Why Whole Foods Market’s Sales Plunged and Margins Narrowed


Oct. 24 2016, Updated 3:05 p.m. ET

A Look at WFM’s top line

Whole Foods Market (WFM), considered a pioneer in the US natural and organic foods industry, enjoyed robust topline growth and margins until competition from Walmart (WMT), Kroger (KR), and Costco (COST) stole its market share.

Whole Foods grew sales at an average of ~12% between fiscal 2010 and fiscal 2014, and it’s expected to see growth of just 2.3% in fiscal 2016. What’s worse is that this growth is largely fueled by new store openings. The company’s same-store sales have been severely hit, falling for the last four consecutive quarters.

While the entire food retail sector has been impacted by ongoing deflation, Whole Foods has been the worst performer in the space. The company’s same-store sales stood at -2.6% in 3Q16 compared to 1.7% for Kroger and 4.1% for Sprouts Farmers Market (SFM).

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A look at margins

Whole Foods has long been perceived as an expensive grocer. The company is working hard to shed its “whole paycheck” image and is in the process of adjusting itself to a lower-margin and lower-cost-structure operating model. This strategy has, however, hurt the company’s margins lately.

In the most recent quarter, WFM reported an 89 basis point decline in its gross margin to 34.7%. Its 3Q16 operating margin fell 116 basis points to 5.6%.

ETF investors seeking exposure to Whole Foods can consider the First Trust Consumer Staples AlphaDEX Fund (FXG), which invests 3.33% of its portfolio in the company.

To see whether investing in Whole Foods is a good idea, read the next two parts of this series.


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