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Earnings Preview: Whole Foods

Zacks Equity Research

Whole Foods Market Inc. (WFM), one of the leading natural and organic foods supermarkets and an S&P 500 company, will release its second-quarter 2012 financial results after the closing bell on Wednesday, May 2.

The current Zacks Consensus Estimate for the quarter is 59 cents a share that reflects a growth of 15.7% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 56 cents and a high of 61 cents a share. The Zacks Consensus revenue estimate is pegged at $2,649 million for the quarter under discussion.

Recap of First-Quarter 2012

Whole Foods Market 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.

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 sustained its top-line growth momentum with revenue climbing 12.9% to $3,390.9 million in the quarter. The revenue was also 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 rises 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 any extra burden to consumers.

Whole Foods said that comparable-store sales rose 8.7% in the quarter, down from 9.1% in the prior-year quarter, but flat with the previous quarter.

Guidance

During the last earnings conference call, Whole Foods hinted 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. The company predicts earnings between $2.28 and $2.32 per share for fiscal 2012.

(Refer the article: Whole Foods’ Healthy Performance)

Zacks Agreement & Magnitude

The Zacks Consensus Estimate for the second quarter moved up by a penny on the upward revisions in the estimates made by 3 out of 20 analysts covering the stock in the last 30 days. In the last 7 days, none of the analysts revisited any estimate as a result no movement was noticed in the Zacks Consensus Estimate.

The increase in the Estimate portrays a positive sentiment ahead of the earnings release among the analysts, who remain optimistic about the company’s performance in 2012.   

Positive Earnings Surprise History

With respect to earnings surprises, Whole Foods has topped the Zacks Consensus Estimate over the last four quarters in the range of 2.4% to 10.9%. The average remained at 6.5%. This suggests that Whole Foods has beaten the Zacks Consensus Estimate by an average of 6.5% in the previous four quarters. Given the past performance, we expect the company to outperform the Zacks Consensus Estimate in the upcoming quarterly results.

Price Stats

Since its last earnings release on February 8, 2012, Whole Foods’ market price has increased 7.3% to $83.49 as of April 27, 2012. During trading hours on April 27, the stock price reached an intra-day low of $82.61 and an intra-day high of $84.19. Currently, the stock price is within its 52-week low-high range of $53.32 (attained on August 9, 2011) and $86.35 (achieved on March 16, 2012). Over the period from February 8, 2012 to April 27, 2012, the stock price dropped to a low of $76.33 on February 8 and rose to a high of $86.35 on March 16.

Neutral on Whole Foods

Being one of the leading natural and organic foods supermarkets, Whole Foods Market with a strong brand image, and 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 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%.

Whole Foods has been spurring its 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.

Whole Foods has been also actively managing its cash flows, by generating healthy free cash and making prudent capital investments. The company’s strong liquidity positions it to drive future growth. The company has also been utilizing its cash flows in the opening of stores, paying down debt and returning cash to shareholders through dividends and share repurchases.

However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may adversely affect their disposable income, triggering a shift in focus from higher priced organic products to cheaper private label brands. This may hurt Whole Foods’ top-line growth.

Currently, we maintain our long-term “Neutral” recommendation on the stock. However, Whole Foods, which faces stiff competition from other supermarket operators such as The Kroger Company (KR) and Supervalu Inc. (SVU), holds a Zacks #2 Rank that translates into a short-term “Buy” rating.

Read the Full Research Report on SVU

Read the Full Research Report on KR

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