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February 14, 2014 6:13 pm
Good news, Whole Foods shoppers. Now a trip to the grocery store will cost, perhaps, just half that paycheck. The company that made organic food part of the mainstream diet – for a cost – has been cutting prices and running promotions. And, gasp, it has added “more high-grade conventional” (read: not organic) offerings. That is bad news for Whole Foods shareholders, in the short term. The shift has hit both sales and the share price.
Whole Foods faces growing competition from other speciality chains, such as Sprouts Farmers Market, which have adopted Whole Foods’ mantra, and from traditional grocers such as Kroger, which have introduced healthier options. That is to be expected when a company hits on a recipe for success. The uneven US economic recovery has also highlighted the importance of price.
In the three months to January 19, comparable store sales at Whole Foods rose 5.4 per cent, against a long-term average of 7 to 8 per cent growth. Like just about every other retailer that has produced lacklustre sales of late, Whole Foods blames Old Man Winter and the economy. But it also said that the rate of price growth slowed – to 2 per cent year on year in the past quarter from 3 per cent in the previous one. The company also cut its full-year earnings targets – it now expects up to 12 per cent growth against a previous target of up to 15 per cent.
Initially, the lower prices hit results because customers are buying the same items for less. Over time, the hope is that the lower costs will give existing customers the incentive to buy more coconut water, grass-fed beef and the like as well as draw new shoppers through the door. But such transitions take time.
Investors are impatient. Whole Foods shares lost 7 per cent after the results this week. At $53, they trade at 31 times forward earnings. which suggests that Whole Foods is still a growth story. Indeed, it runs 373 stores and puts the opportunity at 1,200 in the US alone (it has 16 stores outside the US). Given the threats from rivals, the current strategy should put the company in a better competitive position in the long run. But shares look fully valued until the changes bear fruit.
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