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Whole Foods Falls on Sales Miss Despite Q2 Earnings Beat - Analyst Blog

Zacks Equity Research

Whole Foods Market, Inc. WFM continued with its positive earnings surprise streak for the fourth straight quarter. The company posted second-quarter fiscal 2015 earnings of 43 cents a share that came a penny ahead of the Zacks Consensus Estimate, and rose 13.2% from the year-ago quarter.

Whole Foods Market Inc. - Earnings Surprise | FindTheCompany


Despite an earnings beat, shares of this natural and organic foods supermarket chain operator, plummeted 11.4% during after-market trading hours yesterday, as the revenue miss disappointed investors. The company delivered sales of $3,647 million that fell short of our expectation of $3,711 million. However, the top line increased 9.8% year over year buoyed by effective inventory management and improved store-level performance.

This Zacks Rank #2 (Buy) company has been revamping its pricing strategy and concentrating on value offerings in view of heightened competition as more companies are entering and expanding their presence in the Organic & Natural food business. These companies include The Kroger Co. KR, Sprouts Farmers Market, Inc. SFM and Wal-Mart Stores Inc. WMT.

We believe that Whole Foods is leaving no stone unturned to reach its target customers, whether through national marketing and branding campaigns, home delivery services, store expansion, or the adoption of a digital route. The company, in collaboration with Instacart, has started online delivery services. Moreover, it plans to introduce its new “uniquely-branded store concept” next year, equipped with innovative technology, compelling products at value prices and a much modern look to target millennials and stave off competition.

Whole Foods stated that comparable-store sales (comps) rose 3.6% on a constant currency basis in the reported quarter. Management highlighted that comps in the second quarter were favorably impacted by 50 basis points due to Easter in the said quarter as against the third quarter last year. Management anticipates that comps in the third quarter will be adversely impacted by about 100 basis points.

During the quarter under review, EBITDA rose 11.6% to $355 million, while EBITDA margin expanded 10 basis points to 9.7%. Operating income grew 10.4% to $255 million, whereas operating margin remained flat at 7%.

Stores Update

Whole Foods currently operates 417 stores. The company opened 11 new outlets during the quarter under review. So far in the third quarter, the company has opened three new outlets, and plans to open five more stores. Moreover, it believes that there exists room for 1,200 stores in the U.S. in the long run, and expects to surpass the count of 500 in fiscal 2017.

For fiscal 2015, management targets square footage growth of 9%–10% on the back of 38–42 new store openings, including 5–6 relocations.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $323 million, long-term capital lease obligations of $60 million, and shareholders’ equity of $4,032 million. Return on invested capital (ROIC) for the trailing four quarters was 15.1%.

During the quarter, Whole Foods generated cash flow from operations of $322 million and incurred capital expenditures of $206 million, resulting in free cash flow of $116 million. The company paid $47 million in quarterly dividends and bought back $47 million worth of shares.

Guidance at a Glance

Whole Foods continues to project sales growth of over 9% for fiscal 2015 on the back of low-to-mid single-digit comps growth. Management anticipates EBITDA margin of about 9% and ROIC of over 14%. Moreover, management expects earnings per share growth to remain even with or marginally higher than the rate of increase in sales.

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