THE HEDGEYE EDGE
For the last four quarters Whole Foods Market (WFM) has been plagued by negative same-store sales, driven by three reasons:
- A weighing scandal that gained national attention which they lapped in week 11 of Q3;
- Increase in competition in the space; and
- The negativity around their high prices.
But Whole Foods still stands for something, and as they work to shed their “Whole Paycheck” reputation by investing in price and providing more items on promotion they are turning around their concept. Whole Foods is still one of the most trusted grocery stores in the country, and the original national Natural & Organic Market.
We believe their time to thrive again is coming sooner rather than later.
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Whole Foods has grown rapidly since being founded in 1980, and really has not caught up with the efficiencies of the larger conventional markets.
WFM has been implementing their 9-point recovery plan to better their business and provide a better product to their customers. The plan started with a $300mm cost savings initiative to streamline the business and remove redundancies.
WFM has also begun to implement inventory and labor management systems. WFM is investing in price that is backed by national advertising to drive traffic to the stores. In addition, they are investing in the simplification of the store, which primarily consists of building a centralized kitchen to streamline processes and technological advances.
A lot of this story is about playing the deflation cycle. We have a tendency to be early with some of our calls as we like to think of stocks over a longer duration. WFM will likely be one of those calls.
Currently, the Street hates WFM and the sector in general. Depending on your investment style, that is usually the best time to build a long position. Over the past 50 years, looking at food at home inflation there have been 6 periods of deflation (excluding the current) lasting approximately 7.2 months. The current deflationary cycle has lasted 8 months so we are past an average downturn.
As we approach calendar 4Q16, it looks like early 2017 could be the inflection point in the turn from deflation to inflation and also the sentiment on WFM.