Whole Foods Market's (WFM) downtrodden stock has risen 8% from its February lows. Why? There are a few very specific reasons.
For starters, there is immense optimism on the company's new budget store concept called 365. Kudos to Whole Foods PR team for pulling out all of the stops to hype what amounts to a jazzed-up Aldi store -- it has really captivated the ever-bullish Wall Street crowd.
It has also excited influential journalists, who are supposed to be objective but have been anything but that in their coverage of 365, in my opinion. The fluff pieces have been embarrassing. Maybe that's a function of many of the stories leading with giant colorful photos instead of an assessment of Whole Foods' annual report.
Second, Wall Street is banking on a re-acceleration of same-store sales growth for Whole Foods amid investments in lower prices, mostly in fresh food. I am in Whole Foods' stores quite a bit, and honestly I don't "feel" the cheaper prices. In fact, I think many areas of the store (such as juice drinks and prepared foods) are getting more expensive and perhaps keeping a more cautious U.S. consumer at bay. Only Whole Foods knows what it's doing, ultimately.
Finally, Whole Foods has committed to taking out $300 million in costs over the next year, potentially boosting earnings just as sales could be poised to gain steam.
I have been very skeptical on all of these pillars to a bullish investment thesis on Whole Foods. In my view, the company doesn't deserve the trust of individual and inspirational investors.
The company has hyped its performance for the past three years and massively under-delivered in terms of results and stock price. The co-CEO structure remains absurd. There has been no accountability at the top for years of slowing growth and an overly aggressive approach on pricing and store expansion. So pardon me for not drinking the Kool-Aid on Whole Foods and waiting for tangible progress before putting my name on consistently optimistic pieces.
I went looking for that progress during the company's investment bank presentation on Wednesday and came away, yet again, concerned with Whole Food's near-term and medium-term outlooks.
Here are several things that strike right at the heart of the bull thesis on Whole Foods.
Initial 365 store performance: The first store has been open for about four weeks, and so far it seems to be doing OK. Whole Foods noted it had to install conveyor belts on its registers to handle the bigger basket sizes it is experiencing (they expected small baskets). "We're very happy with the start of 365," said founder John Mackey, adding that while it wasn't expecting too much from the location (for once the company appears to have made some rationale financial assumptions).
What has me concerned, however, is commentary from Mackey on 365 effectively competing with larger Whole Foods stores -- and it's much more than stealing sales. The company is still deciding whether it will price match its 365 stores at Whole Foods. Basically, Whole Foods has created a new fast-growing competitor to its traditional format, one that could easily have 100 stores open in five years very close in proximity.
The entire discussion of price matching its newest chain was bothersome, not to mention the continued admission of the company being clipped by Kroger (KR) and Publix.
Price investments: Mackey may have tipped his hand on quarter-to-date sales with comments on price gaps, or Whole Foods prices vs. its key competitors. "Price gaps are definitely narrowing," said Mackey, adding, "whether they're narrow enough or not, I don't think they are -- I think Whole Foods has more work to do."
When the company's founder says investments in prices are still not closing the gap with more aggressive competitors, it signals to me sales are still sluggish as people migrate to its competitors. This goes back to my view that Whole Foods cavernous stores "feel" more expensive. If my middle income self feels it, rest assured others do, too, and continue to shop the improved organic section at Action Alerts PLUS holding Target (TGT) on pay day.
Long-term growth profile: Whole Foods persistently weak sales and profits have caused executives to go back to the drawing board on new-store selection. Simply, stores that would have gotten approved for openings years ago aren't any longer due to tougher competition pressuring the outlook for returns on investment.
The company y casually made mention that it's reassessing its long-held view on the potential for 1,200 Whole Foods stores in the U.S. The way I read Mackey's comments, Whole Foods will lower this number -- possibly drastically -- in early 2017. And in doing so, upend every Wall Street analyst model, leading to questions on why the stock is still valued aggressively.
On the upside, there are now 20 365 stores in the development pipeline.