Why Whole Foods' Shares Plunged after Q4 Earnings Results

Whole Foods Market, Inc.WFM continued with its dismal performance by posting a negative earnings surprise in yet another quarter. This natural and organic foods supermarket chain operator delivered fourth-quarter fiscal 2015 adjusted earnings of 30 cents a share that lagged the Zacks Consensus Estimate of 35 cents and fell short of management's projection as well due to lower-than-expected sales.

Whole Foods Market Inc. (WFM) - Earnings Surprise | FindTheCompany

The fourth-quarter earnings miss and year-over-year decline of 14.3% were enough to hurt investors' sentiment that was apparent in the after-market trading hours yesterday, when shares of this Zacks Rank #4 (Sell) company tumbled 6.2%.

The top line improved 5.6% year over year to $3,438 million but came in below the Zacks Consensus Estimate of $3,480 million. Whole Foods stated that comparable-store sales (comps) dipped 0.2% on a constant currency basis in the reported quarter, following an increase of 1.3% in the preceding quarter. During the first five weeks of the first quarter of fiscal 2016, comps dropped 2.1%. Analysts believe that intense competition and the allegation of overcharging some prepackaged foods is weighing upon the company's performance.

Whole Foods has been revamping its pricing strategy and concentrating on value offerings in view of heightened competition as more companies are entering and expanding their presence in the Organic & Natural food business. These companies include The Kroger Co. KR , Sprouts Farmers Market, Inc. SFM and Wal-Mart Stores Inc. WMT .

This Austin, TX-based company is leaving no stone unturned to reach its target customers, whether through national marketing and branding campaigns, home delivery services, store expansion, or the adoption of a digital route. Moreover, it introduced a new "uniquely-branded store concept", "365 by Whole Foods Market", slated to be rolled out next year. The new chain will be equipped with innovative technology, compelling products at value prices and a much modern look to target millennials and stave off competition.

With the launch of the "365" smaller format sister chain, Whole Foods intends to turn things around in its favor. However, analysts are concerned whether the new store model will prove to be a game changer and help Whole Foods retain market share amid stiff competition without cannibalizing its own business.

For quite some time now, Whole Foods has been working on lowering prices, upgrading technology and containing costs. As a part of this strategy, the company had reduced its headcount by a significant number. The company now expects to lower expenses by a $300 million run rate by the end of fiscal 2017.

During the quarter under review, adjusted EBITDA plummeted 33.1% to $216 million, while adjusted EBITDA margin contracted 360 basis points to 6.3%.

Store Update

Whole Foods currently operates 433 stores in the U.S., Canada, and the U.K. The company opened 10 new outlets during the reported quarter. In the first quarter of fiscal 2016, the company has opened 2 new outlets, and plans to open 1 more store. Moreover, it believes that there exists room for 1,200 stores in the U.S. in the long run.

For fiscal 2016, management targets square footage growth of 7% or more. The company plans 30 new store openings, comprising three 365 stores and two to three relocations. In fiscal 2017, the company aims to open ten 365 outlets.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $237 million, long-term capital lease obligations of $62 million, and shareholders' equity of $3,769 million. Return on invested capital (ROIC) for the trailing four quarters was 13.4%.

During the quarter, Whole Foods generated cash flow from operations of $132 million and incurred capital expenditures of $172 million, resulting in negative free cash flow of $40 million. The company paid $47 million in quarterly dividends and bought back $325 million worth of shares. For fiscal 2016, management anticipates capital expenditures of 5% of sales.

Management also announced a new $1 billion share buyback program, thereby bringing the total share repurchase authorization to $1.3 billion. The company intends to buy back majority of its shares in the first half of fiscal 2016. The company also increased its quarterly dividend by 4% to 13.5 cents a share, thus marking the fifth successive dividend hike since reinstating the same in 2011. The dividend will be paid on Jan 26, to stockholders on record as of Jan 15, 2016. Since 2011, the company has returned about $2.4 billion to stockholders via dividends and share buybacks.

As part of its capital structure endeavor, Whole Foods entered into a five-year revolving credit facility of $500 million, and plans to take on additional long-term debt of up to $1 billion before the end of the first quarter of fiscal 2016.

Guidance at a Glance

Whole Foods now projects sales growth of about 3%-5% for fiscal 2016. Management anticipates EBITDA margin of about 8.5% and ROIC of over 13.5%.

Excluding net accretion of 5-7 cents a share associated with debt-financed repurchase, the company projects earnings of $1.50 per share or above for fiscal 2016.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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