Is Whole Foods Still a Buy?

Right after Whole Foods Market (NASDAQ: WFM  )  reported its fourth-quarter results, the stock price fell drastically. Does this mean that the company is going downhill? Let's take a look at the company's overall standing and also compare it with other market players Kroger (NYSE: KR  )  and SUPERVALU  (NYSE: SVU  ) .

Fourth-quarter analysis
In the final quarter of fiscal-year 2013, Whole Foods Market reported per-share earnings of $0.32, exceeding Reuters' expectations by $0.01. But, the company's revenue did not reach up to Wall Street's expectations of $3.3 billion and only managed to reach $3 billion. On a year-over-year basis, the company's sales increased by 11%.

While looking at the most important metric for retailers' performance, we find that same-store sales for the company increased by 5.9% in the last quarter. However, this growth rate was much slower than anticipated, as Wall Street had grown accustomed to same-store sales growth of around 8%, which the company had consistently delivered in the past. The slowdown in comparable-store sales growth has been due to cannibalization and increased competition.

After the company announced its quarterly results, its share price took a hit of almost 9%. Taking a holistic view, the quarterly results were not bad, but as Wall Street was expecting glowing sales from the company, the results turned out to be a disappointment for investors. A weak outlook for earnings, revenue, and comparable-store sales also contributed to unnerving investors' confidence in the company. 

What is Whole Foods up to?
Whole Foods declared an increase of 20% in its quarterly dividend, increasing the annual return to the shareholders to almost $180 million. The company's quarterly dividend has now been increased from $0.10 per share to $0.12 per share. Moreover, the company has increased its stock buyback authorization by $300 million, bringing its total buyback authority to $471 million or 3% of outstanding shares. This shows the company's confidence in its future growth and its intent to keep on rewarding its shareholders.

Whole Foods opened 12 new stores within the last quarter, bringing the total number of newly opened stores within fiscal year 2013 to 32. The company has expanded its business into 10 new markets and has been pleased with the initial results, which have exceeded expectations. The company eventually wants the store count to reach 1,000 as opposed to 367 stores right now, which shows the management has aggressive expansion plans for the future. The company's expansion into new markets is set to increase its earning potential in the future.

In the next fiscal year, the company expects its revenue to grow between the range of 11%-13% as opposed to the prior range of 12%-14%. The new range for earnings per share is $1.65-$1.69, lowered from $1.69-$1.72. The company expects comparable-store sales growth to be 5.5%-7% while the previous range was 6.5%-8%. The company didn't give a rosy outlook for the next year, as it is now facing increased competition from other big players which have increased their portions of organic and fresh foods. 

Competitors
In the most recent quarter, Kroger's earnings per share increased 15% from the year-ago quarter. The company is moving in the right direction, as the management reaffirmed its previous earnings guidance, which is inline with its earnings growth target of 8%-11% every year. This quarter also marked a distinct achievement of 40 consecutive periods of positive identical sales. Year-over-year sales for the company also increased by 3.2%.

Kroger's long-awaited acquisition of Harris Teeter for $2.5 billion is expected to take place by February, which will further increase its customer base in the U.S. The company's long-term growth rate is sound, indicating that the company will continue to perform well in the future.

In the most recent quarter, SUPERVALU's earnings per share were in excess of Wall Street's expectation. The company benefited highly from cost-cutting measures and posted per-share earnings of $0.13 while the analysts were expecting EPS to be $0.11. The results are a huge improvement from loss of $0.9 per share, which the company had in the comparable period last year. The company has been losing customers to its rivals, which was shown by only a modest increase in sales growth.

Final thoughts
Whole Foods Market posted higher-than-expected earnings, which are expected to grow in the future as the economy moves toward recovery. As per its long-term goals, the company is opening up new stores and exploring new markets with decent initial results.

However, the major concern for the company right now is the deceleration in its same-store sales growth, which missed the targets in this quarter. The outlook for the next year as portrayed by the company looks rather dim, as the management has revised its earnings, revenue, and same-store sales guidance downward. 

Although the company remains strong with positive but slowing same-store sales, it will be prudent to further monitor the company in the next few quarters before investing in it. Therefore, I remain neutral on it at this point in time.

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  • Report this Comment On January 23, 2014, at 3:28 PM, ellaerdos wrote:

    Z

    WFM is not a competitor of either KR or SVU.

    KR is a well run megachain that builds from scratch. SVU an accumulated collection of small older chains hung together by a logistics system. WFM's competitors are compact niche stores like Super Fresh, Trader Joe's and maybe Wegmans.

    I know, I've lost money on all of them!

  • Report this Comment On January 23, 2014, at 4:11 PM, nlonginow wrote:

    This analysis flies in the face of the broader philosophy of TMF, which considers the fundamentals as being sound enough to warrant a continued place in the Core portfolio of Stock Advisor. More to the point, WFM is the leading execution engine in this space, beating back an attack by TFM recently, and successfully placing new stores in same-regions (Boston, for example). The cannibalization was explained as a necessary first step toward owning the markets they are placed in. Company noted that historical patterns show that cannibalization is quickly followed by each store building it's own unique customer base. TMF approach, then, would be to continue purchasing shares of such a fundamentally sound business, and most likely see the purchases rewarded in the 1-2 year timeframe.

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