Whole Foods Market Inc. is dramatically reshaping its board in an effort to show it is open to change after an activist investor last month publicly urged the organic-grocery chain to explore a sale and speed up its turnaround efforts.
The Austin-based company on Wednesday named a new board chairman and said five directors would step down immediately, replaced by nominees with a broad range of retail and financial experience at companies such as Panera Bread Co. and Foot Locker Inc.
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Whole Foods also expects more directors to retire before its next shareholder meeting, a spokeswoman told The Wall Street Journal. The company didn't name the departing directors.
"Our competitors are not standing still," Whole Foods co-founder and Chief Executive John Mackey told analysts on an earnings call Wednesday, adding that significant change is required at an accelerated pace.
Wednesday's board overhaul wasn't enough to appease Whole Foods' second-largest shareholder, activist hedge fund Jana Partners LLC, which on Wednesday raised the possibility of seeking a shareholder vote on more board changes as soon as this summer.
The shake-up comes during one of the rockiest periods in Whole Foods' nearly 40-year history. The company, with a total of 465 stores, is largely credited with making organic food into a multibillion-dollar market in the U.S.
But conventional grocers have moved into the market, offering cheaper prices and cutting into Whole Foods' sales.
Whole Foods shares have dropped sharply since peaking at around $65 in 2013, and the company's sales have fallen over the past 21 months, the longest stretch since going public in 1992. The stock closed at $36.25 Wednesday, up some 17% since Jana announced its campaign.
The company Wednesday reported same-store sales fell 2.8% for the second quarter of its 2017 fiscal year, slightly better than Wall Street analysts expected. It reaffirmed its outlook of sales continuing to drop by 2.5% for the rest of its fiscal year, and announced that growth would return by next year.
The company projected same-store sales would grow by at least 2% by 2020. Whole Foods also increased its dividend and stock buybacks and said it would slash $300 million in operating expenses by 2020 through labor scheduling changes and attrition.
Whole Foods has detailed a nine-point plan for reviving its flagging sales. It recently made Mr. Mackey sole CEO and is taking steps to change its back-office functions that have been a subject of concern by some shareholders.
The company said Wednesday it would speed up the nationwide roll out of a customer loyalty program, streamline the stocking of shelves across its stores by next year and continue to lower food prices.
Jana, which has an 8.3% stake in Whole Foods, and mutual-fund giant Neuberger Berman, which owns 2.7%, have pressed the company to consider a sale and to add directors with experience in retail operations, technology, finance and real estate. When it launched its campaign last month, Jana suggested three potential nominees.
Jana's aggressive stance shows just how bold activist investors have become in recent years. Activists have successfully pushed for major leadership changes at a number of big companies this year, including Arconic Inc., American International Group Inc. and CSX Corp.
Whole Foods privately offered to take two of Jana's nominees for the board, but the hedge fund balked at the offer and the restrictions it would have imposed on its ability to keep pushing for more change, a Jana spokesman said.
"We decided it made the most sense to let Whole Foods remove more than half of its underperforming board while maintaining all of our options going forward, rather than tying our hands now," he said. "We will now be watching carefully to see how they address the management issues at Whole Foods and to ensure that the board is seriously pursuing all avenues to maximizing shareholder value."
Whole Foods said it was disappointed by how the discussions were handled, but that the conversations are continuing.
Joining the board are Ken Hicks, former chairman and CEO of footwear retailer Foot Locker; Joe Mansueto, the founder of investment research company Morningstar Inc.; Sharon McCollam, a former executive at electronics retailer Best Buy Co.; Scott Powers, a financial executive previously at trust bank State Street Corp.; and Ron Shaich, the founder of fast-casual restaurant chain Panera.
Gabrielle Sulzberger, a financial executive who has sat on the board since 2003, succeeds Dr. John B. Elstrott Jr. as the board's chairman.
"We embarked on aggressive search for the very best people to add to our board," Ms. Sulzberger said. "We recognized that significant and urgent change was required and we listened to shareholders' perspectives."
Neuberger Berman portfolio manager Charles Kantor welcomed the changes but said the reconstituted board needs to prove itself and determine if the strategy Whole Foods laid out Wednesday is the best course of action.
"No stone should be left unturned in their comprehensive review of all opportunities to create value," he said.
Whole Foods also announced it had hired a new chief financial officer, former Kohl's Corp. executive Keith Manbeck, as the company seeks to add managers with more mainstream retailing experience to its leadership.
The retirement of departing CFO Glenda Flanagan was announced last year.
The overhaul accelerates changes Whole Foods announced to its board in December, when it promised to bring the average tenure of its directors more in line with other companies over the next three to five years.
Investors and proxy advisory firms have questioned the directors' independence and length of tenure, which averaged 14 years before the shake-up.
In December, Whole Foods agreed to place 15-year limits on the service of newer board members beginning next year and added Google Inc. executive Mary Ellen Coe to the board, its first new appointee since 2008 at the time.
All of the board members were re-elected with at least 84% of the vote during Whole Foods' annual shareholders meeting in February.
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(END) Dow Jones Newswires
May 11, 2017 02:47 ET (06:47 GMT)