24/7 Wall St.

There was a major shock among grocery stores this past week that threw the industry on its head. Prior to the acquisition news, we speculated that this industry might be in trouble as the result of too much competition and margins too low. It just seems that there are too many sources for getting groceries.

Additionally, the advent of online grocery shopping is not helping. Food delivery services such as Blue Apron are acting like the cooking-show in a box for millennials, further deterring grocery shopping. Not to mention that all this is happening at a time when restaurants have all struggled to find their niches in a peak-store theme.

Consolidation seemed like a natural progression, and once Amazon.com Inc. (NASDAQ: AMZN) and Whole Foods Market Inc. (NASDAQ: WFM) announced their deal on Friday, consolidation is most likely a necessary progression to deal with this monster. 24/7 Wall St. has taken a look at these earth-shattering events from the past week and given some analysis on how this might impact the rest of the industry.

First, Kroger Co. (NYSE: KR) — known as the largest pure play grocer in the United States — released its most recently quarterly results on Thursday. However its guidance tanked the stock and also brought down the industry as a whole.

In terms of guidance for the full year, Kroger lowered its EPS estimate to a range of $2.00 to $2.05 from the previous range of $2.21 to $2.25. Consensus estimates are $2.19 in EPS and $121.24 billion in revenue for the fiscal year.

Shares of Kroger closed Friday down 9% at $22.29, with a consensus analyst price target of $32.50 and a 52-week range of $20.46 to $37.97. Over the course of the week, the stock dropped 27.6%.

Second, Amazon is making an incredibly ambitious purchase by buying out Whole Foods. While this is shocking, it is no doubt Amazon’s brick-and-mortar challenge to the likes of Kroger and Wal-Mart Stores Inc. (NYSE: WMT).

Under the terms of the agreement, Amazon will acquire Whole Foods for $42 per share (a premium of 27% from the previous close) in an all-cash transaction valued at roughly $13.7 billion, including the net debt of Whole Foods. The transaction is still subject to shareholder approval, but the parties expect it to close in the second half of 2017.

Whole Foods will continue to operate stores under the Whole Foods Market brand and source from trusted vendors and partners around the world. John Mackey will remain as CEO of Whole Foods and its headquarters will stay in Austin, Texas.

Shares of Whole Foods closed Friday up 29% at $42.68. The stock has a 52-week range of $27.67 to $43.45 and a consensus price target of $33.95.

Amazon shares were up 2.4% at $987.71 on Friday, with a consensus price target of $1,110.84 and a 52-week range of $682.12 to $1,016.50. What stands out about this acquisition is that Amazon gained about $11 billion in market cap, which could nearly pay for the acquisition outright.

The Whole Foods acquisition is a huge disappointment for Sprouts Farmers Market Inc. (NASDAQ: SFM) on a couple of levels. According to Gordon Haskett analyst Chuck Grom:

First, given its Amazon Prime Now program (currently in ~10 stores with plans to add 10-15 more this year), we had always speculated that one day Sprouts might be on Amazon’s shopping list (not Whole Foods).  Second, given Amazon’s buying power (coupled with Kroger’s more aggressive price investments announced yesterday), the ramifications for Sprouts’ margin structure is certainly opaque at this juncture.  Conversely, on the other hand, let’s not forget that the Sprouts business model has been very transportable over the past 4-5 years (261 current stores; successful entry into the Southeast) and targets more of a middle-income shopper (e.g. greater market share opportunity long-term vis-à-vis Whole Foods).  Accordingly, we think today’s news 100% puts Sprouts into play with Wal-Mart and Kroger potential bidders.

Shares of Sprouts closed Friday down 6.3% at $21.01, with a consensus price target of $25.59 and a 52-week range of $17.38 to $25.98.

For Walmart it might be too early to tell what this acquisition news might bring. On one hand, if Amazon continues down a path of consolidation of lower-to-middle income brick-and-mortar grocery chain/discount stores, the risk to Walmart is much greater. However one counterbalance to consider is that a Whole Foods shopper is not a Walmart shopper, in terms of demographic and location. One customer enjoys an annual household income of over $100K and the other pulls in around $40K to $50K. If Amazon decides to push the Whole Foods 365 Concept, then this might take a chunk out of the middle-income group that Walmart enjoys.

Shares of Walmart closed the week down 4.7% at $75.24, with a consensus price target of $80.49 and a 52-week range of $65.28 to $80.47.

Costco Wholesale Corp. (NASDAQ: COST) is seen in many consumers’ eyes as one of the best values out there, whereas Whole Foods has had trouble shaking its “Whole Paycheck” moniker. But this could change after the acquisition. The question is how Whole Foods’ value proposition changes relative to Costco once Amazon is in control. In other words, how much will Whole Foods lower prices?

Costco shares closed Friday down 7.2% at $167.11, with a consensus price target of $187.41 and a 52-week range of $142.11 to $183.18.