The souring economy is aggravating the troubles of Whole Foods Market Inc., a onetime Wall Street darling now mired in a nearly three-year slump.Founded in 1980 with one store in Austin, Texas, Whole Foods now has more than 270 stores in North America and the United Kingdom. Here, a produce section in a West Orange, N.J., store.
Analysts say the upscale grocer probably will have to trim its earnings forecast for the current fiscal year and announce further cuts to capital spending or new-store plans when it reports fiscal fourth-quarter results Wednesday.
"They're going to have to take their punches," said Bob Summers, an analyst with Pali Research. "It's kind of the wrong time, wrong concept."
The purveyor of natural and organic foods said in August it would reduce planned store openings for its fiscal 2009, which began Sept. 29, and suspend its quarterly dividend. Chief Executive John Mackey said the environment was "the most challenging I have experienced in my 30 years in retail."
Economic conditions since have worsened, making it even harder for the company, based in Austin, Texas, to attract customers to the gourmet foods that account for much of its profit, such as $15-a-pound sesame-crusted salmon and $9-a-pound mushroom-leek strudel.
Whole Foods declined to comment, citing a quiet period in advance of its earnings report. But amid the credit crunch and weaker consumer spending, investors have been selling off Whole Foods shares in anticipation of further bad news. The stock was up 15 cents a share in 4 p.m. Nasdaq composite trading Friday, but the shares are down 74% this year.
Whole Foods, which has about 270 stores in the U.S., Canada and the U.K., thrived for most of its 28 years. Its bright, spacious stores not only offer an abundance of fresh produce and hormone-free meats, but also gourmet prepared dishes that make it a dinner destination as well as a grocery stop. Now, though, consumers are slashing discretionary spending and increasingly buying store brands and discounted groceries.
The timing is particularly poor because Whole Foods aggressively expanded in recent years, often building stores that were bigger and more expensive than its earlier outlets.
One reason analysts expect Whole Foods to make further changes to its plans for new stores or capital expenditures is that it doesn't have much wiggle room on its balance sheet. As of July 6, the company had about $25 million in cash and about $135 million available on credit lines.
Edward Aaron, an analyst with RBC Capital Markets, said he estimates the company has signed leases for about 70 new stores in the coming years. "The $64,000 question," he says, is how much flexibility it has to back out of leases or revise terms.
One case in Seattle signals the grocer is willing to go to extreme lengths to rein in its growth. Seattle developer Interbay Urban Investors LLC in September sued the retailer, alleging that it reneged on a lease signed in 2005 to occupy a 60,000-square-foot store in a shopping center to be built in the city. Last July, with the center under construction, Whole Foods notified the developer that it preferred a 40,000-square-foot store because its sales projections no longer supported the larger format, according to the lawsuit filed in King County Superior Court. Whole Foods also wanted to delay the store's opening by a year to late 2009.
In September, just a week before the developer was to turn over the store to the retailer to outfit, Whole Foods terminated the lease, according to the lawsuit. Many retailers are seeking to delay store openings or cancel them before leases are signed in the poor economy. But an anchor tenant walking away from a signed lease is a rare and troubling sign for retail landlords. The Seattle developer claims damages of nearly $68 million. The developer and his attorney didn't return phone messages seeking comment Friday. Whole Foods declined to comment.
Some analysts say they are troubled by a lack of communication from Whole Foods. "You have a company that doesn't have a lot of cash that doesn't seem to want to communicate very well with their shareholders," said Scott Mushkin, an analyst with Jefferies & Co. "In this environment, where people are nervous, I think it calls for more communication."
A Whole Foods spokeswoman said the company maintained regular communication with investors and analysts before its quiet period, including events it held in Denver and New York in September and early October. Amid the quiet period, "we continued to respond to certain debt-related questions to the extent of what was previously disclosed and public information," she said.
In August, Whole Foods trimmed planned store openings for its current fiscal year to about 15, from 25 to 30. It said its same-store sales, meaning sales in stores open at least a year, rose only 2.6% in the quarter ended July 6. Analysts say demand likely worsened in the latest quarter, and many project flat or 1% growth in same-store sales. Just a few years ago, the grocer was posting double-digit growth in same-store sales.
Whole Foods is aggressively fighting its stigma as a high-priced retailer. Long derided as "Whole Paycheck," it has been offering more discounts and promotions. This summer, it launched a "Whole Deal" newsletter and Web site filled with tips on saving money at its stores. It also has been offering customers budget-focused store tours. In recent weeks, it offered a $5 coupon online for anyone buying at least $25 in groceries at one of its stores.
It's unclear whether that will be enough to change consumers' perceptions about Whole Foods being expensive at a time when consumers want to watch their money.
"Two to three years ago, it was cool to shop at Whole Foods," said Mr. Aaron, the RBC Capital Markets analyst. "Now you might say it's cool to shop at Costco." Mr. Aaron said traffic at the company's stores in Denver, which he visits routinely, "is as light as I've ever seen it."
Whole Foods has been facing other challenges. Bigger competitors like Kroger Co. and Supervalue Inc. are stocking more organic and natural foods. The market for organic and natural products is still very strong as baby boomers and consumers continue to lean towards chemical free, safe products. One example is the home services industry, consumers are choosing natural paints, natural insulation, natural lawn care and natural yard products.
Whole Foods remains positive in the growth potential of their organic food stores business model. Whole Foods is working to acquire the Wild Oats chain of organic food stores. The Federal Trade Commission is continuing to try to undo the company's acquisition last year of Wild Oats Markets Inc. on antitrust grounds.
In addition, although he survived the turmoil, the disclosure last year that Mr. Mackey, the CEO and co-founder, had spent years touting the company's stock on online message boards was a major distraction for the company.
Whole Foods does, however, have plenty of loyal shoppers. While eating sushi at a Whole Foods in Las Vegas on a recent evening, Bonita McLaskey, a 31-year-old accounting manager at a Las Vegas casino, said she's not cutting back on her grocery purchases at Whole Foods despite the economic downturn. Instead, she's curtailing spending on clothing. "I'm trying to eat more organic food," she said. "I don't mind spending whatever is necessary for it."
