Whole Foods Market, Inc. (NASDAQ:WFM) shares have plunged after the natural and organic retailer reported what some apparently consider lackluster quarterly tidings. Of course, for premium-priced companies, the smallest blemish or anomaly can seem like reason to panic. However, I don’t condone such a reaction for this component of the real-money Prosocial Portfolio I manage for Fool.com.
I didn’t see anything intrinsically bad in Whole Foods’ first-quarter results. Net income increased 24% to $146 million, or $0.78 per share, and sales increased a remarkable 14% to $3.9 billion. Same-store sales increased an eye-popping 7.2%, although some of the disappointment relates to analysts’ expectation for a 7.7% jump in same-store sales.
Whole Foods’ forward guidance for the year piled on negative perceptions. It reduced its same-store sales expectations into a tighter range, lowered its 2013 revenue expectation a smidge, and held firm on earnings expectations that are lower than analysts’ expectations. The retailer won’t be able to keep the same level of earnings growth for the rest of the year due to its expansion of more value offerings to boost competitiveness of its product pricing. It revealed that its margins won’t be quite as high for the rest of 2013.
Real long-term Whole Foods Market shareholders shouldn’t fret, though. The grocery business is a tough one, and Whole Foods is one of the sector’s jewels. Consider its basic financial stability, including a strong balance sheet, and stakeholder-friendly initiatives built into its DNA, including healthy eating education for both customers and employees.
For a few examples of industry struggles, consider Harris Teeter Supermarkets Inc (NYSE:HTSI)‘s recent tidings that it’s considering a sale. Although Harris Teeter’s sales had grown over years’ time, its 2012 net income dropped and its holiday quarter’s same-store sales suffered due to promotional activity by rivals. Its 2.5% first-quarter same-store sales don’t hold a candle to Whole Foods’.
Stories like Harris Teeter’s underline the concept that the grocery industry will have some tough times this year, due to macroeconomic factors including many consumers’ limited budgets. Elements like the demise of the payroll tax break and higher gas prices have already further restrained retail spending among some consumers in January, too.
Or consider Safeway Inc. (NYSE:SWY). Safeway’s sales have only increased 2.8% in the last 12 months. Right now, the most bullish thing about Safeway has been word that activist investor West Face Capital has taken a majority stake in the chain; Safeway’s position isn’t helped by the coming retirement of longtime CEO Steven Burd.
Much was made of U.K. supermarket giant Tesco’s entry into the U.S. starting in 2007, but here’s another reminder that grocers are in a tough business in a tough time. Tesco’s high-tailing it out of America, and has been looking into options like selling its Fresh & Easy stores.
Quality on sale
Today’s investor freak-out concerning Whole Foods looks like a buying opportunity to me. Given the fact that Whole Foods’ margins are among the highest in the business, it’s got some wiggle room to give consumers a break on some products’ prices, so panic about margins may not be so smart. Lower prices should drive more revenue, after all, and bring more customers through the doors when they realize the company’s high-price reputation isn’t necessarily the case for all products.