Sell-Side's View On Whole Foods' New Activist Investor Slightly Cautious

Whole Foods Market, Inc. WFM shares surged Monday, rising by roughly 10 percent, after Jana Partners picked up a 8.3 percent stake in the company.

Following the development, sell-side analysts sounded cautious about the move.

Jana's Ownership Stake Doesn't Alter Fundamental Picture

Deutsche Bank said the stake purchase by Jana doesn't change its fundamental take on the company or its competitive positioning. Analyst Shane Higgins said he is concerned around the company's strategy and its overall competitive positioning for a while due to heightened competition within the natural/organic grocery space.

"We do not see any indication that the competitive environment is subsiding, especially given the continued expansion of lower-cost competitors ((e.g., NASDAQ:SFM), Trader Joe's), the greater focus on organic and fresh from leading conventional players ((e.g., NYSE:KR)) and given the growing presence of online retailers — particularly Amazon.com, Inc. AMZN, " the analyst substantiated.

"We remain at Hold on WFM due to valuation and given the very challenging competitive landscape, which will keep pressure on WFM even as it works to improve the business."

Deutsche Bank has a Neutral rating and a $28 price target on the shares of the company.

Competition And White Space Outlook Present Challenges

UBS thinks one of Whole Foods' core challenges would be its need to invest considerably in price to win marginal shoppers back. The firm believes bringing down prices in parity with competition would pressure margin and that its store growth lever isn't attractive.

Drawing a parallel between Jana's involvement with PetSmart, Inc. PETM in mid-2014 and its current stake buy in Whole Foods, analyst Michael Lasser noted that the former was sold to a consortium of private equity players for $83 per share.

UBS rates Whole Foods a Sell, with a $25 price target.

Jana's Involvement Will Expedite Initiatives At Whole Foods

Oppenheimer analyst Rupesh Parikh took note of the company's plethora of initiatives to improve its performance, which he feels will eventually bear fruit in areas such as loyalty, category management, real estate, etc.

"With an activist in the fray, we very much expect WFM to move even quicker with its initiatives," the analyst said.

Accordingly, Oppenheimer raised its price target to $40 from $35, assuming a blend of three scenarios, namely a return to positive comps, Whole Foods sale and fundamentals remaining challenging. The firm, however, removed the company from its top pick in grocery, as it views the risk/reward as less compelling at these levels.

The firm has an Outperform rating on the shares of Whole Foods.

After tacking on 10 percent on Monday, Whole Foods shares were losing steam in Tuesday's session. At the time of writing, the shares were down 2.49 percent at $33.32.

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