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This Could Be the Key to a Turnaround at Whole Foods

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A customer builds a salad at the new Whole Foods Market Inc. Photograph by Patrick T. Fallon — Bloomberg via Getty Images

Credit Suisse is feeling bullish about Whole Foods Market’s turnaround plan, thanks in part to the customers the grocery chain is targeting—and they’re not just millennials.

In the past few years, the organic supermarket’s growth has stalled amid a fiercely competitive landscape as traditional players such as Target (TGT) reach into the organic space, while Trader Joe’s lures consumers away with lower prices. Those intrusions have worried investors about how, and if, Whole Foods can reclaim market share, sending its stock down more than 17% in the past 12 months.

But a team of Credit Suisse analysts led by Edward Kelly wrote in a Wednesday note that they expect Whole Foods to turn around before 2018, due to the company’s aggressive new strategy centered on affordability. Whole Foods has slashed prices, reduced costs, accelerated private brand penetration, and rolled out a value format in its new chain, 365.

That also means that Whole Foods has begun tapping into a wholly different, albeit critical, customer base.

 

“Over the past several years, [Whole Foods] has been opening its core concept stores in smaller markets with a lower density of college-educated consumers and lower household income,” the analysts wrote (considering an area within a three-mile radius of the store). “These small markets are critical to the company’s long-term store targets and the 365 concept should better position [Whole Foods] to achieve these goals.”

That should expand Whole Foods’ potential market and improve its image, the analysts wrote, noting that 58% of the chain’s stores opened between 2012 and 2013 started in markets with fewer than 35,000 college-educated people. That’s up from 38.5% of stores that were opened 8 to 11 years ago.

“[Whole Foods Market] has been slow to react to the heightened competitive landscape, but is now in the early stages of an aggressive repositioning that we believe will reinvigorate growth,” Credit Suisse analysts wrote. “Price investment stories in food retail are not pretty, earnings could remain choppy near-term, but we see a recovery taking hold within 18 months.”

Credit Suisse also noted that Whole Foods’ stock should hit its bottom when its average same-store sales, or sales at stores open more than a year, also hit the floor—likely in the second quarter of 2016— before rallying when average same-store sales rebound.

The analysts upgraded the stock to “Outperform,” Wall Street’s moderated way of recommending a “Buy,” and hiked the stock’s price target to $40‚ making Credit Suisse the most bullish firm on the street covering Whole Foods and one of the few firms recommending a buy. That pushed shares of up 5% in midday trading Wednesday.