Is Growth at Whole Foods Worth the Price?

On Tuesday, Whole Foods Market (NASDAQ: WFM  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Whole Foods is famous for pioneering the revolution toward healthier food offerings at grocery stores, with a variety of natural and organic products that have produced much higher margins than more traditional grocery chains. Yet investors have set high expectations by bidding up shares of the food giant. Let's take an early look at what's been happening with Whole Foods Market over the past quarter and what we're likely to see in its quarterly report.

Stats on Whole Foods Market

Analyst EPS Estimate

$0.73

Change From Year-Ago EPS

14.1%

Revenue Estimate

$3.03 billion

Change From Year-Ago Revenue

13.4%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will earnings at Whole Foods keep up this quarter?
Analysts have marked down their earnings estimates for Whole Foods just minimally in recent months, cutting a penny per share from the just-ended quarter and $0.02 from their full-year fiscal 2013 earnings-per-share consensus. The stock has suffered somewhat as well, declining about 4% since late January.

Whole Foods continues to demonstrate an impressive awareness of what its customers want and a skillful ability to respond to varying customer needs, even at the local store level. One way it has done so is by keeping employee counts high, bucking the trend at Safeway (NYSE: SWY  ) and Wal-Mart, which have cut the ratio of employees to store square-footage by double-digit percentages in the past five years. Costco (NASDAQ: COST  ) has used the same strategy to boost overall sales, seeing employees as a key to boosting customer satisfaction that leads to greater revenue, rather than as a cost center. Whole Foods is following the same game plan to perfection.

One area where Whole Foods could see huge promise is in the rise of private-label brands. In the conventional food space, ConAgra's (NYSE: CAG  ) buyout of Ralcorp Holdings, which closed in late January, upped the ante for private-label sales. Brand-name food producers like Kellogg and General Mills now find themselves on the defensive against lower-priced alternatives that compete well not only on price but also on quality. Yet Whole Foods has taken advantage of the trend to come out with its own private-label offerings, which have the potential to boost its margins even further.

But Whole Foods needs to reassure investors that its disappointing guidance from its quarterly report in February won't hold the company back. The drive to increase its lower-priced offerings to consumers reflects a desire to appeal to a broader base of customers and to get rid of its "Whole Paycheck" reputation. Although that may restrain earnings growth in the short run, it won't stop the company from continuing expansion plans for more stores.

When Whole Foods reports, its emphasis should be on supporting the long-term vision for the grocery chain going forward. With competitors trying to learn lessons from its stellar results, Whole Foods will have to keep innovating to retain its leadership role in the industry and justify the high multiple that shareholders are paying for the stock.

Whole Foods has rewarded investors with huge gains over the past two decades, but there could be even more profits to come. In our 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. So make sure to claim your copy today by clicking here.

Click here to add Whole Foods Market to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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