The nation’s largest natural and organic retailer produced $1.9 billion in sales for Q2, which was in line with 2008 results. Comparable store sales decreased 4.8% versus a 6.7% increase in the prior year. Identical store sales, excluding seven relocations and two major expansions, decreased 5.8% versus a 5.1% increase in the prior year. Factoring in first quarter sales along with second quarter results, sales are hovering around 2008 levels at $4.3 billion.
Perhaps most alarming was the company’s 32% decline in profits for the quarter, based on declining sales and shrinking profit margins. Still, some analysts predicted larger losses, and the company feels things could have been worse. “We are very pleased with our second quarter results, including free cash flow of $98m,” CEO John Mackey said in a prepared statement. “Despite flat sales year over year, we exhibited strong expense control leading to a 10 percent increase in income from operations excluding non-cash asset impairment charges.”
Company executives also gave a preview of third quarter results and updated guidance for the year in its prepared statement. For the first four weeks of the third quarter ended May 10, 2009, comparable store sales decreased 3.9% and identical store sales decreased 4.4%. Full year sales are forecasted at just under $8 billion. The company acknowledges that it is difficult to determine whether the slight improvement over Q1 and Q2 is an indicator of improved results to come, or simply an anomaly.
Morgan Stanley analyst Mark Wiltamuth told the Associated Press that the retailer is still considered too high-end for most consumers who are weathering the recession. He also noted that same-store sales could remain down for the entire year, but said the company could further cut costs to offset losses.
It seems to me that Whole Foods is sitting on the precipice of a successful return to profitability. As BB&T Analyst Andy Wolf explained in a December Q&A with Nutrition Business Journal: “Whole Foods has the best quality control that I know of in anything close to a chain supermarket business. But that doesn’t come for free, so the company must look for an appropriate markup to cover the cost of these high-quality products.” So, the quality of product is there and the company has shown an ability to cut costs effectively in a down economy, and now it is waiting for consumer spending habits to return to normal. Assuming the worst of the financial crisis is behind us, Whole Foods should begin to see modest gains in profit margin and comparable store sales over the next few quarters. However, if consumer sales remain sluggish through the end of the year and into 2010, the company will have to find increasingly creative ways to cut costs and keep investors happy.