Whole Foods '365' Spinoff Stores Are Being Carefully Positioned Near Trader Joe's And Sprouts

Last week, Whole Foods Market, Inc. WFM announced a spinoff store called 365, with the first location set to open May 25.

The new grocer's concept has been described as a practical way for Whole Foods to "improve the chain's overall competitiveness and value positioning," Oppenheimer explained.

"We believe the new concept could be a way to capture share in markets that are too small for a legacy Whole Foods Market store and to gain new value-oriented customers in existing markets," Oppenheimer analysts Rupesh Parikh and Erica Eiler said.

Competition And Location Overlap

Parikh and Eiler delved into the key details of 365, and addressed the mapping plans for the 365 locations.

While the analysts noted a few of the proposed 365 locations will overlap Whole Foods' locations, the most notable overlap is between 365 and Trader Joe's and Sprouts Farmers Market Inc SFM.

Related Link: Trader Joe's Might Be Once Again Catching Whole Foods Off Guard With Price Investments

"Based on our mapping work, we found four 365 stores have a competing WFM location within five miles," the analysts stated. "Out of the first 13 stores, ten are located within five miles of Trader Joe's, seven within five miles of SFM, and six within five miles of a KR (The Kroger Co KR) store. We also found it noteworthy that six 365 stores are located within one mile of a Trader Joe's."

The analysts explained that while the proximity with competitor names could lead to upside for Whole Foods, they are concerned with the locations overlapping the market of original Whole Foods locations. "In our investor conversations, sentiment remains quite negative toward the potential success of this concept, with cannibalization representing a key concern," Parikh and Eiler elaborated.

What It Means For Whole Foods

For the longer term, the analysts view Whole Foods as "appropriate," saying, "Comps stabilization is key for the shares and we don't believe trends have stabilized to date. Our current forecasts build in further comp deterioration on a two-year stacked basis in Q3. We believe the shares are likely to remain range-bound in the high $20's to low $30's."

Oppenheimer rates Whole Foods at Outperform, with an attached 12–18 month price target of $38.00.