Morgan Stanley, Wedbush Both Downgrade Whole Foods Market: Here's Why

In a report published Thursday, Morgan Stanley analyst Vincent Sinisi downgraded shares of

to Equal Weight from Overweight with a price target lowered to $38 from a previous $56 after the company's third quarter results put in to question its medium-term growth prospects. Sinisi noted that his previous bullish thesis on Whole Foods assumed early-stage initiatives would result in a reacceleration of sales. The analyst added that while this is still possible over the long-term, the company's third quarter print "makes us question" the medium-term growth outlook. Sinisi continued Whole Foods gross margin declined greater than expected for the first time since Whole Foods made its price investments a key area of focus. The analyst explained the gross margin decline was due to the "magnitude and breadth of assortment" of its price investments. As such, this brings into question the extent to which the company may have to lower company-specific prices to improve its competitive position in the market. Looking forward, Sinisi pointed out Whole Foods' commentary during its post-earnings conference call that it runs its business for store productivity/hurdle rates, as opposed to same-store sales levels. This does give the analyst confidence in the "strong real estate abilities" of the company, but increases "uncertainty" on future same-store sales levels which will always be a key investor focus.

Phil Terpolilli of Wedbush downgraded shares of Whole Foods to Neutral from Outperform with a price target lowered to $40 from a previous $54. Terpolilli commented that Whole Foods' long-term outlook remains "favorable" within the specialty grocer group based on its strategy adjustments which include further affinity rollout, 365 store launch, marketing efforts. However, the analyst added that "incremental negative headwinds" (such as the negative impact from the NYC investigation into pricing, mixed details on 365 stores) will limit the possibility of a "meaningful" share rebound in the near to medium term. With that said, Terpolilli noted it is wise to shift to a "wait-and-see approach" to determine if Whole Foods can recapture consumer trust and execute on its initiatives.