There has been no shortage of news surrounding Whole Foods Market (WFM) lately, and yesterday was no exception with the grocer reporting fiscal Q2 results and also announcing a slew of other actions. Those include a 29% increase to its quarterly dividend to $0.18/share, a new $1.25 billion share repurchase program, and the announcement of a new CFO.
The results themselves were also better-than-feared as EPS of $0.37 was inline with the Capital IQ Consensus and revenue of $3.74 billion edged the $3.73 billion consensus. As many are aware, competition has been a major obstacle for WFM, pressuring comparable store sales, margins, and growth. But, the Q2 performance at least mitigated some of those concerns. And when combined with the shareholder friendly actions, the end result has been a positive one for the stock as shares are currently trading higher by 5% and hitting new 52 week highs.
In the weeks leading into its Q2 report, the stock had been on quite a role, surging by 22% since the beginning of April. This raised the risk of a "sell-the-news" type of reaction following its Q2 report, but, the aggressive return of capital actions has kept the momentum going.
This rally began to take shape back on April 10 when a report hit stating that activist investor, JANA Partners, established an 8.3% stake in the company. Included in this report was a comment that JANA wanted to initiated a review of strategic alternatives -- including possible mergers. Soon thereafter, the rumor mill sprung into action with reports that Amazon (AMZN) has mulled a possible acquisition of WFM. Then, a couple weeks later, Financial Times reported that Albertson might be interested in making a bid for the organic food grocer. The combination of these reports set a fire under the stock just ahead of last nights report. So far, the stock has managed to sustain the positive momentum.
Circling back to its Q2 results, revenue grew by 1.1% to a quarterly record of $3.7 billion. The growth is roughly inline with its recent performance over the past five quarters. Comps were down (2.8)% in the quarter due to a 3.0% drop in transactions. This was slightly worse than Q1's (2.4)% and Q4's (2.6)%.
Gross margin declined 82 basis points year/year to 34.1% driven by increases in occupancy costs and cost of goods sold as a percentage of sales. LIFO charges were $3 million versus $2 million last year, a negative impact of three basis points. On the positive side, gross margin did improve from Q1's 33.6% figure.
In its earnings press release, WFM also provided an updated outlook for FY17. Specifically, it guided for sales growth of 1.0% or better, comps of (2.5)% or greater, EBITDA margin of about 8%, and EPS of $1.30 or higher, which is essentially inline with the $1.33 consensus.
To conclude, there are a lot of moving parts involved with WFM at the moment -- strategic initiatives, new CFO, new return of capital initiatives, restructuring activities, and a fiercely competitive landscape pressuring its financial results. The Q2 report itself didn't show a significant improvement from recent results, just yet. However, the combination of a higher shareholder yield -- thanks to the increase in dividend & new buyback -- and the possibility of a merger down the road has investors interested.