Barclays Sees 'Activist' as Challenging Fit to Create Value at Whole Foods (WFM)
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A Bloomberg report surfaced on 11/4/16 that made claims that a top 10 shareholder of Whole Foods (NASDAQ: WFM) had "met with potential activist investors to discuss making sweeping changes to the upscale grocery chain, including replacing management and exploring a sale of the company." However, Barclays believes that finding an activist partner that is suitable for the company could be challenging. The partner would need to be able and willing to preserve WFM's culture while simultaneously pushing initiatives with a sense of urgency.
Barclays analyst Karen Short commented, "In summary, we believe the recent management changes are an acknowledgement that change is needed, but the list of "acceptable" activist partners is probably small given that WFM would require a hands-off approach to its culture. However, if an acceptable partner emerged, we believe a partner could create value by modifying parts of WFM's strategy.."
It is clear to Barclays, through recent management shifts, that the company acknowledges that there is a need for change. As growth slows, and fundamentals break down, Barclays believes that WFM should make business decisions that embrace maturity and creates shareholder value.
The company has a goal to reduce costs by a $300m run rate by the end of 2017. However, as of 4Q16, more than 50% of the savings have been realized, yet operating profit declined -9.0% in 2016. Barclays believes that there are additional cost savings opportunities, especially within labor.
Kate Short mentioned in a note, "One specific opportunity WFM has to reduce SG&A costs is to continue reducing labor costs by increasing the mix of part-time workers. WFM has increased the percentage of part-time and seasonal workers from ~13% in 2005 to ~32% in 2015, but there is still room to increase the part-time labor mix since we believe the mix is closer to ~55% at conventional supermarkets. The first figure below shows WFM’s percentage of part-time and seasonal employees since 2005. Increasing the mix of part-time workers should help improve WFM’s labor costs as a percentage of sales, which currently compares unfavorably vs. other food retailers. The second figure below shows WFM vs. other food retailers on labor costs as a percentage of sales (note WFM disclosed in its last proxy filing that the average hourly wage was $19.70). note these numbers are mostly based on our estimates."
The firm maintained an Equalweight rating and price target of $30 on WFM.
Shares of Whole Foods Market closed at $30.94 yesterday.
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