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Whole Foods Market Calms Street's Nerves Over Growth

By: Investor's Business Daily
Posted: 6/10/2013 4:14:00 PM
Referenced Stocks: WFM

It took more than a year, butWhole Foods Market ( WFM ) 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 comparisons.

That kind of performance has drawn praise from analysts who consider Whole Foods the best operator in the supermarket segment, organic or otherwise.

High Praise

"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 last month.

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 with estimates.

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 noted.

Raised Guidance

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 see."

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 price points.

"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."