Whole Foods' Healthy Performance - Analyst Blog

Whole Foods Market Inc. ( WFM ) commenced fiscal 2012 with a bang, posting better-than-expected first-quarter 2012 results on the back of strong sales as shoppers flocked to the grocery chain. The company has been gaining market share compared with other supermarket chains.

These inflicted a sense of confidence in management's mind about the company's performance in 2012, which was quite evident through an upbeat outlook.

Let's Unveil the Picture

Austin, Texas based company, Whole Foods, said that quarterly earnings of 65 cents a share beat the Zacks Consensus Estimate of 60 cents, and jumped 27.5% from 51 cents earned in the prior-year quarter.

Whole Foods, one of the leading natural and organic foods supermarkets, sustained its top-line growth momentum with revenue climbing 12.9% to $3,390.9 million in the quarter, which also came ahead of the Zacks Consensus Estimate of $3,384 million.

Consumers, who had cut back their spending during the recession, are now gradually returning to the chain. However, a rise in gasoline and food prices remains a matter of concern, since passing on increased costs to customers through price rise may boomerang through a shift of customers' preference from higher priced organic products to cheaper private label brands. Therefore, the company must be observant while passing on extra burden to the consumers.

Effective inventory management and improved store-level performance have 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 five fiscal years, gross margin has been in the range of 34% to 35%.

Whole Foods said that comparable-store sales rose 8.7% in the quarter, down from 9.1% in the prior-year quarter, but flat compared with the previous quarter. In the first three weeks of second quarter of 2012, comparable-store sales jumped 9.4%.

The company also notified that identical-store sales climbed 8.2% in the quarter compared with 9.1% in the prior-year quarter and 8.4% in the previous quarter. In the first three weeks of second-quarter 2012, identical-store sales jumped 9%.

Whole Foods indicated that adjusted EBITDA for the quarter surged 20.5% to $283 million, whereas EBITDA margin expanded 50 basis points to 8.3%. Operating income for the quarter jumped 29% to $190.3 million, whereas operating margin increased 70 basis points to 5.6%.

Stores Update

Whole Foods currently operates 317 stores. The company opened 6 stores during the quarter, and plans to open 3 stores in the second quarter of 2012. The company plans to open 24 to 27 stores in 2012 and 28 to 32 stores in 2013. The company opened 18 stores in fiscal 2011. In total, there are 69 stores in the development pipeline. The company believes that there exists a room for 1,000 stores in the long run, and sees expansion opportunity in Canada and the United Kingdom as well.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $530 million, total long-term debt and capital lease obligations of $19.3 million, shareholders' equity of $3,182.7 million.

During the quarter, Whole Foods generated cash flow from operations of $260.9 million and incurred capital expenditures of $111.3 million, resulting in free cash flow of $149.6 million.

Whole Foods paid $17.8 million in dividends and bought back $3.6 million of shares during the quarter.

The company has been utilizing its cash flows in the opening of stores, paying down debt and returning cash to shareholders through dividends and share repurchases.

Strolling through Guidance

The better-than-expected results, prompted management to raise its expectations for the top and bottom lines, and operating margin.

Whole Foods now expects an increase of 13.5%-15% in total sales, underpinned by a 7.3%-8.8% rise in comparable-store sales and a 7%-8.5% growth in identical-store sales in fiscal 2012. Management projects EBITDA in the range of $980 million to $995 million, and expects operating margin to be 5.9%. The company continues to expect capital expenditures in the range of $410 million to $460 million.

The company predicts earnings between $2.28 and $2.32 per share for fiscal 2012. Analysts polled by Zacks, estimates fiscal 2012 earnings at $2.30.

Earlier, Whole Foods had projected 13%-15% increase in total sales, driven by a 6.8%-8.8% rise in comparable-store sales and a 6.5%-8.5% growth in identical-store sales in fiscal 2012. EBITDA was forecasted to be in the range of $960 million to $980 million, and operating margin was expected between 5.7% and 5.8%. The company had previously predicted earnings between $2.21 and $2.26 per share for fiscal 2012.

Currently, we have a long-term 'Neutral' rating on the stock. Moreover, Whole Foods, which competes with The Kroger Company ( KR ), holds a Zacks #2 Rank that translates into a short-term 'Buy' recommendation.

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WHOLE FOODS MKT ( WFM ): Free Stock Analysis Report

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

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

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