Affluent Americans Going Even More Gaga For High-End Groceries

From JPMorgan analyst Charles Grom, good news on the Whole Foods (WFMI) front:

  • Sales trends remain strong. Based on our store work and conversations with industry contacts, we believe that WFMI’s IDs have remained very healthy and are likely trending above the 6.0% the company experienced during the first four weeks of 2Q. Recall, the 6.0% QTD ID represented a meaningful 350 basis point improvement over the +2.5% 1Q trend (+260 bps improvement 2-yr stacked) and was 650 bps above the trailing 3-quarter average. While the bears would point out that WFMI’s strong QTD sales were modestly boosted by February’s Mid-Atlantic region snowstorms (we don’t completely disagree), we believe the company has managed to hold on to its pre-storm momentum and think the top-line is still seeing improvement. Looking ahead, we think Whole Foods’ IDs will continue to benefit from 5 factors going forward: (1) strong unit volume, (2) solid traffic trends, (3) a modest uptick in discretionary sales (e.g. floral, coffee, some confectionary), (4) reflation trends as product costs turn positive, and (5) an expanding basket size.

But, this is telling, in terms of our jobless recovery:

  • Take #3: SG&A in Focus – Evidence of Ongoing Expense Control. We believe Whole Foods is firmly on its way to achieving 100 bps of SG&A improvement (direct store expenses, G&A, pre-opening, relocation) within the next 3-5 years. Two noteworthy observations: First, on the labour front, the company (1) plans to keep leveraging its full-time employee base as it opens new stores, which will further reduce its full-time/part-time split below the current 83% – driving it closer to the 70% target, and (2) has been very cautious about hiring new team members into stores less than a year old – enabling the location to reach target margins before ramping up the employee base. Second, the challenging environment has also enabled Whole Foods to completely eliminate some underperforming gourmet departments in certain stores (for example we observed noticeably fewer chocolate fountains) – thus cutting costs and helping drive the shift back to a healthy product assortment at the same time.

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