Whole Foods (NASDAQ:WFMI) did a good job last quarter of using news of its buyout of Wild Oats (NASDAQ:OATS) to divert Wall Street's attention from its earnings miss. But what bright, sparkly object will the firm use to dazzle and confuse the Street when it reports second-quarter 2007 earnings Wednesday -- or will it even need a diversion at all?

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts follow Whole Foods, which gets a half dozen buy ratings, eight holds, and a sell.
  • Revenues. On average, they expect to see 14% sales growth to $1.49 billion.
  • Earnings. Profits, however, are predicted to be flat at $0.36 per share.

What management says:
The Federal Trade Commission has put the merger with Wild Oats on hold again, with a "second request for additional information." Whole Foods announced last month that it has extended its tender offer to acquire Wild Oats stockholders' shares until May 22, to give the FTC some extra time to approve the merger.

Investors in organic-food-retailing also-rans such as Wal-Mart (NYSE:WMT) and Safeway (NYSE:SWY) shouldn't start gloating just yet, though. Barring an eventual kibosh from the Feds, the prospects for a successful merger here still look promising, with 64% of Wild Oats shares outstanding having been tendered as of April 24.

What management does:
Stable to slightly lower gross margins over the past six quarters finally caught up with Whole Foods in February, when the firm reported its first quarter of declines in rolling operating and net margins after a full year of improving numbers.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Management, providing its fiscal 2007 guidance on the assumption that it would not own Wild Oats, kept mum on whether bringing the chain into the fold will help or hurt the above numbers. Considering the latter's vastly weaker margins, I'd have to expect that if Whole Foods is successful in acquiring its rival, margins will get pulled down further, at least in the short term. 

Either way, Whole Foods looks to be in for tougher times this year. According to its latest guidance, sales are expected to grow 13% to 17% in fiscal 2007 versus comparable periods from 2006. (And note that the company will have 53 weeks in this fiscal year, versus 52 in 2006. It provided its growth comparisons on an "as if we had only 52 weeks this year" basis.) About half of that growth should come from same-store sales growth, with the rest from expanding its store count and floor space by about 16% -- again, this is ex-Wild Oats.

Whole Foods further advised that it expects its operating income growth to be "in line with or slightly lower than sales growth" -- so already, we're looking for flat to declining margins. Moreover, this would be "before pre-opening and relocation costs" -- which can also be expected to pull margins down further.

For those who prefer to look past GAAP numbers and focus on free cash flow, you may find it useful to know that management says that 70% to 75% of its capital expenditures this year will be related to new store openings. So when subtracting capital expenditures from operating cash flow to arrive at free cash flow, make a note that only about one dollar in four here is maintenance capex.

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Fool contributor Rich Smith does not own shares of any company named above.