Whole Foods Market Inc. shares surged the most in more than two years after activist investor Jana Partners LLC acquired a stake and suggested that the organic-food grocer consider putting itself up for sale.
The investment firm announced an 8.3-per-cent stake in a filing on Monday, saying it would seek talks with management and push for a review of Whole Foods' strategic alternatives. Jana also may nominate at least three directors in a bid to help foster a turnaround.
Whole Foods shares gained as much as 12 per cent to $34.66 in New York, the most since November 2014. The stock had been up 1 per cent this year through the end of last week.
The supermarket chain, which helped pioneer the organic-food movement, has been grappling with its worst sales slump in more than a decade. Six straight quarters of declining same-store sales have forced the company to close stores and rein in costs. A record-setting bout of food deflation has put additional pressure on the entire grocery industry.
"They went from owning the space to having massive competition," said Brian Yarbrough, an analyst at Edward Jones. "It's a strong brand that has really struggled."
In announcing its investment, Jana vowed to address the weak performance and potentially shake up the board. The New York-based firm also will examine real estate and Whole Foods' new small-store format called 365.
Still, it may be difficult for Jana to improve performance in the short term, Yarbrough said. An outright sale to a grocery competitor like Kroger Co. may make more sense, he said.
"It will be very tough to speed up the turnaround process -- the most upside would be with a sale," he said.
Larger mainstream grocers, including Kroger and Wal-Mart Stores Inc., continue to advance on Whole Foods' organic turf, weighing on sales. Whole Foods has sought to fight back by offering more discounts and starting the new 365 chain, which is aimed at younger shoppers. But the strategy has been slow to pay off.
The slump prompted Whole Foods to shrink the size of its chain this quarter for the first time in more than a decade. The company, which has about 440 U.S. stores, also abandoned its longer-term growth target of reaching 1,200 locations, seeking instead to get expenses under control.
The comeback effort is in the hands of Chief Executive Officer John Mackey, a co-founder of the Austin, Texas-based company who retook sole leadership last year. He had served as co-CEO with Walter Robb until November.
The struggles have fueled speculation that an activist investor will step forward and push for changes. As Jana fills that role, the firm is looking to reassess everything from Whole Foods' brand to the way it schedules worker hours.
Monday's filing named five co-investors working with Jana, including three who have agreed to stand as dissident director nominees should Jana pursue a proxy fight in 2018: Glenn Murphy, Thomas Dickson, and Meredith Adler. The other two are Diane Dietz and Mark Bittman, who are acting as consultants. Bittman is a well-known food journalist and author who previously wrote a column for the New York Times.
Jana's most recent activist encounters have happened largely behind the scenes. Last month, the hedge fund announced an agreement with Blackhawk Network Holdings Inc. to add two independent directors -- before it had even disclosed its 4.7 percent stake in the prepaid-payment network. In February, Jana struck similar settlements with drugmaker Bristol-Myers Squibb Co. and jeweler Tiffany & Co. without any public scuffles.
The Whole Foods encounter started with a different tone: Jana released an activist 13D filing that includes names of potential dissident director nominees. That suggests it's prepared for a proxy fight for control of the board.
"The shares are undervalued and represent an attractive investment opportunity," the firm said in the filing. "Jana has substantial experience analyzing and investing in the grocery sector and more broadly across the food and retail sectors."