Whole Foods Beats on Earnings; Cuts View - Analyst Blog


Whole Foods Market, Inc. ( WFM ) continues with its positive earnings surprise trend by posting better-than-expected fourth-quarter fiscal 2013 bottom-line results. Earnings of 32 cents a share beat the Zacks Consensus Estimate by a penny and rose 7% from 30 cents earned in the prior-year quarter as shoppers flocked to the grocery chain.

However, the top line fell short of our expectation as other prominent players are gradually expanding their market presence by offering more natural or organic products, thus compelling the company to revise its price.

Consequently, Whole Foods trimmed its sales forecasts. Not surprisingly, shares tumbled 9.2% in aftermarket trading hours, yesterday. Even the announcement of a dividend hike failed to calm the jitteriness of investors.

Let's Unveil the Picture

Whole Foods, a leading natural and organic foods supermarket, sustained its top-line growth momentum with revenue climbing 2% to $2,976 million in the quarter, but falling short of the Zacks Consensus Estimate of $3,036 million. On a comparative 12-week basis, sales were up 10.8%.

Effective inventory management and improved store-level performance helped the company sustain the downturn and achieve improved sales and profit. Whole Foods has been revamping its pricing strategy and concentrating more on value offerings, while maintaining healthy margins. In the last 3 fiscal years, gross margin has been in the range of 34.8% - 35.5%.

Whole Foods stated that comparable-store sales rose 5.9% in the quarter, indicating the soft growth the company witnessed in fiscal 2013. For the first 5 weeks of first-quarter fiscal 2014, comparable-store sales jumped 5.8%.

The company also notified that identical-store sales climbed 5.5%, down from the improvement of 6.7% registered in the preceding quarter. For the first 5 weeks of first-quarter fiscal 2014, identical-store sales jumped 5.2%.

Whole Foods indicated that gross profit rose 3% to $1,061 million, whereas gross margin grew 37 basis points to 35.6% as cost of goods sold and occupancy costs shriveled as a percentage of sales.

Store contribution jumped 7% to $305 million. As a percentage of sales, store contribution increased 43 basis points to 10.3%.

Adjusted EBITDA for the quarter rose 8% to $298 million, whereas adjusted EBITDA margin expanded 50 basis points to 10%. Operating income for the quarter jumped 9% to $192 million, whereas operating margin increased 50 basis points to 6.5%.

Stores Update

Whole Foods currently operates 367 stores. The company opened 12 outlets during the fourth quarter. So far in the first quarter of fiscal 2014, the company has opened 5 stores, and plans to open 5 more stores.

The company plans to open 33 to 38 stores in fiscal 2014 and 35 to 40 stores in fiscal 2015. The company opened 32 stores in fiscal 2013, after opening 25 outlets in fiscal 2012. Moreover, it believes that there exists room for 1,000 stores in the long run, and envisions expansion opportunities in Canada and the United Kingdom.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $290 million, long-term capital lease obligations of $26 million, and shareholders' equity of $3,878 million.

During the quarter, Whole Foods generated cash flow from operations of $191 million and incurred capital expenditures of $160 million, resulting in free cash flow of $31 million. The company paid $37 million in quarterly dividends and bought back $37 million worth of shares.

The company's board of directors also increased the dividend payout by 20% to 12 cents a share. The next dividend will be paid on Jan 28, 2014 to stakeholders of record as of Jan 17, 2014. The board also authorized a new $500 million share repurchase program, to be exhausted through Dec 31, 2015, in addition to the existing authorization of $300 million to be utilized through Dec 31, 2014.

The company has been utilizing its cash flow for opening new stores, paying down debt and returning cash to shareholders through dividends and share repurchases.

Strolling Through Guidance

Whole Foods project an escalation of 11% to 13% in total sales for fiscal 2014 on the back of an expected 5.5% to 7% rise in comparable-store sales and 5% to 6.5% growth in identical-store sales.

Earlier, management had forecasted 12% to 14% sales growth buoyed by a 6.5% to 8% rise in comparable-store sales and a 6% to 7.5% jump in identical-store sales.

Management provided EBITDA guidance of $1.36 billion to $1.39 billion, and projected operating margin between 6.9% and 7%. The company anticipates capital expenditures between $600 million and $650 million.

Management now envisions earnings between $1.65 and $1.69 per share, portraying a year-over-year jump of 12% to 15%, down from a range of $1.69 to $1.72 forecasted earlier. Analysts polled by Zacks, estimate fiscal 2014 earnings at $1.73, which may witness a downward revision in the coming days.

Zacks Rank for Whole Foods

Currently, Whole Foods carries a Zacks Rank #2 (Buy). However, there are certain other stocks that warrant a look, such as Pinnacle Foods Inc. ( PF ), The J. M. Smucker Company ( SJM ) and Treehouse Foods, Inc. ( THS ), all carrying a Zacks Rank #2 (Buy).

PINNACLE FOODS (PF): Free Stock Analysis Report

SMUCKER JM (SJM): Free Stock Analysis Report

TREEHOUSE FOODS (THS): Free Stock Analysis Report

WHOLE FOODS MKT (WFM): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: PF , SJM , THS , WFM



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