Can't blame noted activist investor Jana Partners for building a new stake in struggling organic grocer Whole Foods (WFM) .
Shares of Whole Foods surged 10% to $34.19 on Monday on a WSJreport that Jana was pressuring the company to accelerate turnaround efforts and even consider a sale. Jana is also reportedly pushing for a board overhaul.
A person close to the matter told TheStreet that Jana may nominate former Gap(GPS) - Get Report CEO Glenn Murphy, now co-chairman of Lululemon Athletica(LULU) - Get Report , former Barclays retail analyst Mereditch Adler and Thomas Dickson, who sits on the board of CST Brands (CST) , to Whole Foods' board of directors if it pushes for an overhaul.
Jana is also working with food journalist and former New York Times columnist Mark Bittman and skincare company Rodan + Fields CEO Diana Dietz and the person said they could become board nominees in the future, as well.
The person said Jana is approaching Whole Foods first from a "friendly" standpoint but that the company, which is "a mess," must do something to fix its operational issues. He said to take a company like Whole Foods with such a strong brand and turn it around to having no value to shareholders is "abysmal."
Whole Foods responded in a typical boilerplate fashion.
"Whole Foods Market welcomes investment in the company and is open to the views and opinions of all of our shareholders. We value constructive dialogue toward our shared goals of creating shareholder value, successfully executing on our strategic priorities and taking actions that will position the Company for continued success. We are committed to driving value for all Whole Foods Market shareholders and will continue to act to achieve this important objective."
Points out Jefferies analyst Chris Mandeville, "An outright sale could be explored, but we don't see this as imminent; we expect some combo of Board change, operational efficiencies, and real estate optimization to be pursued first."
As TheStreetreported in February, the arrival of an activist investor is long overdue.
Judging by the latest quarterly results, the company continues to fail at re-establishing itself as the number one destination for organic food. The retailer's same-store sales declined 2.4% for the fiscal first quarter, despite stepped-up promotions in produce, meat and dairy to be more competitive with its new rivals. Earnings badly missed estimates by $0.09 a share and executives chopped their full-year outlook.
Even as it continued to lower prices on consumer staples -- which are supposed to be traffic drivers -- Whole Foods saw the number of transactions decline a stunning 3.9%. Its same-store sales have now fallen in six straight quarters, according to Bloomberg data.
Through the first five weeks of the second quarter, things actually got worse for Whole Foods, as same-store sales were down 3.2%. The company blamed the weather for the awful start to the second quarter. For good measure, Whole Foods shocked everyone by saying it recently closed nine stores (once unthinkable), calling into question the past five years of aggressive store openings (100 or so in past three years, many of which are larger locations) and the brand's longer-term potential.
Whole Foods has lost between nine to 14 million customers over the last six quarters, Barclay's analyst Karen Short estimated in a recent note. Short believes Kroger(KR) - Get Report has been one of the prime beneficiaries of the traffic exodus from Whole Foods as the traditional supermarket has ramped up its number of organic food offerings and discounts.
The "staggering" traffic declines, says Short, casts a dark cloud over Whole Foods' future.
"As most retailers know, once traffic has been lost those patterns rarely reverse. As a result, in our view Whole Foods might face significant challenges to reverse behavioral changes even if execution improves because execution at competing retailers remains very strong."
Whole Foods has been facing competition from every direction, both online and in-store from major grocers such as its biggest rival, the grocery story chains, led by Kroger (KR) - Get Report, as well as Trader Joe's, Costco (COST) - Get Report, Sprouts Farmers Markets(SFM) - Get Report and Natural Grocers(NGVC) - Get Report . Shares of Whole Foods have crashed about 35% over the last two years.
Others on Wall Street share Short's cautious views on Whole Foods.
"An increasingly difficult industry backdrop has exacerbated continued poor underlying momentum, and visibility on near-term improvement [for Whole Foods] at the company is low," wrote Credit Suisse analyst Edward Kelly in a new note.
Updated from Apr. 10 with new details.