Business is looking kind of grim over at Whole Foods Markets. It just released third-quarter results that show its recent over-charging scandal took a bite out of sales. And the latest news about 365, the new and more moderately priced concept it is developing for Millennials, increasingly has observers worried about cannibalization.
For the quarter, the Austin, Tex.-based grocery retailer says total sales rose 8% to $3.6 billion -- a record. But on a comparable-store basis, sales gained just 1.3%, well below analyst expectations.
And while it’s clear that the overcharging scandal -- which New York investigators called one of the worst cases they had ever seen -- hurt results in this past quarter, it seems just as evident that burned consumers are in no hurry to come back to a company that has long struggled to shed its “Whole Paycheck” nickname.
“Whole Foods Markets efforts to overcome its high price perception will now become increasingly difficult given the negative media attention around over-charging, and the process of rebuilding trust with customers could take time and act as a headwind,” writes Karen Short, an analyst who follows the company for Deutsche Bank. “In fact, in the near-term, it may not get credit for any price reductions given its tarnished image.” (She says the company is rating Whole Foods as a “hold” rather than a “sell” based on its strong cash position.)
And Short, who predicts that comparable-sales results may turn negative ahead as a result, also says the plans for the new 365 chain “create more concern than comfort.” In part, that’s because some cannibalization between the 365 and legacy stores is inevitable. But she also questions whether the company can achieve its stated goal of 1,200 Whole Foods stores “if the 365 format gains traction.”
And at Sterne Agee CRT, analyst Charles Grom downgraded Whole Foods to a neutral rating, based on “a higher level of uncertainty about the long-term ramifications of pricing problems,” as well as the expanding organic offerings of Whole Foods’ competitors and the 365 problem. “This wall of uncertainty will likely last beyond the next few quarters, putting the stock into purgatory for the foreseeable future.”
And while Whole Foods has positioned the 365 expansion plan as a strategically offensive move, citing success stories like Nordstrom Rack, Grom isn’t convinced. “It is becoming increasingly clear to us that 365 is more of a defensive concept with no clear pathway to success,” he writes, and “could easily prove unsuccessful given an already crowded space.”