Will Whole Foods regain consumer trust?

Whole Foods Market, Inc. is scrambling to restore consumer trust after an audit in the recent quarter found the retailer had been mislabeling weights and therefore overcharging customers in New York for prepackaged food. The matter, which occurred in only nine of Whole Foods’ more than 400 stores, received national attention and sent comparable sales plummeting during the last week of June.

“We have seen a slight improvement in trends fourth quarter to date; however, comps are still well below our 2.5% average for the 19 weeks prior to the negative publicity,” said Walter Robb, co-chief executive officer of Whole Foods, during a July 29 earnings call with financial analysts.

For the third quarter ended July 5, Whole Foods had net income of $154 million, equal to 43c per share on the common stock, up 2% from $151 million, or 41c per share, for the prior-year period. Sales increased 8% to a record $3,632 million for the quarter from $3,377 million the year before.

Comparable store sales on a constant currency basis rose 1.3%, which in addition to the negative publicity reflected an unfavorable shift in the timing of Easter.

Immediately following the overcharging investigation, Whole Foods executives said the company has taken steps to address and prevent the issue from reoccurring.

“I want to emphasize these were not systematic, but rather caused by inadvertent human error,” Mr. Robb said. “Clear and transparent pricing is integral to how we operate. We have taken immediate steps to address these issues, including improving our training regarding in-store packing, weighing, and labeling processes, and expanding our third-party auditing process company-wide.”

John Mackey, co-c.e.o., said measuring errors occur in any supermarket.

“We’re not sure why Whole Foods was singled out for this attention,” he said. “We don’t know why the media ran wild with this. Our error rates are very small. We’ve done our own auditing. We put in procedures now so that we can perhaps be perfect, but we believe an objective evaluation, if you compare Whole Foods’ record, these are inadvertent errors, and there’s no systematic mistakes being made here. It’s a very small percentage of our total product.

“It’s just something that went viral in the media, and it has hurt our trust and yet we do feel like we are victims… We don’t know exactly why the (Department of Consumer Affairs) went after Whole Foods like this, and we’re not sure why the media went crazy with it, but it did happen...

“As far as re-establishing trust with our customers, there’s no magical wand we can wave.”

Looking ahead, executives expect to deliver sales growth of approximately 7% and diluted earnings per share of 34c to 35c for the fourth quarter. For fiscal 2015, the company is projecting sales growth of approximately 9%, driven by comparable store-sales growth in the low single digits and square footage growth of 10% based on 38 new stores, including five relocations.