Whole Foods' Strategic Shift Too Little Too Late?

Whole Foods Market, Inc. WFM reported its Q1 EPS in-line with expectations, but reduced its full-year guidance. Although the company has refined its growth strategy, this “may not be enough to offset secular headwinds,” Deutsche Bank’s Shane Higgins said in a report. He maintained a Hold rating on the company, while reducing the price target from $29 to $28.

Whole Foods reported its first-quarter EPS at $0.39, in-line with the consensus expectations. However, the company faced weak traffic due to intense competition. The comps guidance for fiscal year 2017 was lowered from -2.0 percent to 0 percent to -2.5 percent or better. The EBITDA margin and EPS guidance was reduced from ~8.2 percent to ~8 percent and from $1.42 or greater to $1.33 or greater.

Analyst Higgins reduced the EPS estimates for FY 2017 and 2018 from $1.45 to $1.34 and from $1.50 to $1.30, respectively.

Strategic Shift

Whole Foods indicated that it was refining its growth strategy and would no longer target 1,200 units. The company intends to “refocus its resources on winning with its core customer, who may be less price-sensitive,” Higgins noted.

Whole Foods plans to increase its category management efforts, which it hopes would boost comps and earnings growth in the longer term. The company would work with data analytics firm dunnhumby to enable it to adopt a data-driven approach to merchandising, marketing and pricing.

“While we support WFM’s steps to slow unit growth and to engage dunnhumby, we believe that category management and more targeted investments may take time to reverse the weak traffic and comps trends – especially given an increasingly competitive environment,” the analyst wrote.

Higgins also expressed concerns around the company focusing on serving its core customer, which could dissuade less dedicated shoppers, particularly Millennials. He added that comps and margins would remain under pressure “for at least the next few quarters” and the performance of shares would remain range bound.