Whole Foods Shareholders to Meet Amid Pressure on the Board (WSJ; 2/17/17)

Chain recently dropped plans to expand to 1,200 stores in the U.S. and announced its largest number of stores closures in its history

By Heather Haddon and David Benoit

Whole Foods Market Inc.’s annual shareholders meeting will convene Friday amid investors’ concerns about the organic-food retailer’s ability to make changes to address sustained declines in sales growth and steep reductions in its share value.
Some investors are saying the Austin, Texas-based company is at an inflection point: it needs to improve its performance in the increasingly competitive grocery industry, or potentially face a challenge to the board in about six months’ time, according to people familiar with the matter.

A Whole Foods spokeswoman declined to comment.

Protest votes against directors without a competing slate of nominees are unlikely to unseat current board members but can embolden activists and critics to try to campaign in the following year, especially if performance hasn’t changed.

Last week, Whole Foods delivered a downbeat financial outlook, with executives dropping previous plans to expand to 1,200 stores in the U.S. and announcing its largest number of stores closures in one stint in its nearly 40-year history.

The entire grocery industry is sluggish as increased competition has eaten into margins and slowed growth, even among industry standouts such as Kroger Co. Food retail stock prices are down an average of 3.55% year to date, according to FactSet data. But mainstream grocers’ expansion into natural and organic products has particularly hurt Whole Foods in a sector it once dominated. The company’s stock has lost more than half its value since its most recent peak in 2013.

Whole Foods founder and CEO John Mackey pledged last week to use data and promotions to lure back core shoppers to its 469 stores in the U.S., Canada and the U.K., and the roughly 80 new ones it is planning to open. Mr. Mackey will face investors alone for the first time in six years after the company recently ended its dual-CEO leadership structure.

Wall Street analysts last week were largely positive on the company’s shift to more fiscal discipline. Other investors were heartened by Mr. Mackey’s candidness about the company’s problems. “A recovery seems likely,” said Laura L. McGonagle, senior vice president at Trillium Asset Management, a Boston investment firm that owns Whole Foods shares.

But others believe the company has a long way to go to turn around its bottom line and expect pressure on leadership to grow.
Neuberger Berman, a top-10 investor with about 2.4% of the stock, has been privately pushing for faster change at the company, for example, the people said. It believes Whole Foods resonates better with millennials and sells more prepared foods than rivals, but that management hasn’t kept up with the chain’s growth, the people said.

“Where are the next-generation kids who are talking about farm to table? They are trying to embrace that crowd in a groovy way but they’ve missed the boat. That’s a problem,” said Julie Goodridge, founder and chief executive for Boston-based NorthStar Asset Management, which decreased its stake in Whole Foods to 1% from 3% last fiscal quarter after owning the company’s stock since 1992.

Proxy advisers, meanwhile, are adding to the pressure with concerns about Whole Foods’ board attendance, executive pay and the “coziness” of its board, according to Glass Lewis & Co.

Glass Lewis raised red flags over the independence of Whole Foods’ board last month and recommended against the severance package for Walter Robb, who stepped down as co-CEO in December but remains on the company’s board. Mr. Robb didn’t respond to requests for comment.

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