Is this Make or Break for Whole Foods Market?

Whole Foods Market (WFM) reports its FQ3 ’15 result after the closing bell today. Whole Foods has struggled year-to-date (YTD) recording a share price decline of circa -20.71% relative to the NASDAQ which has appreciated just over 6.5%. The fall in Whole Foods stock price is largely attributed to its poor FQ2 ’15 result which it released in May. Unenthusiastic guidance, uncertainties surrounding management’s strategy and slowing comparable-store sales growth all hurt the stock.

Estimize and Wall Street predict an EPS figure of $0.45. Estimize, however forecasts a higher revenue number of $3.789B versus Wall Street which estimate a figure of $3.697B.

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Whole Foods, which specializes in delivering organic produce continues to face strong competition and aggressive pricing from key competitors including Wal-Mart (WMT), Costco (COST) and Kroger (KR) as they penetrate the organic food and beverage markets with offerings of their own. This has resulted in weaker sales and falling margins for Whole Foods. In an attempt to boost sales and stimulate earnings, Whole Foods’ management have initiated some strategic changes to drive foot traffic and fend off competitive pressures. One of the key initiatives is opening smaller stores branded as 365, which is aimed at attracting millennials. The 365 stores are not only expected to be competitive from a cost point of view, but due to the smaller store layout, 365 stores are expected have a higher yield per sq ft due to lower construction costs and cheaper rent.

Despite the potential upside associated with penetrating the large target market with the 365 stores, not everyone is convinced this initiative is appropriate for the Whole Foods business model. Many analysts and investors argue that introducing a lower margin – higher volume business will not only hurt margins but cannibalize sales from the existing premium Whole Foods stores.

The struggles of Whole Foods have been intensified recently when the company was found to have mislabeled pre-packaged products resulting in overcharging of certain items. This regulatory finding could not have come at a worse time for Whole Foods, with surging competition and falling margins, Whole Foods cannot afford to have a negative stigma attached to its brand.

The report for Whole Foods today will be closely watched by investors as they eagerly await the quarterly results and also management’s comments surrounding the company’s 365 stores strategy. Trading at PE Ratio (TTM) of 24.24X which is significantly less than its 5 year average of 33.91X reflects the markets pessimistic view leading into the result. If Whole Foods can deliver an upbeat report this afternoon and convince investors its strategic developments will pay dividends in the future, the stock may bounce and experience some positive momentum. If however, the reports misses expectations, Whole Foods may continue to experience share price weakness.

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(Photo Credit: phototainable)

Source: Is this Make or Break for Whole Foods Market?

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