Recovery evidence–Whole Foods’ customers are coming back

The first fiscal quarter was strong

I’m not sure what I think of Whole Foods (WFMI) as a stock.  But the company’s recently-reported first quarter (ending January 17th) results are a solid indicator that the US economy is on the recovery path, in my opinion.  The evidence? –customers are coming back to the company’s stores for the first time since recession hit.

Earnings per share for the quarter were $.36 (excluding a $.04 charge for anticipated losses on store closings) vs. $.20 in the year-ago period.  More important as an economic indicator, though–

Comp store sales are now positive

Comp store sales for WFMI continued to rebound from an early 2009 low and have emerged into positive territory.  The progression is as follows:

2Q 2009     -4.8%

3Q 2009     -2.5%

4Q 2009     -0.9%

1Q 2010   first five weeks     +1.5%

rest of quarter                     +4.3%

2Q 2010  to date                     +7.0%

Admittedly, comps are getting easier as WFMI compares against its results during the worst of the economic slump of a year ago, but consumer behavior is very encouraging.  What’s happening?  Why is this an important sign for the economy?

Recessionary behavior…

During the recession, consumers traded down.  This affected WFMI in two ways, in much the same way as one would see from a luxury goods retailer.  That’s not so surprising, since in effect that’s what WFMI is.

–Some “aspirational” customers could no longer afford to buy at WFMI and began to use traditional supermarkets for a larger portion, or all, of their food shopping.

–Other clients continued to buy the same proportion of their food at WFMI as before, but gravitated toward the “center of the store,” which contains staples and non-perishables, and away from the higher-margin fresh produce and prepared foods.

(Not all WFMI’s problems came from recession.  It was also suffering from having raised its prices too aggressively during the good times.  The acquisition of Wild Oats was more difficult than expected.  And it turned out that the 50,000+ square foot stores WFMI had been opening over the past several years were too expensive to build and too big to run economically.)

…is changing for the better

The progressive increase in same store sales is coming from:

more customers.  Stores are reporting that the higher customer numbers are a combination of former regulars returning for the first time in over a year, and first-timers.

more items in the basket. Pricing is flat year-on-year.  Purchase amounts are rising because customers are buying more of their food at WFMI, although the company is also beginning to detect some movement toward higher-priced items.

a move away from the store center and toward the periphery. Strength in fresh produce, for example,  is “extraordinary.”

–most important, I think, the improvement is across all departments in the store and in all regions of the country.

WFMI has helped its own cause

It has shifted to opening smaller, more efficient stores.  It’s also been controlling inventories, especially of perishables, better.  Former Wild Oats stores are beginning to comp strongly positive.   WFMI has been able to buy organic produce more cheaply, because traditional supermarkets have cut back on their ordering.  It also sounds like WFMI itself has shifted from “organic” meat offerings to less expensive “natural.”  (The latter designation means no/low use of antibiotics and hormones; the former means that plus 100% organic feed and limited confinement.)  The company has also begun a “Health Starts Here” education campaign promoting the stores’ products.

WFMI is clearly convinced the worst is over,

because it has sharply increased its guidance for full-year earnings.  Wall Street took the results announcement as surprisingly good news.  The stock was up about 13% in Thursday trading.   If you wanted to make a positive case for the stock, I think it would have two parts:

–the management of WFMI has a flair for high-end food retailing, and

–the financial rescue of the company in late 2008 by  Leonard Green and Partners, and that firm’s emergence as a significant shareholder, has brought to WFMI a higher degree of financial discipline and management control.

Maybe so.  I don’t know enough to have a strong opinion.  I do think, though, that the strength in WFMI’s business is a good indicator that the economy is recovering its health.

Strength here is better than in luxury goods

As I hear them, luxury goods makers and retailers are saying that the very high end–“statement pieces” of jewelry, for example–have bounced back strongly.  Otherwise, however, customers are probing the low end of offerings to find a comfortable place to shop.  Retailers are asking for still more modestly-priced goods to tempt customers back into the stores.  Yes, WFMI has cut prices, but it seems to me the upturn in food is much more across the board (so far, anyway) and likely much more sustainable than for luxury goods.

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