Being one of the leading natural and organic foods supermarkets,
Whole Foods Market Inc.
(
WFM
) with a strong brand image along with marketing and merchandising
expertise, offers investors one of the strongest growth profiles in
the industry. The stock is poised to surge once the economy revives
and demand for healthier and natural food improves.
The Driving Forces
Stringent cost-control measures, effective inventory management
and improved store-level performance are driving earnings growth.
Whole Foods also 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%.
Moreover, Whole Foods has been spurring sales through new store
openings, acquisitions and comparable store sales growth. Given the
fragmented food retailing industry, the company has a track record
of successfully integrating regional acquisitions. The company has
been gaining market share compared with other supermarket
chains.
The company has been steady in opening new stores, having opened
15 and 16 stores, respectively in fiscal 2009 and 2010, and 18
stores in fiscal 2011. Whole Foods hinted that it wants to
accelerate its pace of store openings in the coming years with
current plans being 24 to 27 new stores to be opened in 2012 and 28
to 32 stores in 2013. The company believes that there exists room
for 1,000 stores in the long run, and sees expansion opportunities
in Canada and the United Kingdom as well.
Active Management of Cash Flows
Whole Foods has been also actively managing its cash flows, by
generating significant free cash and making prudent capital
investments. The company's strong liquidity, positions it to drive
future growth. During second-quarter 2012, the company generated
cash flow from operations of $255.8 million and incurred capital
expenditures of $101.9 million, resulting in free cash flow of
$153.9 million.
The company has been utilizing its cash flows for the opening of
stores, paying down debt and returning cash to shareholders through
dividends and share repurchases.
Brighter Outlook
Whole Foods' better-than-expected second-quarter 2012 results on
the back of strong sales (as shoppers flocked to the grocery chain)
prompted management to provide an upbeat outlook. Quarterly
earnings of 64 cents a share beat the Zacks Consensus Estimate of
59 cents, and jumped 25.5% from 51 cents earned in the prior-year
quarter.
Whole Foods now expects an increase of 14.8-15.6% in total
sales, underpinned by expectations of an 8.2-8.9% rise in
comparable-store sales and a 7.8-8.6% growth in identical-store
sales in fiscal 2012.
Earlier, Whole Foods had projected a 13.5-15% increase in total
sales, driven by expectations of a 7.3-8.8% rise in
comparable-store sales and 7%-8.5% growth in identical-store
sales.
Whole Foods, which competes with
The Kroger Company
(
KR
) and
Supervalu Inc.
(
SVU
), guided earnings between $2.44 and $2.47 per share for fiscal
2012, reflecting a year-over-year growth of 26% to 28%. Analysts
polled by Zacks, estimate fiscal 2012 earnings at $2.46. The
company had previously projected earnings in the range of $2.28 to
$2.32 per share.
Concerns
Whole Foods remains concerned about the sluggish recovery in the
economy with a cautious consumer spending.
The company's customers remain sensitive to macroeconomic
factors including interest rate hikes, credit availability,
unemployment levels and high household debt levels, which may
negatively impact their disposable income triggering a shift in
focus from higher priced organic products to cheaper private label
brands. This may adversely affect Whole Foods' top-line growth.
Conclusion
Currently, we maintain our long-term Neutral recommendation on
the stock. However, Whole Foods' strong fundamentals and favorable
outlook are well defined through a Zacks #1 Rank that translates
into a short-term Strong Buy rating.
KROGER CO (KR): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
WHOLE FOODS MKT (WFM): Free Stock Analysis
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