Whole Foods Surges After Jana Goes Activist

Who says activist investors are dead, swallowed whole by the relentless passive, ETF wave?

Moments ago Whole Foods, which has seen its stock suffer a painful decline for the past two years, spiked on a WSJ report that Barry Rosenstein's Jana Partners has amassed a 9% stake in WFM and is pushing the organic grocer to speed up its turnaround efforts while also exploring a possible sale. 

According to the WSJ, Jana, which is Whole Foods’ second-largest shareholder, plans to press the chain "to improve its technology and operations" to better compete with larger rivals, shake up its board and find out how much a potential bidder might be willing to pay, according to people familiar with the matter."

Because, the thinking goes, management never thought of that before.

And while Jana’s campaign is simply the result of the stock sliding (leading to unhappy LPs), forcing the activist investor to scramble and boost the flailing share price, the truth is that Whole Foods has struggled to make the transition from high-flying upstart with a loyal following into a large, national chain with the kind of back-office systems tracking customers and inventory that rivals use to keep costs down and sales up.

Whole Foods’ stock has risen 4% over the past 12 months, compared with a 15% gain in the S&P 500, and has lost more than half its value since peaking in 2013. Sales have fallen over the past 18 months. Same-store sales fell 2.5% during its fiscal year that ended in September 2016. The company’s market value currently stands at around $10 billion.

Some more details from the WSJ:

Jana has lined up a potential slate of board nominees, the people said, four months before the deadline to launch a board fight. That’s likely a signal that Jana, which has quietly reached settlements with several companies this year to install new directors, will be aggressive in demanding change at Whole Foods. The activist hasn’t yet met with Whole Foods’ current board or executives, the people said.

 

With Whole Foods, Jana is departing a bit from its usual approach. The fund, founded by Barry Rosenstein in 2001, typically works with management and boards behind the scenes. It’s played a role in changing the boards of Bristol-Myers Squibb Co. , Tiffany & Co. and Blackhawk Network Holdings Inc., all without the kind of public fight associated with activists.

 

Jana’s campaign will amplify the quieter grumblings of other Whole Foods shareholders. Mutual-fund giant Neuberger Berman, which owns about 2.4% of Whole Foods, has been privately pushing for faster change at the company, The Wall Street Journal has reported. The firm has complained that the chain hasn’t fully capitalized on its popularity among millennials or prepared foods sales, areas where it bests its rivals.

To be sure, investors are not happy with the stock's performance: "some say that while the company is taking the right steps, it’s moving too slowly to catch up to rivals that are years ahead in retail technology and customer management. They’ve indicated that management had to perform this year or risk a louder uprising this fall."

“We think [Whole Foods] needs to move from a growth phase to an efficiency phase,” UBS analysts wrote in tagging the company with a sell rating last month. “The entrepreneurial culture that served it well in its growth mode now needs to be more process-oriented. That can be a rough transition.”

At Whole Foods’ annual meeting in February, the board was re-elected but faced a high protest vote. Two directors got around 85% support and an advisory vote on executive compensation got 84%, levels that signal investor angst.

At the end of the day, however, a transformation at WFM may be out of management's hands, especially if the upwardly mobile consumer class has seen its discretionary income swallowed by spending on such mandatory outlays as Obamacare, or has been eating up by inflation and the occasional iPhone. In any case, with a relatively modest net debt load, one thing is certain in WFM's future: a surge in stock buybacks, all else equal.

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