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Whole Foods Market : Investors, analysts wonder what future holds for Whole Foods

07/31/2015 | 09:19pm US/Eastern

July 31--Share of Whole Foods Market saw a second straight day of heavy trading volume at a discounted price Friday as investors worried whether the organic foods giant would pull out of its latest funk.

More than 13 million shares for the Austin-based company traded hands Friday -- more than double the daily average -- at a stock price that teetered near a 52-week low.

Wall Street's response followed disappointing earnings Wednesday that sent Whole Foods' stock tumbling more than 10 percent.

"The numbers are very disappointing," said Joseph Agnese, equity analyst with S&P Capital IQ. "The company is really struggling to accelerate sales growth, which have been slowing for quite a while now and I think they are going to have a tough time" bouncing back.

On Wednesday, Whole Foods reported third-quarter earnings per share of 43 cents and record revenue of $3.63 billion. While the retailer posted 8 percent in revenue growth, it still missed the mark with Wall Street, which projected earnings per share of 45 cents and $3.69 billion in revenues.

And in a key grocery industry metric of same-store sales, Whole Foods reported relatively tepid growth of 2.2 percent, well below the 10 percent-and-above sales growth the retailer enjoyed in previous years.

By Friday, the stock saw a small rally, closing up 1 percent or 36 cents to $36.44. It has a 52-week range of $35.21 to $57.57.

The earnings follow a challenging quarter for the company, as it faces legal questions over the sugar content of its store brand Greek yogurt, concerns from some farmers faced regarding a new produce rating system and a New York consumer affairs agency investigation into overpricing concerns.

Whole Foods executives said negative media attention from the New York probe hurt the company's sales and contributed to an earnings report that didn't impress Wall Street.

"Whole Foods reported a disastrous quarter, missing Street expectations," wrote Scott Mushkin, managing director and analyst at Wolfe Research. Whole Foods "has let its high price problem fester and now, with competition relentlessly attacking the company, it finds itself in a very difficult position of having to invest in price while it has its foot on the store development accelerator."

As a result, a handful of analysts downgraded the stock, but most stuck to their current ratings. However, investors might have to ride out a less than robust sales period, they cautioned.

"We do not foresee a quick resolution," J.P. Morgan equity research analyst Ken Goldman said in his most recent note. And while "the comp headwinds are very apparent ...we suspect the worst is over."

Charles Grom, analyst at Sterne Agee CRT, said his firm was downgrading its Whole Foods rating to neutral because of a growing level of uncertainty, such as the impact of the retailer's plans to launch a new chain of smaller stores.

"This wall of uncertainty will likely last beyond the next few quarters, putting the stock into purgatory for the foreseeable future," Grom said in his research note.

Whole Foods is one of Austin's highest-profile companies with more than 2,500 employees in Central Texas and a total of 90,000 workers worldwide at 424 stores.

The retailer next year will launch 365 by Whole Foods Market, a chain of smaller, value-driven stores starting with its first location in Northwest Los Angeles followed by stores in Santa Monica, Calif.; Portland, Ore; Bellevue, Wash., and Houston. These smaller store leases, which are slated to open in the second half of 2016, are an average 30,000 square feet, which some analysts said was larger than expected.

Despite the challenges, Whole Foods reiterated its plans Wednesday to cross the 500-store mark in 2017 and eventually sees a demand for 1,200 U.S. locations. It said it plans to open five 365 stores by the second half of 2016, doubling that number by 2017.


(c)2015 Austin American-Statesman, Texas

Visit Austin American-Statesman, Texas at www.statesman.com

Distributed by Tribune Content Agency, LLC.

© Tribune Content Agency, source Regional News

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