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Earnings Preview: Whole Foods

Zacks Equity Research

Whole Foods Market Inc. (NasdaqGS:WFM - News), one of the leading natural and organic foods supermarkets and an S&P 500 company, will release its first-quarter 2012 financial results after the closing bell on Wednesday, February 8, 2012.

The current Zacks Consensus Estimate for the quarter is 60 cents a share that reflects a growth of 17.6% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 57 cents and a high of 62 cents a share. The Zacks Consensus Revenue Estimate is pegged at $3,383 million for the quarter under discussion.

Recap of Fourth-Quarter 2011

Whole Foods Market posted better-than-expected fourth-quarter 2011 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.

Austin, Texas based company Whole Foods’ quarterly earnings of 42 cents a share scraped past the Zacks Consensus Estimate by a penny, and jumped 27.3% from 33 cents earned in the prior-year quarter.

The company sustained its top-line growth momentum with revenue climbing 12.2% to $2,353.8 million in the quarter, but it fell short of the Zacks Consensus Estimate of $2,360 million.

Consumers, who had cut back their spending during the recession, are now gradually returning to the chain. However, rising gasoline and food prices remain matter of concerns, since passing on increased costs to customers through price rise may boomerang.

Whole Foods said that comparable-store sales rose 8.7% in the quarter, flat compared with the prior-year quarter, but up from 8.4% in the previous quarter.


During the last earnings conference call, Whole Foods hinted an increase of 13%-15% in total sales, underpinned 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. The company predicts earnings between $2.21 and $2.26 per share for fiscal 2012.

Zacks Agreement & Magnitude

Of the 19 analysts following the stock, none revised their estimates in the last 7 or 30 days, thereby keeping the Zacks Consensus Estimate unchanged at 60 cents.

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 13.3%. The average remained at 7.7%. This suggests that Whole Foods has beaten the Zacks Consensus Estimate by an average of 7.7% 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 November 2, 2011, Whole Foods’ market price has increased 8.5% to $76.41 as of February 6, 2012. During trading hours on February 6, the stock price reached an intra-daylow of $75.85 and an intra-dayhigh of $77.01. Currently, the stock price is within its 52-week low-high range of $52.52 (attained on February 9, 2011) and $78.29 (achieved on January 18, 2012). Over the period from November 2, 2011 to February 6, 2012, the stock dropped to a low of $62.77 on November 21, 2011 and rose to a high of $78.29 on January 18, 2012.

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 34.9%.

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.

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 negatively impact their disposable income triggering a shift in focus from higher priced organic products to cheaper private label brands. This may adversely affect 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 (NYSE:KR - News) and Supervalu Inc. (NYSE:SVU - News), holds a Zacks #2 Rank, which translates into a short-term “Buy” rating.

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