Whole Foods march continues

Whole Foods march continues

Whole Foods Market has insisted its "value and differentiation" yielded dividends during the first half of its year, when the US natural retailer was able to grow same-store sales ahead of the market and expand its share.

The company revealed yesterday (8 May) first-half net profit rose 22% on the back of higher sales and tightened capital discipline. Whole Foods said sales jumped 14% to US$6.9bn in the period. Comparable-store sales were up 7.1% and identical-store sales, excluding four relocations and three expansions, increased 6.8%.

Commenting on the result in a conference call, co-CEO John Mackey said the strong sales performance reflected the fact Whole Foods has outperformed the US grocery sector. "We are not aware of any public food retailers producing these levels of same-store-sales results and believe our efforts around value and differentiation continue to be a significant contributor to our market share gains," he said.

The natural and organic grocer is focused on shifting from its upmarket positioning in order to compete more effectively with mainstream supermarkets. It is lowering prices across the store, Mackey said. According to pricing data collected by Whole Foods, its pricing on non-perishable products "continued to be very sharp", while perishable teams "improved their price competitiveness".

However, Mackey added flat gross margins demonstrated prices were not being cut at the expense of profitability.

"We remain committed to our current path of expanding our value offerings across the store, increasing our promotional activity, and improving our relative price positioning. We believe our gross margin results reflect our incremental progress, as our cost of goods sold was flat year over year with a reduction in shrink offsetting our value efforts. The slight improvement in gross margin was driven by leverage in occupancy costs," Mackey explained.

Improving its value proposition is only one arm of Whole Foods attempt to build its overall proposition and the company also remains focused on delivering superior quality and service, Mackey insisted. "While we are focused on value, the Whole Foods Market brand is defined by our high quality standards, and we continue to find ways to further distance ourselves from other food retailers."

In March, the group said all stores in the US and Canada would have to show whether products contain GM ingredients by 2018. It currently provides information on animal welfare standards on its meat products, "eco-scale" ratings for cleaning products" and information on sustainability in its seafood offering. "We believe that quality and transparency are inseparable and that providing detailed information about the products we offer... is one of the reasons millions of people place their trust in us each day," Mackey said.

Looking to the full year, Whole Foods raised its earnings outlook and narrowed its sales guidance. The company said EPS is expected to fall in a range of $2.86-2.89, up by 2-3 cents a share, while identical-store sales growth is expected to total 6.5-7.2%.

Investors responded positively to the news, with shares up over 8% following the announcement. According to William Blair & Co. analyst Mark Miller, the financial update did much to dispel concerns about the value direction Whole Foods has pursued.

"Because of the slower start to the period, a spate of softer retail sales reports, and investor misperceptions regarding management's motivation to step up price/value efforts, the in-line comp-store sales result will be viewed as an important positive. Slightly better gross margin also builds confidence that management can execute in an investor-friendly way in its ambition to capture a much bigger share of a huge industry," he wrote in a note.

According to Miller, the expansion possibilities presented by Whole Foods' drive to capture share from mainstream grocers are "open ended" thanks to "favourable secular demand drivers for natural and organic foods" and "continued strong execution".