Since its most recent earnings report, shares of Whole Foods Market, Inc. (NASDAQ:WFM) have fallen to trade near the bottom of their 52-week range. Fears that lower projected top lines and margins will inevitably cut into earnings growth gave Wall Street enough of an excuse for a big sell-off.
Despite a recent focus on lowering prices, I don’t think this is the kind of price cut management envisioned for its investors. Yet, for stock shoppers with a healthy appetite, now is a great opportunity to invest a whole paycheck (or more) in Whole Foods.
A big part of the Wall Street panic came from management’s reiteration that they will continue to focus on price and providing value to the customer. However, given Whole Foods Market, Inc. (NASDAQ:WFM) has some of the highest prices in the industry as well as some of the highest margins, the huge drop in share price seems like a bit of an overreaction.
The grocery industry is filled with companies producing significantly thinner margins. As food prices rise, those margins continue to decline as grocers compete to keep customers happy. Grocery giant The Kroger Co. (NYSE:KR) is a great example as its seen gross margin decline from 23.2% in 2009 to 20.9% in 2011 and 20.3% in its most recent quarterly report.
Comparatively, over roughly the same period, Whole Foods actually grew margins from a whopping 34.8% to 35.5%. Those are some of the highest numbers in the industry, so it’s safe to say Whole Foods can definitely give customers a bit of a price break.
Why lower prices will work
Last quarter, consumers looked to cut down expenses any way they could with the looming fiscal cliff and tax hikes at the forefront of everyone’s mind. This sentiment may be to blame for the slowdown in the company’s comp sales from the usual 8.5%-8.9% to 7.2% last quarter.
We’ve seen this before. When Whole Foods faced headwinds from a dismal macro-economic environment in 2009-2010, the company cut prices and focused on costs. The results speak for themselves, as Whole Foods has seen its profits and stock price grow significantly in the years since.
Now, in another volatile economy, with higher payroll taxes and consumers looking to spend less, Whole Foods is poised for a redux of the strategy. Co-CEO Walter Robb explains they’re “going for the big prize, which is those folks that are not eating as healthy.”
As the pricing gap narrows, the value proposition for less healthy eaters becomes quite compelling. After all, most people know that they should eat healthier foods. Even with a rapidly growing organic foods market, Whole Foods believes it can accelerate that growth while capturing a large part of the market.