Whole Foods Market Is Getting Better – Here's Why

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Mar 25, 2015
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Shares of the organic food retailer, Whole Foods Market (WFM, Financial), have soared 11.5% in the last two months. The retailer has worked hard to change its brand image from “Whole Paycheck” to a quality organic food grocer. It has undertaken a number of digital initiatives, which has helped it to grow the business. Also, an increase in consumer spending in the U.S. has resulted in higher demand.

Whole Foods recently reported its fourth quarter numbers, which were ahead of the Street’s estimates. The impressive results made the share prices move north. Let’s take a closer look at the quarter.

An overview of the quarter

Revenue was up 10%, clocking in at $4.7 billion, as compared to the previous year. Thus, the top line was in line with the analysts’ estimates and was driven by price cuts on a range of products. The same store sales of the company rose 4.5% during the quarter. Key drivers for the growth in comp sales were an increase of 2.3% and 2.2% in the number of transactions and the average transaction size.

Whole Foods Market was witnessing lower sales previously. This was due to higher prices charged by the grocer which forced customers to shift to other retailers, who provided organic products at competitive prices. In order to combat the competitive pressures and boost its sales, the retailer lowered its prices.

The bottom line of the company also surged higher. Earnings climbed 9.5% to $0.46 per share, over last year. This was slightly better than the analysts’ estimate of $0.45 per share and was helped by cost cutting measures.

Efforts galore

Since lowering the product prices would affect the margins, here’s how the premium organic grocer managed it well. It implemented measures to control the cost structure to maintain the margins and the profitability of the company.

However, gross margins fell 0.2% to 34.8%, despite a 0.4% decline in SG&A. Margins were mainly affected by the costs related to national ad campaign, called Values Matter, excluding which margins would have improved. The new ad campaign was introduced to differentiate Whole Foods’ products from other organic retailers.

Further, the company plans to launch new stores, expanding its existing footprint globally. Also, it is making a number of efforts to expand the digital footprint. Its new mobile app has become very popular with 600,000 downloads. The company plans to upgrade it in 2015 with new additional features.

Whole Foods Market is one of the first companies to adopt Apple Pay at its stores, which now account for 2% of total sales. Transactions would further increase with the launch of Apple Watch this year.

Furthermore, it has entered into a partnership with the grocery delivery app, called Instacart, which now makes 5% of total sales. Thus, the management plans to expand it to more products and wider markets through its delivery and pickup services. Moreover, it plans to launch the first brand campaign this year, which should further attract more customers.

Conclusive thoughts

The premium organic grocer has made commendable moves which have helped it grow. The launch of new products, reduction in product prices, a host of digital initiatives and a loyalty reward program, should together be quite fruitful for the retailer. Moreover, it has been giving away dividends and doing share buybacks. Thus, investors too are happy with its performance. Overall, this organic food retailer looks great to go.