Slow to Cut Prices,
Whole Foods Is Punished
By Annie Gasparro
Shares in the natural
and organic grocery pioneer plunged nearly 19% on Wednesday, vaporizing more
than $3 billion of the company's market value, after it reduced its sales and
earnings outlook for the third time in six months.
Whole Foods also
reported flat earnings for the latest quarter and revealed that a key measure
of sales growth hit its weakest pace since early in the U.S. economic recovery
more than four years ago.
Whole Foods' years of
rapid growth demonstrated consumer demand for natural and organic foods that
were once niche products. The Austin, Texas company, founded in 1980, now has
about 380 stores, and revenue last year of $12.9 billion.
Nationwide, sales of
natural and organic foods now amount to roughly $50 billion a year. Investors
had adored Whole Foods, giving it a market value at times exceeding that of Kroger Co. the nation's largest mainstream grocery
chain, which has seven times as many grocery stores.
But its accomplishment
drew broad new competition, from mainstream retailers like Kroger and Safeway Inc. and
Fresh Market Inc. Wal-Mart Stores Inc. last month said it struck a deal with
Wild Oats to launch 100 mostly organic products that will be priced 25% cheaper
than national brands.
Phoenix-based Sprouts,
which has about 170 stores, on Wednesday said earnings rose 86% for the latest
quarter and raised its forecast for the year, pushing its shares up 6% in
after-hours trading. The shares had dropped 12% as of 4 p.m.
Its shares had fallen
45% from their peak in October through Wednesday's market close amid concerns
about over expansion and competition among specialty grocers.Sprouts Chief
Executive Doug Sanders credited Sprouts' focus on affordable prices, which
attracted customers who wouldn't otherwise be able to buy natural and organic
foods.
Whole Foods has
largely tapped out its core demographic in upscale urban neighborhoods. The
company's solution has been to expand beyond its comfort zone in new areas such
as poorer neighborhoods, smaller cities and suburbs. It has recently opened
stores in Detroit and West Des Moines, Iowa, and plans to open one in Chicago's
South side next year. To fend off new competition and attract customers in
those new markets it has had to lower the high prices—and profit margins—that
earned it the moniker "whole paycheck."
"There's
certainly a very rich competitive system out there right now. We recognize
that. No one's going to give us any business," Co-Chief Executive Walter
Robb said on a conference call with analysts late Tuesday. The company declined
to comment on Wednesday on the decline in its share price.
Tuesday's forecast
underscored the new reality. The company projected sales at stores open at
least a year will grow in 5% to 5.5% in the current fiscal year ending in
September, compared with an average of 8% annually for the past 15 years.
The company says it is
also reducing store expenses to help insulate its profit margins, and is
investing in things like grocery delivery, exclusive products, and enticing
extras, such as the greenhouse on the roof of its new Brooklyn, N.Y., store.
Some analysts say the
grocer isn't doing enough to compete in this new environment. They want it to
cut prices even more quickly and conspicuously.
"I'm not really
hearing anything that's suggesting management is taking this situation as
seriously as some investors want you to," Ken Goldman, a J.P. Morgan Chase
& Co. analyst, said to Whole Foods executives on a conference call.
Charles Grom, a Sterne
Agee & Leach Inc. analyst, said Whole Foods needs to better promote its
lower prices and special deals. "You're just going to lower the prices and
hope that the customers start to recognize it over time?" he questioned.
Co-founder and co-CEO John Mackey acknowledged that "We haven't been
investing in price as aggressively as we probably needed to." And Whole
Foods said it is "experimenting" with some marketing strategies now.
But Mr. Robb also said
"we're never going to be in a race to the bottom; chase [customers] only
on value, only on price. That's not who we are."
Whole Foods'
share-price drop on Wednesday, down $9.02 to $38.93, cost Mr. Mackey more than
$8 million based on his latest disclosed ownership stake.
Many investors remain
bullish about Whole Foods' business-even if its valuation had gone too high.
Whole Foods' stock has typically traded in recent years around 35 times its
latest annual earnings, compared with about 15 times for Kroger. After
Wednesday, Whole Foods trades around 26 times earnings.
"The stock got a
little pricey. When you have consistent linear returns, the stock market will
put a premium on it," said Russ Piazza, chairman of Front Street Capital
Management Inc., a Missoula, Mont.-based money manager that owns Whole Foods
shares.
Mr. Piazza said Front
Street bought more shares on Wednesday's decline. He likened Whole Foods'
situation to that of Starbucks Corp. which created a market for high-end coffee shops that
drew competition, and then over expanded before regrouping a few years ago.
"No one is challenging the potential for the Starbucks brand now," he
said. "Wall Street has a short-term view."
From the Wall Street Journal
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