The Dangers Of Overreacting To The Current Economic Environment: Whole Foods Market (WFMI) And Tween Brands (TWB)

Subprime lenders like New Century Financial, Novastar, and, to a large extent, Countrywide Financial, learned a hard lesson in the dangers of operating businesses as though the then-current good economic times would last forever.

Now the economy has taken a turn for the worse, and companies are struggling to react to new realities. Whole Foods Market (WFMI) is trying to convince shoppers that it actually can be a good place for value-conscious consumers, as its results disappoint Wall Street.

Today’s Wall Street Journal reports that Tween Brands (TWB) is converting 560 of its Limited Too stores into Justice stores, its lower-price point brand. According to The Journal, "The strategy shift by the New Albany, Ohio, retailer, which sells apparel aimed at 7- to 14-year-old girls, comes as the economic slowdown is causing preteens and teens, along with older consumers, to trade down to lower-priced goods."

I’m not sold on either of these ideas for responding to the economic environment. When times are good, few people realize that they can get bad and, now that they’re bad, it’s hard to imagine them getting good again. But history has demonstrated amply that economic conditions do bounce back and forth, with a general trend toward the good.

Whole Foods has built an empire over the past 25+ years with its emphasis on a unique upscale environment and high-quality, all-natural and organic products. Investors were rewarded with high margins and stunningly good stock market returns and, now after just a few quarters of that strategy not working in large part because of weak consumer spending, the company is changing course, possibly giving up a lot of what makes it unique in the first place.

Similarly, Tween Brands has struggled to meet its earnings and revenue guidance in recent quarters, and maybe this is one way to do that — or at least convince anxious investors that the company is doing something to respond to current problems. By switching over to its lower-priced label, the company is giving up its strong margins in a move that will probably look dumb once happy days are here again.

The obsession with quarterly results is forcing companies to "DO SOMETHING!" in response to temporarily weak results when, in reality, focusing on long-term value is what leads to strong returns for long-term shareholders.

Looking at a tough economic picture and making huge changes to the company to make it one that does well in a tough environment while ignoring the upside lost in a good environment is no less of a sin than operating as though the good times will last forever.

Zac Bissonnette