Put Whole Foods Back on the Shelf Ahead of Earnings
It would seem, based on the 7% year-to-date decline in the SPDR S&P Retail ETF (XRT) - Get Report , that retailers are still waiting for U.S. consumers to spend the money they're saving on gas elsewhere. The recent plunge in the shares of Walmart (WMT) - Get Report , owing to a drop in quarterly profits, is evidence that the industry is facing slumping sales.
This environment makes Whole Foods (WFM) a tough stock to like ahead of its third-quarter earnings results, which are due out Wednesday after the closing bell. Whole Foods shares -- at around $30 -- are down 40% in 2015 and 23% over the past year, trailing both the Dow Jones Industrial Average (DJI) and the S&P 500 (SPX) index. And if you've held WFM stock for the past three years, you're in the hole by more than 30%.
The Austin, Texas-based specialty grocer has built its brand around selling organic and natural food products. But owing to increased competition from the likes of Kroger (KR) - Get Report and Trader Joes, Whole Foods revenue and profits have been sliced, which culminated in a revenue and earnings miss in the second quarter. And with estimates falling for the just-ended quarter, it may be a while before WFM stock rebounds.
For the quarter that ended in September, the company is expected to earn 35 cents a share on revenue of $3.48 billion, translating to flat earnings, while revenue is expected to be up around 7%. But at the start of the quarter, projected earnings were 38 cents a share.
Likewise, for the full year ending in December, the consensus earnings estimate was down to $1.67 a share, compared to the $1.72 a share consensus figure being offered at the start of the quarter. Full-year revenue, meanwhile, is projected to be $15.43 billion, translating to growth of 8.7%.
While 8.7% revenue growth might seem solid, compared to projected flat revenue for Walmart and 1% growth for Kroger, Whole Foods' gross margins remain an issue, having fallen 66 basis points in the second quarter. At the same time, the company's costs are on the rise, up 24 basis points in the second quarter.
True, Whole Foods has begun to make changes, including rolling out a smaller store format aimed at driving higher in-store traffic and reducing its costs. But it will take several quarters before the results of those efforts can have a meaningful impact on profits, so things may get worse before they get better. Investors would be better served to look for stocks with stronger growth prospects.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.