Time To Sell Whole Foods, 'Headwinds Still Too Numerous To Ignore'

In a report published Thursday, Pivotal Research Group analyst Ajay Jain initiated coverage of Whole Foods Market, Inc. WFM with a Sell rating and $29 price target as the analyst sees no signs of comps stabilizing in the near-term.

According to Jain's most recent channel checks, Trader Joe's is proving to be a growing threat to Whole Foods from a market share perspective. The analyst noted that in every single market he tracks, Trader Joe's increased its market share compared to a year ago. In fact, Trader Joe's growing dominance helps to explain Whole Foods' rational behind its "365" concept.

Jain continued that while Whole Foods' management should be applauded for taking "credible steps" in modifying and adapting its business given the growing competitive landscape, the 365 concept is unlikely to be a "game change" or demonstrate any "material sales impact" for at least several years.

Jain also noted that Whole Foods' longer-term guidance is calling for 15 to 16 percent earnings per share growth and comps in the 5 to 6 percent range through fiscal 2018. The analyst stated that his own model is "materially lower" than management's vision as the company anticipated a "much more meaningful" sales lift as a result of a 20 to 30 basis point annual investment in gross margin. In fact, the company's level of price investment is "clearly insufficient" to achieve the company's growth expectations.

Finally, Jain suggested that Whole Foods' could see its comps turn negative in the first quarter. Meanwhile, the recent controversy around the weight and pricing investigation in New York City "exacerbated" on-going challenges with the company's price image and could result in longer term "reputational damage."