We currently maintain our long-term "Neutral" recommendation on
Whole Foods Market Inc
), one of the leading natural and organic food supermarkets in
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The $18.6 billion company has a strong brand image, which along
with marketing and merchandising expertise enables it to offer
investors one of the strongest growth profiles in the industry.
Whole Foods has been spurring sales through new store openings,
acquisitions and comparable store sales growth. The company plans
opening of 25 new stores in 2012, 28 to 32 stores in 2013 and 33 to
38 stores in 2014. Effective pricing strategy and concentration on
value offerings also bode well for the stock. Margins are healthy
and ranged within 34%-35% in the last five fiscal years. Earnings
growth gets a boost from strict cost-control measures, effective
inventory management and improved store-level performance.
Moreover, the company has been actively managing its cash flows, by
generating significant free cash and making prudent capital
investments. Cash flows are also being utilized for opening of new
stores, paying down debt and returning cash to shareholders through
dividends and share repurchases.
Outlook remains bright for Whole Foods, as the company expects an
increase of 15.6-15.8% in total sales, underpinned by expectations
of an 8.6-8.8% rise in comparable-store sales and an 8.2-8.4%
growth in identical-store sales in fiscal 2012. Earnings are
expected to be within $2.51 and $2.52 per share range for fiscal
2012, reflecting a year-over-year growth of 30% to 31%.
We find the company's strong fundamentals quite compelling.
Currently, the stock has a projected long-term earnings growth of
18.7%, significantly higher than the peer group average of 12%.
Despite these growth catalysts, lingering macro concerns, cautious
consumer spending and the stock's current valuation limits growth
in the near term.
Whole Foods' top-line growth faces downside risk from a shift in
consumers focus from higher priced organic products to cheaper
private label brands triggered by negative impacts of interest rate
hikes, credit availability, unemployment levels, and high household
debt levels on disposable income. To add to the peril, rising
competitive pressure from
The Kroger Company
) is raising concerns for the stock.
Moreover, we find the company's shares to be richly valued at the
current juncture. Whole Foods currently trades at a forward P/E of
34.7x, a whopping 204.4% premium to the peer group average of
11.4x. Also, the stock reflects price-to-book ratio of 5.06 and
price-to-sales ratio of 1.66, which is substantially above the peer
group average of 1.53 and 0.27, respectively.
Whole Foods currently retains a Zacks #3 Rank that translates into
a short-term 'Hold' rating.