Whole Foods protects profits in second quarter as it cuts prices

By Lisa Baertlein

(Reuters) - Whole Foods Market Inc (WFM.O) on Wednesday reported better-than-expected quarterly earnings as it controlled costs while lowering prices in the face of stiff competition from a bevy of retail rivals.

The biggest challenge for the nation's largest natural and organic grocery chain has been to protect profits while it works to shake its "Whole Paycheck" reputation for lofty prices and stay a step ahead of Wal-Mart Stores Inc (WMT.N), Kroger Co (KR.N) and other mainstream grocers that are expanding into the specialty realm Whole Foods pioneered.

Shares of Whole Foods rose 2.4 percent to $29.19 in after-hours trading, but remained significantly off their all-time high of just above $63 in October 2013.

The company, which recently slashed labor costs by centralizing marketing and some purchasing, later this month will debut the first store in its more affordable chain called 365 by Whole Foods Market.

Whole Foods will open its first 365 store in the Los Angeles neighborhood of Silver Lake on May 25.

"We believe there is customer demand for both (existing and new store) formats," said Walter Robb, co-chief executive officer of Whole Foods Market, who added that the company soon will open smaller-format 365 shops in Lake Oswego, Oregon and Bellevue, Washington.

"We are excited to learn from these first three stores and evolve from there," Robb said.

The company is stealing a page from other large grocers by moving to so-called "everyday low pricing," advertising special deals, preparing to roll out a loyalty program and experimenting with digital coupons, mobile payments and delivery.

It is also highlighting what makes it different. The company remains a leader in sourcing antibiotic-free meats and local products, and is taking retailing to another level with bars, trendy restaurants and food kiosks in its newer stores.

Net income was $142 million, or 44 cents per share, for the second quarter ended April 10, beating analysts' average estimate of 41 cents, according to Thomson Reuters I/B/E/S.

Same-store sales for the quarter slipped 3 percent from a year earlier, more than the 2 percent decline analysts' expected, after lower prices on items like fruits and vegetables did not offset a rise in the number of items sold.

Same-store sales have weakened for three straight quarters. They fell 1.8 percent in the first quarter and slipped 0.2 percent in the fourth quarter of the last fiscal year. For the current quarter through May 1, they were down 2.6 percent.

(Reporting by Lisa Baertlein in Los Angeles; Editing by Bernard Orr)