Whole Foods Market continues to feel the heat of competition, price cuts

With the opening of its first highly anticipated smaller-format store just three weeks away, Whole Foods Market reported quarterly earnings that beat analysts’ expectations but saw a decline in some key metrics.

Sales grew 1.3 percent, while gross margin and comparable store sales fell in the second quarter of the year ending April 10.

In an attempt to shake its expensive reputation and differentiate from mass and other specialty retailers who are ramping up their efforts in natural and organic, Whole Foods has been testing lower prices on certain items. “We believe improving our value perception is one of the key components to regaining our sales momentum,” co-CEO John Mackey during an earnings call Wednesday, noting that Whole Foods will continue to expand price investments and add weekly discounts in select categories.

But so far, revenue from promotions hasn't yet been enough to offset the investments. “We are facing ongoing headwinds from a highly competitive environment as well as cannibalization, but the negative impact of our value strategy was the primary factor [in declining comp store sales],” Mackey said.

The retailer is also continuing its push to unify the digital and in-store experience by adding digital coupons to its mobile app. Following another pilot test in Dallas this summer, it plans to roll out a customer rewards program across the nation.

Highlights from the quarter include:

  • Gross margin declined 103 basis points to 34.9 percent of sales.
  • Sales were $3.7 billion, up slightly from $3.6 billion in the second quarter of 2015.
  • Comparable store sales decreased 3 percent, marking the third straight quarter of decline.
  • EBITDA were $353 million, or 9.5 percent of sales.
  • Diluted earnings per share were $0.44, beating estimates from analysts.
  • Twenty-nine basis point drop in operating margin

The pilot phase of a new point-of-sale system has been completed, and that system will be in all U.S. stores before the end of the calendar year, Mackey said. A new labor-scheduling program has also been implemented in all customer service teams across the U.S., with plans to introduce it to two other store teams later this year. This new program saves administrative time and provides insight into how to spend labor dollars more efficiently, he said.

In light of its performance, Whole Foods adjusted its outlook for 2016, saying in a statement that it “expects to be at or below the low end of its prior sales and earnings per share ranges [which were 3 percent to 5 percent], reflecting recent sales trends and additional investments in marketing and technology in the second half of the year.”

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