Financial AnalysisWhole Foods Market, Inc. (Whole Foods) sales revenue increased from approximately $12.92 billion in the fiscal year 2013 to approximately $14.2 billion in the fiscal year 2014. The sales revenue trend continued its upward path, increasing to approximately $15.4 billion in the fiscal year 2015 . While the rising sales is a positive trend, it came at the expense of declining pricing power as the company’s gross margin declined from 35.84 percent in 2013 to 35.54 percent in 2014, and again to 35.19 percent in 2015 . This is a potential sign of the rising competitive pressure from the competitors who are also increasingly targeting health-conscious consumers. The rising competitive pressure is also evident in the fact that the company’s SG&A expenditure as a proportion of net sales grew in 2015 as compared to 2014, while its net profit margin declined from 4.08 percent in 2014 to 3.48 percent in 2015.
The fact that Whole Foods is operating in an increasingly competitive industry, has not gone unnoticed by the investors. The company’s stock ended the day on January 10, 2014 at $52.56 while it was slightly lower at $49.95 a year later on January 9, 2015. It closed at only $31.98 on January 8, 2016 which means the stock has lost a little over third of its value in just a year.
While the company, indeed, faces more challenging competitive environment today as it did a year or two ago, the decline in stock price cannot be justified on the basis of company’s financial performance. It seems more likely that the investors have punished Whole Foods due to their pessimistic view of the company’s future.
Whole Foods deserve praise for improving its asset utilization rate. The company’s asset turnover ratio improved 2.38 in 2013 to 2.52 in 2014 and again to 2.68 in 2015. While the return on asset did slightly increase from 10.17 percent in 2013 to 10.26 percent in 2014, it declined to 9.33 percent in 2015 which indicates the company may be faced with declining profit margins due to factors such as growing competition and customers becoming more price-sensitive. The company’s return on invested capital increased from 14.25 percent in 2013 to 14.88 percent in 2014, but declined to 13.91 percent in 2015 . Whole Foods opened 32 more stores in the fiscal year 2015, bringing the total to 431. The company’s management may benefit from more controlled expansion and could possibly close less profitable stores, which may also improve its asset utilization rate.
The company’s financial analysis reveals it has performed relatively well and there are few surprises. The success of Whole Foods was bound to attract more competition and the growing health awareness among consumers as well as the rising popularity of organic food is an open secret now. Even the conventional supermarket brands such as Wal-Mart and Target have jumped on the bandwagon, and offer a growing selection of organic products. The company’s stock performance has, indeed, been disappointing but the stock price should rise if the company’s management is able to convince the investors it is well-prepared to defend its territory against competitors with similar business model or far more resources such as Wal-Mart and Target.
Whole Foods is considered one of the pioneers in the industry for organic products. But it is faced with growing competitive pressure as even conventional supermarket players offer a growing number of organic food and products, and often at lower prices. Whole Foods has taken steps to expand its nationwide presence by opening more stores but the company should aim for more controlled expansion so as not to risk spreading its resources and focus too thin. The company’s stock has declined significantly but this also presents a great opportunity to buy the stock for the cheap. Thus, I would invest in Whole Foods’ stock as I sense a greater upside potential. I believe the consumers’ demand for organic products is not going to decline anytime soon and Whole Foods has a strong brand which it can further leverage through international expansion. I realize Whole Foods’ pricing power may decline but the company should be able to bring down its operational costs through economies of scale which should help preserve or even improve profit margins.
- MorningStar. (n.d.). Whole Foods Market Inc WFM. Retrieved January 10, 2016. Web.
- Whole Foods. (2015). Form 10-K. Austin, TX: Whole Foods Market, Inc. Print.
- Yahoo! Finance. (n.d.). Whole Foods Market, Inc. (WFM). Retrieved January 10, 2016.Web.