Whole Foods (WFM) still can't seem to nail a quarter, despite efforts to slash prices and cut costs. Shares plunged as much as 4% in after-hours trading Wednesday. The organic grocer's fiscal third-quarter earnings (ended July 3) fell 14%, to 37 cents a share, in line with Wall Street forecasts. Net sales rose 1.9% from the prior year, to $3.7 billion, also matching analyst forecasts.
Meanwhile, Wall Street is sending the shares spiraling lower. Here are the three likely reasons for this response:
- Same-store sales are still plunging.
Whole Foods said same-store sales declined 2.6% in the quarter. The result didn't improve at all from the first three weeks of the quarter when Whole Foods said its sales were down about 2.6%. Even as it continued to lower prices on consumer staples, Whole Foods saw the number of transactions decline 2.7% in the quarter -- in the second quarter, transactions declined 2.1%. Whole Foods same-store sales have now fallen in four straight quarters, according to Bloomberg data.
For the first few weeks of the fourth fiscal quarter, Whole Foods said same-store sales have dropped 2.4%, reinforcing Wall Street's concerns on the company's fundamentals.
"Wellness has gone mass, leaving high-end specialty players like Whole Foods struggling as conventional grocers, warehouse clubs, and lower-priced, more accessible specialty concepts continue to grow their presence in natural and organic and open stores around Whole Foods," wrote Goldman Sachs analyst Stephen Tanal in a damning note on July 26. Tanal rates shares of Whole Foods a sell.
- Profit margins are under siege.
Whole Foods' discounting took its toll on profit yet again. Gross profit margin declined 89 basis points year over year to 34.7 in the quarter. Wall Street was looking for a gross margin of 34.4%. (So while margin was ever-so-slightly better than expected), the showing only reinforced Wall Street's hesitation on the stock.
Pointed out Pivotal Research Group analyst Ajay Jain in a July 26 note, "If sales and gross margins remain pressured, we question whether earnings can remain flat in fiscal year 2017."
- Outlook is lackluster.
As a result of competitive pressures from the likes of Kroger (KR) and Target (TGT) in organics and investments in lower prices, Whole Foods once again served up a cautious outlook. Earnings for the fiscal fourth quarter are seen (by management) in a range of 23 cents a share to 24 cents a share. Wall Street expects 24 cents a share. (So the company is AGAIN lowering earnings expectations to cover their rear ends. The question is, will it be even worse than they expect?)