It took more than a year, butWhole Foods Market (
) finally seems to have convinced Wall Street the company is a
good bet for long-term growth.
Whole Foods operates a chain of natural and organic foods
supermarkets that sell the usual staples, such as fresh produce
and meats, canned goods and paper products as well as prepared
foods, nutritional supplements and vitamins.
As of May 7, the company had 349 stores in the U.S., Canada
and the U.K., making it the biggest natural and organic grocery
chain in the country. It also has 85 stores under development,
either as new stores, relocations or renovations.
Financially, Whole Foods has been a model of consistency
through the years. Since 2009, the company has grown annual
earnings at least 30% and sales at least 12%.
Over the last 13 quarters, its EPS has increased 18% or more
even as it bumps up against increasingly tough year-over-year
That kind of performance has drawn praise from analysts who
consider Whole Foods the best operator in the supermarket
segment, organic or otherwise.
"Whole Foods is arguably the best operated, best positioned
grocer in the U.S., with a brand that resonates with consumers
seeking better-for-you eating," noted Ken Goldman, analyst at
JPMorgan. "It continues to post the strongest comps in the food
retail universe, and we believe the long-term returns on capital
will continue to increase."
Yet until about a month ago, Whole Foods had a hard time
gaining much traction on Wall Street. Its stock price basically
went sideways from early May 2012 to early May 2013, even though
it continued to deliver robust results.
That all changed May 8, when Whole Foods shares popped 10% to
a record high on better-than-expected results for its fiscal
second quarter and a positive outlook.
Shares have continued to move higher in the weeks since,
although its pulled back in recent days along with the general
market. It currently trades near 50, reflecting a two-for-one
stock split that took place May 29.
The Q2 results didn't represent a big step forward from a
growth perspective. Year-over-year earnings gained 19%, up from
18% growth the previous quarter but below the trend over most of
the last three years.
Still, the performance seemed to tamp down concerns about
Whole Food's long-term growth prospects.
"The market was basically waiting to see where the growth was
going," said Ken Perkins, analyst at Morningstar. "The quarter
reassured investors that Whole Foods' growth is definitely still
there, and that it has a long way to run."
One concern going into the second quarter was Whole Foods'
performance during its first quarter, when earnings and sales
growth decelerated substantially.
Recent results helped allay those concerns.
For one thing, Whole Foods' Q2 same-store sales grew 6.9% from
a year earlier, which represented a sequential acceleration on a
two-year basis of 50 basis points.
For another, the company's same-store sales growth during the
first three weeks of the current quarter accelerated to 7.4%,
excluding an employee discount day.
"We believe these results may alleviate some investor anxiety
about decelerating numbers that was generated from the prior
quarter's disappointing performance," Goldman noted in a report
Whole Foods logged earnings of 38 cents a share, adjusted for
the split, for its fiscal second quarter, which ended April 14.
That was up from an adjusted 32 cents the prior year and above
consensus analyst views. Sales climbed 13% to $3 million, in line
The company's gross margin came in at 36.4%, up almost 10
basis points year-over-year. Management expects less gross margin
expansion during the second half of the year than it had during
the first half, though its margin outlook has improved.
"Although the company expects price investments to continue to
pressure the gross margin, it also sees many opportunities to
offset this pressure with economies of scale, product
differentiation and continued expense leverage," Goldman
After reporting Q2 results, Whole Foods raised its full-year
earnings guidance to a range of $2.86 to $2.89 a share from its
earlier forecast of $2.83 to $2.87.
"They raised guidance in line with our original expectations,
which reiterated to us that there has been no slowdown,"
Morningstar's Perkins said. "That was what we were looking to
Accounting for the recent stock split, analysts polled by
Thomson Reuters expect full-year profit of $1.45 a share, up from
$1.26 a year earlier.
Whole Foods expects to open 32 stores this fiscal year and 33
to 38 more in fiscal 2014. It eventually plans to roughly triple
its store count, a reflection of its confidence that more
consumers are being drawn to organic foods despite their higher
"Whole Foods thinks they can get to 1,000 stores, so there's a
long runway in terms of growth," Perkins said. "They will
probably focus most of their attention on growing in the U.S.,
particularly fairly wealthy communities of 200,000 or more. Those
types of communities play into their niche a little more."