U.S. Markets closed

Whole Foods Downgraded to Neutral

Zacks Equity Research

Whole Foods Downgraded to Neutral

On Feb 14, 2013, we downgraded our recommendation on Whole Foods Market, Inc. (WFM), the natural and organic foods supermarket, to Neutral based on the company’s cautious stance for the remainder part of fiscal 2013. The stock currently holds a Zacks Rank #3 (Hold).

Why the Downgrade?

Whole Foods has been witnessing downward estimate revisions since the company came out with its first-quarter fiscal 2013 results and provided a conservative outlook for the remaining quarters. The company’s first-quarter earnings of 78 cents a share jumped 20% year over year and came a penny ahead of the Zacks Consensus Estimate. Revenue of $3,856 million rose 13.7% but fell short of the Zacks Consensus Estimate of $3,875 million.

Management hinted that the rate of growth in earnings per share in the remaining part of the fiscal 2013 would not be at a similar level as that of the first quarter as gross margin would remain under pressure, primarily in the second and third quarters. This is due to tough year-over-year comparison, along with competitive pricing strategy to gain market share against other supermarket chains.

The Zacks Consensus Estimates for fiscal 2013 fell by 1% to $2.87 per share over the last 7 days. For the second and third quarter, the Zacks Consensus Estimates dropped by 1.4% and 1.3% to 73 cents and 74 cents, respectively, over the same time frame.

Causes for Concern

We observe that comparable and identical store sales growth trend is softening. Whole Foods said that comparable-store sales rose 7.2% in the quarter, down from 8.7% in the prior-year quarter and from 8.5% in the previous quarter. Identical-store sales climbed 7.1% in the quarter compared with 8.2% in the year-ago quarter and 8.3% in the preceding quarter.

Consequently, Whole Foods narrowed its sales outlook. Whole Foods now projects an escalation of 10% to 11% in total sales compared with 10% to 12% growth forecasted earlier.

Other Stocks to Consider

There are certain other stocks that warrant a look, such as Flowers Foods, Inc. (FLO) and J&J Snack Foods Corp. (JJSF), both of which hold a Zacks Rank #1 (Strong Buy) and are expected to continue with their upbeat performances. Another stock that should be merited is The Hershey Company (HSY), which holds a Zacks Rank #2 (Buy).

Read the Full Research Report on HSY

Read the Full Research Report on JJSF

Read the Full Research Report on FLO

Read the Full Research Report on WFM

Zacks Investment Research

More From Zacks.com