By Annie Gasparro
Whole Foods Market Inc. said sales growth slowed sharply last
month following allegations that it overcharged customers in New
York, contributing to another disappointing quarter for the
natural-foods grocer.
Whole Foods said Wednesday that sales at established stores rose
1.3% in the three months ending July 5--its weakest growth since
2009 during the economic downturn. The company has struggled to
keep customers amid tough competition from smaller imitators and
big mainstream retailers such as Target Corp. that are stocking
local and organic items.
Struggles at Whole Foods were exacerbated in the final weeks of
the quarter after New York City officials found the company had
mislabeled weights of freshly packaged foods like vegetable
platters and chicken tenders, leading to overcharges of under $1 to
nearly $15 an item.
Whole Foods co-Chief Executives John Mackey and Walter Robb made
a video apology on July 1, saying the mislabeling was an
inadvertent error by employees and that it also led to some
incorrectly low weights.
The mislabeling fueled Whole Foods' image of being an overpriced
grocer--something it has been trying to combat in recent years amid
slowing sales growth.
The company said Wednesday it has since retrained its employees,
and that the allegations involved only nine of its 425 stores, but
that it had a national effect. "By any measure, it had a
significant impact on our sales," said Mr. Robb. "If trust is
broken, it has to be rebuilt a step at a time."
Whole Foods' stock fell 11% to $36.25 in after-hours trading
Wednesday, as the company also issued fourth-quarter guidance that
fell short of analyst expectations. Its shares are down 19% so far
this year.
In the past two years, the Austin, Texas, chain has been
lowering its prices to compete in a tougher era, after having the
natural-and-organic-food market cornered for decades. It expected
sales to take a hit initially, but believed it would attract more
shoppers, eventually accelerating its growth.
But it still hasn't reached that turning point, said Edward
Jones analyst Brian Yarbrough. "The growth rate has slowed
massively," he said, "yet they are still opening more stores." He
said the New York pricing issue isn't the only reason for its
same-store sales growth slowing to 0.6% in the first few weeks of
the current quarter.
"People are starting to lose faith in the management team," he
said.
Mr. Robb contends that Whole Foods is starting to get its
pricing right. It is opening a new line of stores next year called
365 by Whole Foods Market that it hopes will tap into a new set of
consumers who are more value conscious, giving Whole Foods an
additional avenue for growth.
The first one will be in the Los Angeles area in a location
initially targeted for a Whole Foods store. Analysts have
questioned how profitable the new 365 stores will be and whether
they will significantly steal sales from the existing chain.
"In this rapidly changing marketplace, we believe we are taking
the necessary steps to position ourselves for the longer term,"
said Mr. Robb said.
Whole Foods, which traces its roots back to the 1970s, says it
can still triple the number of its U.S. namesake stores to 1,200
locations.
Overall for its quarter, Whole Foods posted a profit of $154
million, or 43 cents a share, up from $151 million, or 41 cents a
share, a year earlier. Revenue rose nearly 8% to $3.63 billion.
Analysts surveyed by Thomson Reuters expected a profit of 45
cents on revenue of $3.69 billion.
For the current quarter, it projects profit of 34 cents to 35
cents a share with sales increasing by about 7%, compared with the
consensus estimate of 38 cents a share in earnings on sales of
$3.59 billion, or roughly 10% higher than the year-ago period,
according to analysts surveyed by Thomson Reuters.
Maria Armental contributed to this article.
Write to Annie Gasparro at annie.gasparro@wsj.com
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