Whole Foods Market: a Strong Buy?

Whole Foods Market (WFM) announced third quarter ended June 30, 2016 total sales of $3.70 billion, up 2 percent year-over-year from $3.63 billion during the same period last year.

Whole Foods Market declared third quarter of 2016 net income of $120 million or $0.37 per diluted share, down 22 percent year-over-year from $154 million or $0.43 per diluted share in third quarter of 2015.

The global organic foods provider reported continued year-over-year slight improvement in its top line primarily driven by a healthy trend of comparable store sales and rising sales from the company’s increasing number of global organic foods outlet.

Focusing in the right areas  

Whole Foods Market has illustrated notable improvement in top line for the first quarter of 2016 after witnessing continued revenue decline since last four quarters.
However, operating margin for the company declined 58 basis points during the first quarter of 2016 compared to the fourth quarter of fiscal year 2015 and despite significant cost-saving initiatives being undertaken by the company.

Going forward, Whole Foods Market is consistently facing significant competition from value-driven organic food providers like Trader Joes, Sprouts Farmers Market (SFM) and conventional retailers like Costco (COST), Kroger (KR) and Walmart (WMT). Therefore, Whole Foods Market needs to deliver superior product innovation in order to successfully counter the expanding competition from these well-established organic food players.

The organic foods company is believed to continue to suffer top line losses and market share loss to several other organic foods retailers that have sheer size and impressive financial position to support their growth operations while delivering attractive innovation in their organic food offerings.

The overall financial performance of Whole Foods Market has diminished with the expanding competition.
Whole Foods Market: a Strong Buy?
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The company declared 8.4% of EBITDA margin during the first quarter of 2016, which is believed to be the weakest since past 16 quarters. However, Whole Foods Market’s sales per square foot were recorded better than Walmart (WMT), Fresh Market (TFM) and Kroger (KR) while weaker than Costco (COST). Whole Foods Market same-store sales remained the highest among its competitors and the company registered the greatest EBITDA margins.

Impressive moves  

Whole Foods Market has undertaken several growth efforts to enhance the value perception, expand long-term profitability and restructure traffic such as strategic investments in core technology platforms and superior digital technologies, improved external marketing initiatives, strategic and well-planned price reductions, enhanced promotional activities, introducing attractive stores, enhanced focus on prepared foods and exclusive brands and impressive cost restructuring.

Moving ahead, Whole Foods Market targets on opening three major 365 stores from May 2016 till August 2016. The organic foods company has already declared 13 key leases for 365 store format. These innovative 365 stores are expected to support the company in better managing the value sensitivity issues and would target millennials.

The company is expected to be successfully countering the rising threat from other major organic foods retailers through the strategic introduction of new stores at key destinations while optimizing its financial position for successfully supporting the well-planned growth efforts.

Whole Foods Market delivered 45 basis point enhancement in comps since last quarter, with a notable growth in items per basket hugely offset the decline in the average cost per item and the number of transactions. The combined operations optimization efforts of Whole Foods Market including, the company’s value strategy, customers moving towards selecting smaller-priced items and disinflation in certain item types caused year-over-year fall in average cost per item.

Although the company’s value approach is consistently and negatively impacting gross margin and comps, while Whole Foods Market is continuing to witness a widespread improvement in the number of items per basket and seems stimulated with expanding traffic trends through some major departments, mainly produce.


Overall, the investors are advised to “Hold” their position in Whole Foods Market, Inc. considering the company’s significant long-term growth prospects but, currently weaker financial position with significant total debt of $1.05 billion against weaker total cash position of $625 million only, restricting the company to make future growth investments. The profit margin of 3.04% seems satisfactory. The PEG ratio of 4.91 indicate healthy company growth.
Published on Aug 22, 2016
By Subhen Mittra

Copyrighted 2020. Content published with author's permission.

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