Whole Foods plan draws mixed reviews
The ambitious new strategic plan and reconfigured board of directors announced by Whole Foods Market Wednesday is “the minimum management could do to keep the wolves from the door in terms of forcing a sale of the company,” one industry observer said Thursday, but the plan also has its skeptics.
As revealed in an earnings review Wednesday, the Austin, Texas-based natural food giant said it was replacing five board members and embarking upon a plan to resuscitate sales and earnings momentum behind a $300 million cost-reduction program and accelerations of nascent category management, loyalty and other process changes it said would reduce prices, improve volumes and support targets of $18 billion in sales, 2% or greater comps and 9.5% EBITDA margins by fiscal 2020.
The announcements came a month to the day after the activist investment fund Jana Partners revealed it had acquired a significant ownership stake in Whole Foods and would use its position to advocate for a range of changes at the company, including a slate of proposed board candidates — none of whom wound up picked for Whole Foods’ reconfigured board. Jana’s involvement in the company led to widespread industry speculation that Whole Foods could be a takeover target of companies like Albertsons or Kroger.
Newly appointed board chair Gabrielle Sulzberger said Wednesday that Whole Foods offered to take on two of Jana’s proposed board members in exchange for a cooperation agreement “to enable the board to focus on the important tasks at hand,” but said Jana “didn’t want to tie their hands with an agreement.” She added the investment group was “pleasantly surprised by the changes” and that Whole Foods looked forward to more constructive dialogue with the investor.
In the meantime, the company is moving on with five new board appointees: Sharon McCollam and Ken Hicks, who in their most recent management roles helped drive turnarounds at Best Buy and Foot Locker, respectively; Ron Shaich, chairman and CEO of Panera Bread; Joe Mansueto, founder and executive chairman of Morningstar; and Scott Powers of State Street Global Advisors.
“While skeptics will question the long-term plan, we like the new team CEO [John] Mackey has surrounded himself with,” Chuck Grom, an analyst for Gordon Haskett Research Advisors, said in a research note. “Finally, let’s not forget that Jana still has a big stick to influence additional change in the coming months.”
Whole Foods also on Wednesday raised its dividend and announced a $1.25 billion stock buyback — moves that “may keep investors out of the activist’s (sic) corner now,” noted Chris Mandeville, an analyst for Jefferies.
Karen Short of Barclays Capital praised the board changes but thrashed the 2020 plan as unrealistic. She noted the plan was approved by the same outgoing board that badly missed some financial targets of Whole Foods’ 2014 strategic plan. That plan also called for $300 million in cost reductions — which will be achieved, officials said — but also for 2018 EBITDA to reach $2.2 billion. That figure will likely fall short by 40%, Short said.
“While we believe the Whole Foods brand resonates with consumers and is salvageable, the prospects for recovery decline with each passing day of deliberation,” Short said. “WFM has wasted years deliberating, analyzing and deciding how to evolve in today’s rapidly changing landscape, and given how much time has been wasted, we are far from convinced that there is enough of a sense of urgency to alter the trajectory under the current management team. There hasn’t been a sense of urgency for five years – why would there be a greater sense of urgency today?”
The strategic plan calls for an acceleration of a category management program and purchasing structuring. Mackey said the company expects to complete the latter by the end of this year and the former by the end of fiscal 2018. “All of the money that we’re going to save through category management, we’re going to turn around and invest in lower prices,” Mackey said. “So there’s actually going be a significant reduction in prices while maintaining similar gross margins.”
Whole Foods has dabbled in tests of loyalty programs for several years but said this week it would race to implement the best aspects of those tests in a national rollout that would focus on driving additional sales from existing customers. “Just by adding one additional item per trip among our core shoppers, which represents 40% of our sales, that’s a half a billion dollars right there. And that’s just one of the key things that we’ll be aiming on with the focus of this program,” Jason Buechel, CIO, said in the conference call.
Whole Foods has already dialed back a 1,200-store growth plan and instead is aiming for less than 5% annual square footage growth. Mackey said new stores would be focused on flagship sites in large cities, on relocating smaller stores and on its 365 concept. He said 22 365 stores are in the pipeline “and we will be increasing that number.”
Of the four 365 units currently operating, Mackey said one — presumably the Silver Lake store in Los Angeles — was doing “amazingly well,” while the Austin store that opened last month was exceeding expectations. The remaining two — in Bellevue, Wash., and Portland, Ore. — have underperformed.
365 stores are set to open Santa Monica, Calif., and in Akron, Ohio, later this year.
Mackey said cost reductions would be supported by greater labor scheduling efficiency, by centrally managing support functions and not-for-sale goods, and through attacking legacy costs it picked up as a growth company but no longer needed. The latter areas are being addressed by outside consultants, he noted.
Jay Jacobowitz of Retail Insights praised Mackey’s plan to direct new store openings toward urban markets, noting it supported population and demographic trends right for the brand. Jacobowitz also supported the board nominees — “I think the Panera connection is worth watching.”