AUSTIN, Texas — Whole Foods Market here said last week the Wild Oats integration is continuing to proceed smoothly — although industry analysts expressed concerns about decelerating same-store sales and the ongoing earnings drag from the integration.
At the 27 Wild Oats stores already rebranded, sales climbed from an average of 6% after remerchandising but before rebranding to 12% after the Whole Foods banner was hung, John Mackey, chairman and chief executive officer, told analysts last week.
“Sales have gone up in every instance where we've changed the name,” Mackey told analysts during a conference call to discuss financial results for the second quarter that ended April 13. “But we don't rebrand a store till it has been remerchandised and is worthy of having the Whole Foods name on it.”
Mackey said Whole Foods plans to remerchandise and rebrand the balance of 58 Wild Oats stores before the end of the fiscal year.
Net income at Whole Foods declined 13.1% to $40 million for the 12-week quarter — including a negative impact of approximately $8.6 million, or 6 cents per share from Wild Oats — while sales jumped 27.6% to $1.9 billion and comparable-store sales rose 6.7%. For the 28-week half, net income dropped 20.7% to $79.1 million, while sales increased 29.7% to $4.3 billion and comps rose 8.2%.
Excluding the impact of Wild Oats, sales at Whole Foods rose 15.6% to $1.7 billion during the second quarter, while sales at the 62 Wild Oats stores in operation during the quarter were $175.4 million, or 9.4% of total sales, with identical sales growth of 5.4%.
Comps during the first four weeks of the third quarter through May 11 were up by 5.7% at Whole Foods and by 5.6% at the 58 remaining Wild Oats locations (after four stores were closed early in the quarter).
Mark Wiltamuth, an analyst with Morgan Stanley, New York, said the deceleration in Whole Foods' comps from the first quarter through the early third quarter stems from a weaker economy and the fact that 30% of the store base is in California.
“The economy, consumer trading-down and cannibalization are driving the slowdown in Whole Foods' comps,” he said. “Food inflation is running 4% to 5%, and the grocery industry has been systematically passing it through to consumers, [which] is driving a certain level of sticker shock in the grocery aisles — and Whole Foods, as a premium-price/higher-quality food retailer, is more at risk for trade-down effects.”
He said cost synergies from Wild Oats are likely to emerge “in earnest” during the second half, “[but] since the company lowered prices at the Wild Oats stores and added more in-store labor, the Wild Oats base may be entering Whole Foods with lower earnings power in the initial quarters,” Wiltamuth added.
Simeon Gutman, an analyst with Goldman Sachs, New York, said the sequential deceleration in comps makes it appear that, “for the first time in memory, the macro-environment is adversely impacting sales. Because Oats spending will remain elevated for at least two more quarters and because the difficult macro-environment now appears to be a viable top-line risk factor, earnings uncertainty has never seemed higher.”
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said the comp-sales deceleration makes it unlikely Whole Foods will reach its guidance range of 7.5% to 9.5% for the year “given the challenging competitive environment, increased cannibalization and the weak economy.” He said he is forecasting comp sales for the year at about 7%.
Although food inflation is running above 4% and Whole Foods tends to follow the market in passing on or absorbing higher costs, Mackey said the chain's price increases during the second quarter were below the U.S. average.
He said Whole Foods is continuing to make “selective price investments” on commodity-type branded items “to broaden our appeal, which is not only the right long-term strategy but the right short-term strategy, particularly in today's market.”
He also said private-label goods represent 22% of total grocery and Whole Body sales, up from 15% three years ago.
Whole Foods plans to be more aggressive in expanding the availability of its value items, “particularly in the perishable area.” Mackey said.
Walter Robb, co-president and chief operating officer, said the company “clearly has opportunities to offer more value choices in perishables. In fact, we are incredibly competitive, and as our value story comes out, there will be good rewards for us.”
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