Once the darling of Wall Street, Whole Foods Market spent much of the last 18 months out in the cold as it witnessed sales and profits slide in the face of the economic downturn. However, the company’s stock surged to a two-year high yesterday (13 May) after the natural and organic retailer reported strong sales and profits growth. With the economic outlook brightening, it seems Whole Foods is beginning to witness something of a renaissance. Katy Humphries reports.
2009 was a disappointing year for US natural and organic retailer Whole Foods Market. Battered by declining consumer spending and trends that saw shoppers trade down to cheaper products – and retailers – the company was dogged by concerns over its ability to meet debt maturities as it posted declining same store sales last November.
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Nevertheless, outspoken founder and CEO John Mackay remained characteristically confident, insisting that the company had “turned the corner” as he delivered sales for the fiscal that fell below even the market’s relatively low expectations.
Mackay certainly had some cause for optimism. The up-market retailer had spent much of the past 12 months cutting costs and improving efficiency, while also addressing balance sheet issues and cutting CAPEX by reigning in its highly-aggressive store expansion programme.
While the company remained at the mercy of the wider economy, it had spent its time in the wilderness wisely and was prepared to emerge from the downturn in better fighting shape, a more efficient organisation with better margins and a stronger balance sheet.
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“We have successfully emerged from this recession with a healthier balance sheet and better capital disciplines,” Mackey emphasised during the company’s earnings call with analysts this week.
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By GlobalDataIndeed, to date this year the company has twice raised its full-year sales and earnings guidance on the back of two expectation-beating quarters.
Whole Foods now expects same-stores sales growth to fall in a 6-7% target range, up from its previous guidance of 3.5-5.5%, while EPS guidance was raised from $1.20-1.25 to $1.33-1.37.
“We are impressed by Whole Foods’ ability to turn the business around after a disappointing 2009,” Morning Star analysts wrote in a research note. “Increased store productivity helped leverage rent and other fixed expenses and as a result Whole Foods delivered $119m in [Q2] operating income, representing 5.7% of sales, up from 3.7% in the prior-year period.”
At the end of the first quarter, Whole Foods was able to hail the return of middle class shoppers as its sales benefited from increased traffic to its stores.
By the end of the second quarter, the group revealed that returning consumers are now “selectively trading up” to more expensive items. Whole Foods said that it has seen an increase in transaction value during the period as middle class US customers begin to ease open their purse strings, the first increase in basket size since the fourth quarter of 2008.
Sales for the second quarter increased 13.4% to $2.1bn, driven by comparable-store sales growth of 8.7% during the period, the company said.
These sales trends are well above Whole Foods’ mainstream rivals, evidence perhaps that while the group’s positioning at the high-end of the market meant that it was among the first to feel the chill winds of recession, it has also been the first to benefit from the halting return of consumer confidence.
The group has benefited from the sharper upswing in sentiment among Whole Foods’ more affluent target consumers. This improved sentiment has also lifted sales at other higher-end retailers – such as Neiman Marcus, Saks, Nordstrom and Bloomingdale’s – as wealthy US shoppers renew their spending on luxury goods.
Meanwhile, although the likes of Safeway, Kroger and Supervalu have witnessed some evidence that consumers are beginning to trade up, in their case this has not always been a good thing.
Grocery store shoppers have begun to trade up to branded products. The rapid expansion of of higher retailer margin private label has at least slowed and, simultaneously, ID sales trends at traditional grocers have also been dented by food deflation.
Unlike the traditional grocers, Whole Foods ruled out slashing prices to drive volumes, for the time being at least, meaning that deflationary trends are unlikely to be felt as keenly on the bottom line.
“We’re sticking with our goal of offering competitive prices on known value items, day in and day out,” Mackey said during the group’s Q2 conference call.
While Whole Foods will come up against some tougher comparables in the remainder of this year, providing the recovery stays on-track in the US, the group looks well-placed to capitalise on improving sentiment and grow both sales and margins.
