $10.22 billion
Earnings Per Share (EPS):
2016 est. $1.74
2017 est. $1.84
Price/Earnings (2015): 20.12x
Projected 3–5 Year Annual Earnings Growth: 10.7%
Dividend Yield: 1.81%
Risk: Average
Website: https://www.wholefoodsmarket.com/