Wall Street Isn’t Buying What $WFM is Selling

Remember when Whole Foods was a special place? It was a respite from the God foresaken Foodtowns and Pathmarks of the world. But the world caught up to Whole Foods and now the innovator is becoming the imitator of lesser brands. In this case, I am speaking of Whole Foods’ 365 niche store concept, an obvious rip off from Trader Joe’s.

I like TJ; but everyone knows it’s s poor man’s WFM. The company is lost without a paddle. Wall Street isn’t buying what they’re selling and neither am I.

Analysts take.

TAG understands the co is actively attempting to reduce costs and restructure the business, but there has not been much improvement in sales despite a multi-year investment in price and traffic driving initiatives. The competitive environment remains intense, and Whole Foods is still searching for a solution. Traditional and other specialty grocers continue to encroach on Whole Foods’ niche, forcing the co to increase its investment in pricing and marketing, and seek growth beyond the core concept via its new “365” by Whole Foods banner. In addition, the shift toward online grocery and the need to invest to be relevant and differentiated in that space may weigh on earnings. Although Whole Foods seems to be doing the right thing by focusing on traffic-driving initiatives and reducing its cost structure, they need to see stabilization in same-store sales to believe that the co’s efforts are generating results.

Pivotal Research notes the most worrisome development about Whole Foods’ latest results is the continued sales deceleration heading into FY17. Two-year stacked comp trends declined from +0.6% in 2Q16 to -1.3% in 3Q16. They expect two-year stacked comps to take a further step back by 130 bps to -2.6% in 4Q. Against this backdrop of heavy gross margin investment and continued descent of Whole Foods’ sales trajectory, the potential for comps to remain negative in FY17 is now a real possibility. Currently, the consensus expectation is +1.5% for FY17 comps. By the time mgt. communicates its preliminary FY17 guidance in early November, they think there will be several more shoes to drop that could weigh on the earnings outlook for next year; Sell.

RBC notes that while QTD commentary fell below expectations, they believe Whole Foods relieved fears over the need to rebase earnings. With better earnings surety and unchanged (albeit weak) comp profile, near-term downside is limited. Their thesis is predicated on 365’s ability to tap into a previously unavailable growth engine. Legacy quarterly results, absent a sequential deceleration, do not shake that view.

Wedbush notes WFM’s 3Q16 performance was effectively in-line on impressive cost control and included encouraging commentary surrounding various initiatives including recent produce investments (beginning to improve basket sizes, traffic), but the company’s QTD comp trend decelerated again on a 2-year stack basis. While they see opportunities for WFM in FY17 as intriguing (new store concept, procurement, affinity program, POS initiatives), these factors may do little to offset near-term competitive concerns for investors and therefore still believe WFM shares will remain range bound.