Whole Foods Stores Turning Trends on Lower Pricing

(MoneyWatch)  Whole Foods sales continued to slide in the latest quarter, but consumers are not as determined to cut back on their shopping at the natural -- and gourmet -- food purveyor, which has been lowering prices to encourage customers to think of it as more cost competitive with other retailers.

Sales in the company's third quarter increased two percent to $1.9 billion but comparable store sales - in locations open for at least a year -- decreased 2.5 percent and identical store sales - in stores open for at least a year excluding remodels and relocations -- decreased 3.8 percent, or 3.3 percent if foreign currency impact isn't considered. Diluted earnings per share actually improved, coming in at 25 cents per share versus 24 cents in last year's quarter, and beating analyst estimates.

In the first quarter of this year, identical store sales were down 4.9 percent and in the second quarter they fell by 5.8 percent, so the 3.8 percent decline represents an improvement in trend. While presenting that as a positive is essentially using a less-bad assessment, and certainly doesn't mean Whole Foods idents will turn positive in the current quarter, at least it does suggest that customers are not as eager to save money at the retailer's expense. Indeed, with lower commodity costs and company initiatives contributing to price reductions, Whole Foods' identical store sales number may slightly under represent store trends. CEO John Mackey noted that the softening of the idents slide was the result of better trends both in how much shoppers were spending per visit and customer count.

In a conference call, as transcribed by SeekingAlpha, Mackey said:

In quarter two, we saw transaction counts stabilize and then start to recover, with a marked downward swing in average unit price and basket size. In quarter three, the recovery in transaction count continued, with average unit price and basket size stabilizing and then improving toward the end of the quarter. We hope these trends are an indication that the level of trading down might be easing somewhat. For the first four weeks of quarter four ended, Aug. 2, our comps, excluding the impact of foreign currency, declined 0.7 percent and idents declined 2.4 percent, an improvement from the declines we saw in the third quarter. Transaction count and basket size both continued to show favorable trends. While our comps and idents are still slightly negative, we are encouraged by the continued sequential improvement we are seeing.

The improved trend may be partly attributable to Whole Foods initiation of selected price cutting. The company has expanded its benchmarking to include a wider range of food retailers and targeted popular items for price breaks as it considers how to balance the value equation and appear more competitive.

Walter Robb, Whole Foods COO, said that the company determined in spring 2008 that a softening economy was going to have an increasing impact and began to look at pricing as an issue it needed to address. He asserted:

We decided to tack pretty strongly towards value, so we've been doing this now for well over a year. And I would say it's fair to say it took us six to nine months to begin to get some traction on these efforts and for the customers to really begin to give us credit for being more competitive and for meeting their needs in these times.

Getting price right as regards the market has been critical in Whole Foods drive to stabilize sales trends, but the execution and consumer recognition required to generate improvement have taken time, Robb said, adding:

You don't turn things like that around overnight, but our own internal studies have shown that people are giving us increasing credit for being competitive, and also they're seeing the visibility of the value in the stores. They come in the store, they can see visibly the better deals, the better pricing, the better choices

Lower prices on popular items should tie into a healthy eating push that Whole Foods plans, one that will de-emphasize the gourmet element of its operation and enshrine the notion of the store as a foundation for all-around wellness.