Why Whole Foods Must Consider Strategic Alternatives



The need for a turnaround at Whole Foods

As we discussed in the previous article, Jana Partners disclosed an 8.3% stake in Whole Foods Market (WFM) on April 10, 2017. The investor said that it would work to speed up Whole Foods’ turnaround process and that it might also consider a sale.

In this article, we’ll discuss Whole Foods’ financial performance to better understand what prompted Jana to consider strategic alternatives for the company.

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Whole Foods’ golden days

Whole Foods Market has been credited with cultivating widespread customer interest in natural and organic foods in the United States. The company had almost no competition in the US organic food market for almost 20 years. During this period, it enjoyed substantial growth and high margins.

Its top line rose at an average of 14% between 2005 and 2014. Its operating profit stood at an average of 5.5% during the same period, dwarfing the growth and margins of traditional supermarket players. For instance, Kroger’s (KR) average sales rose at an average of 6% during the period. The company had an average operating margin of just 2.7%.

What led to the downfall?

Whole Foods’ success attracted other traditional retailers and supermarket players to the organic foods space. Retail giants such as Walmart (WMT), Costco (COST), and Kroger (KR) flooded their shelves with natural food and products at very competitive prices. This move started WFM’s downfall as the company began to struggle with its “whole paycheck” status.

A look at WFM’s current status

Whole Foods’ same-store sales have been in the red for the last six consecutive quarters as the company has struggled to attract traffic. Its operating margin stood at 3.5% in the last reported quarter, compared to its average of 6.5% between 2012 and 2014.

Investors seeking to add exposure to Whole Foods can consider the Market Vectors Retail ETF (RTH), which invests 1.6% of its portfolio in the company.


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