Yahoo Finance A Look at Whole Foods’ Margins ahead of Its Fiscal 2Q16 Results
A Whole Foods Appetizer: Earnings Preview for Fiscal 2Q16
WFM’s margin trends
Lower sales growth, gross margin pressure, and increasing operating expenses resulted in a 7% year-over-year decline in Whole Foods Market’s (WFM) operating profit to $252 million in 1Q16. The company’s operating margin declined by 60 basis points to 5.2% during the quarter.
Despite fading financial performance, Whole Foods Market (WFM) continues to display higher margins than its supermarket and mass-merchandising competitors.
Whole Foods Market’s trailing-12-month (or TTM) operating margin of 5.4% is higher compared to Kroger’s (KR) 3.2%, Walmart’s (WMT) 5%, and Costco’s (COST) 3%.
However, the other two organic segment players, The Fresh Market (TFM) and Sprouts Farmers Market (SFM), also have high TTM margins of 5.8% and 6.3%, respectively.
Comparing WFM’s margins to Kroger
Whole Foods Market (WFM) enjoyed high margins for a long time as it comfortably reaped the benefits from the changing customer preferences toward organic foods. The company’s average operating margin stood at 6.6% from fiscal 2012 to fiscal 2014. In comparison, supermarket giant Kroger registered 2.3% average operating margin during the same period.
With the entry of mainstream supermarkets and mass merchandisers in the organic space and with increasing competition from other value-based organic players like Sprouts Farmers Market (SFM) and Trader Joe’s, Whole Foods Market started to feel the pressure on its top line and margins.
Prices and margins slide
WFM, which was already struggling with its “Whole Paycheck” image, had to offer lower-priced deals and allow its margins to contract. As a result, its operating margin slid to 2.5% for the three months ended September 9, 2015. This was lower than Kroger’s operating margin of 3% for the three months ended November 7, 2015.
As can be seen from the above chart, the gap between Whole Foods’ and Kroger’s operating margins has historically been huge. The operating margin gap averaged ~420 basis points between fiscal 2012–fiscal 2014.
ETF investors seeking to add exposure to Whole Foods can consider the Market Vectors Retail ETF (RTH), which invests 1.5% of its portfolio in the company.
In the next part, we’ll learn what Whole Foods Market’s management has to say about the company’s performance.
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