After hitting a peak in mid-February, shares of Whole Foods (WFM) have been through the meat grinder. The stock is 33% off its recent highs and it looks like a tempting buy, but I would stay away.
Sales for the fiscal second quarter, which ended April 12, came in a bit light at $3.6 billion and earnings per share of $0.44 were ahead of the consensus estimate, but same-store sales were a disaster. Whole Foods said same-store sales rose just 3.6% versus expectations of a 5.2% increase. In the same period last year, the company posted a 4.5% same-store sales increase and the year before that a 6.9% jump. Same-store sales increases in the 6% to 7% range look like a thing of the past.
The management have tried a variety of initiatives to drive same-store sales higher; among them are store refreshes, produce price reductions, ad campaigns and an affinity program. But nothing has seemed to work. If Whole Foods can't jump-start sales at its 417 locations, I don't think anyone believes the company can reach its long-stated goal of 1,200 stores in the United States.
The company announced plans to launch a new uniquely branded store concept (i.e., a "mini-me"), which will offer a lower-priced assortment in a small-store format. The new concept, which will be called "365 by Whole Foods Market," is slated to launch next year and the company will provide more information about it in the fall.
I'm concerned the new format will prove a distraction, bringing down margins and eating up capital. The new format will be very similar to Sprouts Farmers Market (SFM). Sprouts is a fast-growing grocery store chain focused on selling fresh, affordable organic foods. The stores are highly promotional; they focus on value and offer produce prices that are significantly lower than those of competitors. Sprouts has been growing sales almost 19% a year for the last seven years and has posted same-store sales growth of more than 20% in the last two years.
With declining same-store sales, margins under pressure and uncertainty over Whole Foods' new store concept, I wouldn't pay nearly 24x fiscal 2015 EPS estimates of $1.72. I would avoid the shares of Whole Foods until the company can provide more evidence that its turnaround initiatives are beginning to pay off.