Whole Foods bets on 365 format, cost cuts to revive growth

Key Points
  • Whole Foods CEO said the company's smaller-format 365 stores are doing well.
  • The CEO expects the company will return to positive comps and earnings growth by fiscal-year end 2018.
  • The company is targeting an additional $300 million in cost savings.
  • Earlier Wednesday, Whole Foods reported its earnings and announced a shake up of its board.
A Whole Foods store
Keith Beaty | Toronto Star | Getty Images

Whole Foods Markets co-founder and CEO John Mackey insisted the company's smaller-format 365 stores are doing well as he provided an update on the retailer's turnaround strategy Wednesday.

The call comes one month after activist investor Jana Partners disclosed a nearly 9 percent stake in the Austin, Texas-based chain and ratcheted up pressure on management to deliver better results. It also came on the same day Whole Foods announced a shake up of its board of directors, including the exit of five members and the naming of a new chairperson.

"We understand that we need to do much more, and faster," said Mackey. "Initiatives in operational improvements we're undertaking will drive sales, EBITDA, and EPS growth and shareholder value."

Mackey projected the retailer will return to positive comps and earnings growth by fiscal-year end 2018.

Extend Rewards Program, Focus on Cost Cuts

He said one way the retailer plans to achieve the goals is by focusing on its affinity rewards and marketing initiatives as well as through cost savings.

At the same time, the CEO said the company plans $300 million in additional cost savings on top of what was already announced in 2015 and is "taking a number of steps to reach these incremental savings."

Whole Foods is struggling as competition in the organic and natural foods retail space intensifies. It comes as archrival Sprouts Farmers Market, Wal-Mart Stores and others have pushed to lure customers with lower prices.

The company's fiscal second-quarter same-store sales or comps reported Wednesday marked the seventh consecutive quarter of negative comps for the company. Same-store sales in the quarter ended April 9 were down 2.8 percent, although better than the 3.1 percent decline in comps that had been projected by analysts polled by Thomson Reuters.

One part of the company's turnaround strategy is to roll out more of its 365 stores, which are smaller than its traditional Whole Foods outlets and aimed at value-focused consumers. Also, the company plans to continue cost cutting in its business.

"We continue to test and refine our 365 model," said Mackey. "We like the profit model that 365 delivers. It doesn't have all the bells and whistles that Whole Foods has but also has significantly lower capital costs."

The company currently operates four of the 365 format stores and indicated it has 22 more in the pipeline and will be increasing that number. The company said it's made "significant improvements" to the 365 model since originally rolling out the concept.

Meantime, Whole Foods named five new independent directors, effective immediately, as well as announced that Gabrielle Sulzberger was appointed the new chairperson of the retailer's board. She has been a board member of the company since 2003.

Also, Whole Foods named Keith Manbeck as its new chief financial officer. Most recently, Manbeck was a senior vice president in charge of digital finance, strategy management and business transformation at Kohl's. He assumes the new post, effective May 17.

Whole Foods' new chair takes swipe at Jana Partners

During the call, the new chairperson commented on Jana Partners and its recent purchase of a stake in the retailer. She also took a swipe at the activist investor.

According to Sulzberger, Whole Foods was not contacted by Jana prior to the April 10 filing but afterward held discussions with them and even identified two of Jana's nominees it was prepared to add to a new board.

"Jana indicated they were pleasantly surprised by the changes but they currently didn't want to tie their hands with an agreement," said Sulzberger. "Both sides suggested that we would continue the dialogue."

Added the Whole Foods chair, "We are disappointed that our confidential discussions have been provided by Jana to the press. We look forward to constructive dialogue with all of our shareholders, including Jana."

Besides Jana Partners, Whole Foods is facing pressure from investor Neuberger Berman, which owns just under 3 percent of the retailer. Neuberger last month notified the board that it should "immediately engage shareholders" to consider options, including a possible sale of the company.

There's also been speculation another grocer may want to acquire Whole Foods, including perhaps Albertsons.

During Wednesday's call, Whole Foods management wasn't asked specifically about a possible sale of the company or possible suitors.

Jana didn't immediately respond to CNBC's request for comment.

One analyst during the call asked if Whole Foods had "enough depth of management to execute" the ambitious plan or whether they might "bring in additional help."

The CEO seemed to be taken aback, responding: "We feel like we're well advised. We have a number of excellent consulting firms we're working with."

He also pointed out the company just hired a new CFO who will "add new depth to our leadership team."