Whole Foods Market, Inc. Is More Powerful Than Wall Street Thought

By Markets Fool.com

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Whole Foods has been running "Value Matters" campaigns for the first time. Photo: Whole Foods

May 7th of 2014 is a day Whole Foods investors will not soon forget. Back then, the company reported that competition was taking a bite out of not only margins, but same-store sales growth. The market reacted by sending shares down by as much as 22%.

As the company promised to continue cutting prices on organic produce in order to drive sales, Wall Street thought that this move would mark the beginning of the end for Whole Foods. Co CEOs Walter Robb and John Mackey tried to reinforce a solid future by laying out an accelerated store-opening plan to stay ahead of the competition, but that argument fell on deaf ears.

At the time, a number of Motley Fool analysts, myself included, concluded that Wall Street was being shortsighted. Though we're less than a year removed from that date, the market has decidedly come down on our side. Let's take a look at Whole Foods' Q1 2015 results released yesterday to see why.

Same store sales are back on the rise
There is, perhaps, no figure more important for investors in retail stores to take note of than same-store sales. Anyone can grow their revenue by simply increasing the number of physical locations -- but it takes a special organization to consistently drive higher and higher sales figures at the same location.

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In essence, it is a sign that what a company is offering resonates with its customers.

Over the last year, here's what this crucial metric has looked like.

Whole Foods Same-Store Sales | Create infographics

Clearly, a combination of lower prices -- helping to shed the moniker of "Whole Paycheck" -- combined with the company's first major national advertising push are helping to drive more traffic in stores. Robb said, "We attribute ourbroad-based salesmomentum to ourcustomers' positive response to ourmany strategic initiatives, along with improving consumer confidence."

Those initiatives include on-line ordering and home delivery -- in partnership with Instacart -- which account for as much as 5% of store sales in some locations. It also includes Whole Foods' first foray into an affinity program. Robb stated that the 12-store roll out has been largely successful, with "high activation and registration rates, and above average basket sizes for participants."

What the future looks like
For those who hoped that Whole Foods would finally stop its "value strategy"-- or as we normal humans call "cutting prices" -- the company offered sobering news: "[we] expect to continue [our] value strategy and ... expect a greater decline in gross margin ... in fiscal year 2015 than in fiscal year 2014."

Management said that by focusing on leveraging internal distribution, coordinated purchasing and its labor, it could offset the loss in margins that is associated with this value strategy. In the end, that might be enough for investors, as the company said it, "expects diluted earnings-per-share growth for the fiscal year to be in line with or slightly higher than sales growth." While it might seem like the company will eventually run out of places to cut costs, as long as earnings grow faster than revenue, that's great news for shareholders.

Since last May, the future hasn't looked as bright for the company as it does right now. Smaller natural and organic players won't be able to compete on price, and larger players simply don't have the differentiation that attracts the same customers that frequent Whole Foods locations.

While a stock that trades for 34 times earnings certainly isn't cheap, today's price could look like a bargain a decade from now, when the chain is much closer to reaching its goal of 1,200 stores stateside.

The article Whole Foods Market, Inc. Is More Powerful Than Wall Street Thought originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Whole Foods Market, and is dying for them to open more locations in his home state of Wisconsin. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.