Did Weak Guidance Spoil Whole Foods?

Whole Foods (NASDAQ: WFM  ) fell 9% Thursday after leaving investors hungry for more following the release its fiscal first-quarter results.

Though earnings per share came in slightly above analyst estimates after growing 20% year over year to $0.78, quarterly revenue missed after rising 13.7% from the year-ago period to $3.856 billion. In addition, Whole Foods lowered the high end of its revenue guidance for the remainder of 2013 and now expects sales growth in the range of only 10% to 11%. When all's said and done at the end of the year, then, and based on last year's revenue of $11.7 billion, that means 2013 sales should come in between $12.87 and $12.99 billion, or below analysts' consensus of $13.2 billion.

Clean up in the value aisle
So what happened?

While margins increased across the board, management warned investors not to expect the same level of EPS growth for the remainder of the year as the store achieved in the first quarter.  Specifically, during Wednesday's earnings conference call, co-CEO Walter Robb stated, "We know that one of the keys to broadening our appeal when growing our sales over the longer term is to improve our relative value positioning."

Translation? Whole Foods wants to place more focus on lower-priced (and therefore lower-margin) items to be more competitive in the grocery market. Of course, they're not talking about adopting a Costco-esque strategy of pushing massive volumes of product at barely above cost. But by showing customers they can offer great products at reasonably low prices, Whole Foods is making its brand that much more appealing to increasingly value-conscious consumers who may otherwise be tempted to drive down the street to the nearest Safeway (NYSE: SWY  ) to fill their carts. Considering the higher costs and relatively stagnant revenue growth Safeway has endured for the past few years, you can bet the competing grocery chain is doing everything it can to stifle Whole Foods' threatening meteoric rise.

Continued growth, shareholder value
In addition, Whole Foods managed to open a record 10 new stores in its fiscal first quarter, bringing its total number of locations to 345 with further plans to continue expanding at an accelerating pace for the foreseeable future. To be sure, according to management, Whole Foods has signed 11 new leases since its fourth-quarter earnings announcement, and currently has "85 stores in development, totaling 3 million square feet and representing 24% of [their] operating store base," according to the call.

Finally, Whole Foods continued increasing shareholders' slice of the pie by repurchasing $26 million in stock during the quarter, and its balance sheet remains solid with $1.2 billion in cash and equivalents and no debt as of the end of the quarter, even after spending $371 million in December to fund its $2-per-share special dividend.

In the end, Whole Foods' business remains healthy as ever and should be more than enough to satisfy the heartiest of appetites for substantial profits down the road. Patient long-term investors, then, should view the market's knee-jerk reaction as a fantastic opportunity to buy.

More for the road
It's hard to believe that a grocery store could book investors more than 30 times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this brand-new premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. We're also providing a full year of regular analyst updates to go with it, so make sure to claim your copy today by clicking here.

 


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