Whole Foods endures short-term pain for long-term gain

AUSTIN, TEXAS —Whole Foods Market disappointed investors in the second quarter, when earnings fell behind the year-ago period and failed to match analysts expectations. Strong store growth added doors and sales but cut into profits, a situation that may continue given the Wild Oats acquisition.

Whole Foods shares, which were running at around $46 the day before its May 9 earnings announcement fell as low as $40 on May 10 and closed at $41.15.

While second-quarter sales gained 11.6% to $1.5 billion—which the company credited to a 12% square footage growth and a 6% comparable-store sales gain—net income slipped to $46 million, or 32 cents per diluted share, versus $51.8 million, or 36 cents per diluted share, in the year-ago period. Blamed for the quarter’s earnings slide were pre-opening and relocation costs of $15.6 million, or 7 cents per diluted share, versus $7.3 million, or 3 cents per diluted share, in last year’s period, and $6.4 million relating to share-based compensation, pre-opening rent and accelerated depreciation expense for accounting purposes but noncash versus $3.9 million in the prior-year quarter.

Last year’s quarter included an extraordinary charge of 1 cent per share.

With second-quarter store openings and announcement of the Wild Oats acquisition, Whole Foods has been aggressive on growth. “We opened a record six new stores during the quarter which brings us to 15 opened over the last 12 months, and we are still on track to open more stores this fiscal year than we ever have,” said John Mackey, Whole Foods chairman and ceo.

Analyst reaction to the financials was mixed. Goldman Sachs cut its price target and HSBC Securities downgraded Whole Foods shares. However, UBS retained a buy rating, as did Argus, where analyst Erin Ashley, in a research note, focused on the food retailer’s strong comp trends, particularly at newer stores. Ashley added, “Although direct store expenses at these locations have hurt margins and earnings, we continue to believe that Whole Foods’ aggressive store opening plans will provide benefits over the next 12 months.”

Reports that the Securities and Exchange Commission is reviewing Whole Foods’ acquisition of Wild Oats may also have worried some investors, although such actions are typical after food retail mergers, and Whole Foods already has expressed a willingness to divest stores where too much sales overlap might occur.