Recently, we have upgraded our long-term recommendation on
Whole Foods Market Inc.
) to 'Outperform' from 'Neutral'. The long-term recommendation
was upgraded mainly due to the company's strategic initiatives
like cost containment efforts, effective inventory management and
its plans to improve store-level performance, which is believed
to be accretive to its long-term growth.
Whole Foods reported its fiscal fourth-quarter 2012 (ended
September 30, 2012) financial results some days back. Earnings
increased roughly 43.0% to 60 cents a share, which were in line
with the Zacks Consensus Estimate. The year-over-year strong
growth in earnings was driven by robust sales as shoppers flocked
the grocery chain for natural and organic products.
Moreover, sales climbed 23.6% to $2,910.3 million, outpacing
the Zacks Consensus Estimate of $2,905 million. The company has
been boosting its sales through new store openings, acquisitions
and comparable store sales growth.
Further, Whole Foods has been revamping its pricing strategy
and concentrating more on value offerings, while maintaining
healthy margins. In the last five fiscal years, gross margin has
been in the range of 34% to 35%.
Additionally, we observed that Whole Foods has been actively
managing its cash flows by generating significant free cash and
making prudent capital investments. The company's solid liquidity
positions it to drive future growth. The company, during
fourth-quarter 2012, generated cash flow from operations of
$188.8 million. Moreover, it raised its dividend payout by 43% to
20 cents a share.
Whole Foods portrays a very strong valuation compared to its
peers. The stock trades at a 12-month forward P/E of 31.6x, which
is at a premium of 272.2% compared with its peer group average.
On a price-to-book ratio shares are currently trading at 4.4x, a
266.7% premium to the peer group average of 1.20x. The company's
long-term estimated earnings per share growth rate also remain
sturdy at 18.0% versus 11.0% growth of its peer group.
Whole Foods is one of the leading natural and organic foods
supermarkets with a healthy brand image and marketing and
merchandising expertise, which offers investors one of the
strongest growth profiles in the industry.
Based on the above analysis, we believe Whole Foods has a
sturdy fundamental outlook and we expect it to continue
accelerating revenue and earnings growth over the next few
However, Whole Foods, which competes with
The Kroger Co.
), carries a Zacks #3 Rank implying short-term Hold rating for
the next 1-3 months.
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WHOLE FOODS MKT (WFM): Free Stock Analysis
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