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Last week, Amazon (NASDAQ: AMZN) reported earnings that underwhelmed some investors. Shares were bid down over 5% the next day, as the company's better-than-expected quarter was overshadowed by weaker-than-expected guidance.
One factor that may be worrying investors was a rare year-over-year decline in one of Amazon's business segments: physical stores. Physical stores are made up of Amazon's new brick-and-mortar inventions, including the Amazon 4-star store, Amazon bookstores, and the cashier-less Amazon Go concept store. Still, these are tiny contributions; virtually the entire segment is made up of Whole Foods, which Amazon acquired in the summer of 2017.
Last quarter, Amazon reported a surprise 3% decline in physical store revenue. However, investors shouldn't panic. That figure is not representative of how Whole Foods is actually doing.
Is Whole Foods growing? Image source: Getty Images.
Two major adjustments
Embedded in the 3% decline in physical stores were two important adjustments. First, when Amazon acquired Whole Foods, it had to adjust Whole Foods' reporting schedule, which shifted about five days into the fourth quarter of 2017. Those extra days made year-over-year comparisons a bit more difficult relative to Q3 results.
Second -- and most important -- when a customer makes a Whole Foods order online, either for delivery or pickup outside a Whole Foods store, it doesn't show up in the physical store segment, but rather the, "online store" segment. That's important, because since Amazon is an online-first retailer, a large part of the thesis for buying Whole Foods was to boost Amazon's online grocery capabilities.
Management said on its conference call with analysts that when one adjusts for the above factors, Whole Foods sales were actually up 6% year-over-year.
6% for a large grocer is awesome
6% growth, while certainly lower than the rest of Amazon's high-octane segments, is actually quite a bit better than Whole Foods was doing prior to Amazon's purchase. It's also better than Whole Foods' large grocery store peers.
In the final quarter before Amazon's acquisition, Whole Foods grew revenue only 0.6%. Meanwhile, competitor Kroger, the largest pure-play grocer, only grew sales 1.7% (adjusted for acquisitions and divestitures) in its latest reported quarter (Q3 2018). Target, which has a sizable grocery businesses, grew its Q3 food and beverage sales by 4.9%. While Walmart hasn't broken out total year-over-year grocery sales, it did report comparable grocery sales in the "low single digits" on its last earnings presentation. In that light, Whole Foods' results not only weren't a negative, they were downright positive by comparison.