Whole Foods Market: Countering Profitability Pressures

Dec. 5.13 | About: Whole Foods (WFM)

American residents are shifting towards organic and natural food consumption, which is projected to grow at 12.9% annually through 2017 including this year. With this growth rate, Whole Foods Market (NASDAQ:WFM), which operates a chain of natural and organic product stores is adopting a strategy of expansion to capitalize on the trend. For the next year, the company has increased the number of new stores openings, which will enhance its market presence.

As of fiscal year 2013, Whole Foods Market has 367 stores with total space of approximately 13.9 million square feet. The company reported $12.91 billion of revenue in fiscal year 2013, which implies that it generated $928.77 of revenue per square foot. As per the company's estimates, it will open approximately 35 new stores with an average store size of 37,000 square feet, having total incremental square footage of 1.29 million. With the assumption of carrying forward the revenue per square foot in the next fiscal year, I expect Whole Food to generate approximately $14.10 billion in fiscal year 2014 with total square footage of 15.19 million.

Company's strategy to counter competition - A possible Risk

Consumption of natural and organic food is witnessing an upsurge with more people shift to a health conscious lifestyle as stated above. With this, retail chains are adding natural and organic food to their merchandise to provide the products customers are searching for. This is leading towards immense competition, as evident in the fourth quarter updates of Whole Food Market, wherein same store sales merely increased 5.9%, which decreased from 7.5% in the third quarter.

Target (NYSE:TGT) has P-Fresh, which is an expanded fresh food layout within the Target stores. The company is adding its P-Fresh division to its stores, from approximately 350 stores in 2010 to 1,100 stores currently. The P-Fresh division in Target stores sells around 232 organic and natural products. With these remodeled stores having the P-Fresh layout, total offerings in Target's stores are up 40%, thus enhancing the customer's shopping experience. Along with the enhanced offerings, these products are priced 14% lower than Whole Foods Market's products, thus leading towards intense competition.

Whole Foods Market is adopting a new pricing strategy to counter its competitors. The company is providing discounts and promoting its merchandise by lowering the prices to match the competitive environment. In addition to price cuts, Whole Foods Market is adding lower-priced goods in its retail outlets. Although this strategy is expected to attract customers towards its stores, it will put pressure on the company's bottom line going forward. With this scenario, Whole Foods Market's management has lowered its profits forecast for 2014, which will be in the range of $1.65 to $1.69 per share, down from its earlier forecast of $1.69 to $1.72 per share. Despite the fall in profit guidance, its top line is expected to grow at a rate of 9.21% year over year based on the revenue forecast for fiscal year 2014, discussed above.

Enhancing Shareholders wealth - Dividends and share repurchase.


Dividend per share ($)







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Over the period of 2011-2013 ,Whole Foods Market's dividend has increased 41.42% on average. This was supported by its strong cash flow growth; in the last year, its cash flows has increased 44.40%. In the last quarter, the company returned $508 million in dividends to its shareholders. With this cash reduction from the company's financials, it is still left with $1.4 billion of cash and its equivalents.

Next year Whole Food Market will increase its dividend distribution to $0.48 per share, which will further enhance the shareholders' value. The trend of increasing dividends every year and its strong cash balance makes me believe Whole Foods Market will continue to distribute dividends over the coming years.

Along with the dividend distribution, Whole Foods Market is also buying back its shares to return cash to its shareholders. In the fourth quarter results update, the company repurchased approximately $125 million of its shares. In the same quarter, it announced an additional share repurchase of approximately $500 million, bringing a total authorization of $800 million. The increment in its share buyback plan is expected to increase the company's earnings per share considerably over the coming year.

How much has the company returned to its shareholders in totality?

The shareholder's yield for the year ending September 2013 was 2.51% with dividends of $508 million and the net negative stock issuance of $44 million in the trailing twelve months. This negative figure signifies that the company has repurchased more shares than issuance of new stock in the market. Going further, the company has announced dividend increase to $0.48 for the next year, from $0.40 the past year, and an additional share repurchase of $500 million, which will be repurchased through December 31, 2015. These factors will increased the shareholder's yield of the company significantly, thus enhancing the shareholder's value.

On the other hand, its competitor The Kroger (NYSE:KR), has distributed $294 million as dividends to its shareholders in the trailing twelve months. Along with this, Kroger has a flooded negative net stock issuance of $403 million. With these factors, its trailing twelve month shareholder's yield is 3.17%. This is supported by the company's strong free cash flow growth, which grew 136% in the trailing twelve months. With the tremendous cash flow growth rate, Kroger recently increased its annual dividends from $0.60 to $0.66. The company has increased the dividends for the seventh consecutive quarter, enhancing its shareholder's yield. This is expected to increase the company's dividend yield, which is increasing from a trailing twelve month yield 1.4% to a forward dividend yield of 1.50%.

Bottom Line

Whole Foods Market has strong fundamentals as the company's revenue is expected to rise over the next year, which is supported by its expansion plan as discussed above. Moreover, the company is putting money into the investor's pockets through dividends and share repurchases every year with increments, which is making me bullish on this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.