The Daily Dose: Trying to Warm Up to Whole Foods

 | Jul 31, 2014 | 11:00 AM EDT
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I really want to warm up to Whole Foods (WFM) shares right now. Here's why.

1. I believe in the leadership of co-CEOs Walter Robb and John Mackey. Their passion for the Whole Foods mission statement permeates the entire company, leading to strong customer service and attention to detail in terms of merchandise presentation. We sure can't say that for Wal-Mart (WMT).

2. Whole Foods remains the destination for organic goods among higher-income families. Yes, I get that Wal-Mart is offering some organic food, and ditto for Target (TGT) (both of which my firm rates as Sells). Fairway (FWM) is a decent foe, and then of course there is Trader Joe's. But, when push comes to shove, I believe the core Whole Foods customer remains very loyal to the brand due to the selection of merchandise offered.

The problem is that the stock market continues to fret that Whole Foods is losing that upper-middle-income consumer to the aforementioned companies, which is causing the company to invest in more attractive price points that eat into the gross profit margin. The lower prices, thus far, have still not reinvigorated same-store sales.

3. The company is actively entering new markets. Unlike what we've seen among many restaurants and retailers, the Whole Foods message is not being jammed down the throats of consumers via the placement of two stores within a five-mile radius. In other words, Whole Foods still has potential for long-term square-footage growth, and strong sales per square foot.

So, no, Whole Foods is not the next Supervalu (SVU) disaster story. However, the company continues to be a "show-me" type of investment. For Wall Street to give the nod to Whole Foods, and in order to prevent further stock routs during the next earnings season, the company will have to bring more to the table than a mention of "stabilizing" sales trends. Going forward, given that shout-out to stabilizing sales, Whole Foods must deliver an incrementally improving gross profit margin. This would signal to investors that price investments are driving new volume to the stores.

Here is what I didn't like from Whole Foods quarter, besides the modest earnings-per-share guide-down.

First, transaction growth was 2%, slower than the 2.4% realized in the preceding quarter -- and despite investment in price. This number will only fuel the bearish debate on the stock, which revolves around the company losing market share.

Second, I am not a fan of that big sales-growth drop-off among stores that are five to eight years old -- and those over eight years old as well. The disparity is glaring, and hints that competitive intrusion in the organic space is taking a toll.

Inside the Family Dollar-Dollar Tree Merger

Look out, Walgreen (WAG) and CVS (CVS) -- you, too, will be harmed by this mega merger between Family Dollar (FDO) and Dollar Tree (DLTR). I received the following tidbit from Family Dollar Wednesday, and it shows how the combined company will really be dominating certain trade areas:

"About 25%-30% of our stores are in the same customer trade area with a Dollar Tree store. As you can imagine, the size of customer trade areas differs, depending on population density and the size of the market. For example, the trade area in Brooklyn, NY would be much smaller than the trade area in Roanoke, AL."

One last thing: The CEO of Best Buy (BBY), Hubert Joly, gave a very insightful interview to Re/code's Walt Mossberg Wednesday. In it he intoned somewhat downbeat comments regarding volume and pricing on electronics. In my view, seeing as this is mere weeks before the quarter is set for release, it is a red flag.

Do with that wisdom what you wish.

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