This is meant only for ticker report, not as a Fool.com article -- Jim
When a company starts fiddling with its guidance, especially when lowering the top end of a previous range, and when that includes such items as gross margin and same-store sales (comps), analysts get nervous and investors begin to sell their shares.
That's what happened the day after Whole Foods Market released its fiscal 2013 first-quarter results and shares dropped about 10% as a result.
The trouble facing Whole Foods is that it has been doing really well over the past several years, and that's not always sustainable going forward. Of course, investors don't want to see it go into a death spiral, but I don't think that's what is happening here.
The company has enjoyed 11 straight quarters of 8% or better year-over-year comps, including a record 9.5% in the second quarter of last year; this past quarter, that fell to 7.2 %. Not only that, but last year, the company enjoyed growing gross margins for each quarter year over year and reached a record 36% in the second quarter; this past quarter, while there was again a slight increase year-over-year, it was down sequentially driven in part by competing more strongly on price with rivals like Safeway, Kroger, and Wegmans. In addition, when it saw healthy earnings-per-share growth of 20% in the first quarter of this year, higher than guidance indicated, it did not increase full-year guidance, implying that it expects to see less EPS growth for the remainder of the year .
While investors are supposed to price future expectations of growth into a company -- and the above points certainly indicate that Whole Foods could be feeling some pressure -- investors also have a tendency to take recent news and project it forward as if the situation will never change. I think that, combined with possibly conservative guidance by management (especially regarding EPS), is contributing to the share-price decline mentioned above.
The thesis for growth is not broken. The company opened nine stores in the first quarter, on its way to opening 32 to 34 this year, and comps of 7.2% are still very good for any grocer. It's averaged 7.3% in comps over the past 10 y ears, so until comps dip significantly below that level, I wouldn't be too worried.
Furthermore, grocery margins are always tight and the company's been pushing the upper boundary for a while. If investors think Whole Foods can do that all the time, given vagaries of the business such as freezes or droughts affecting crops and animals -- or even continue to grow them -- then those expectations are unreasonable.
Keep an eye on these numbers and keep in mind the areas you must watch as originally described, but I don't think the situation's changed enough to become seriously worried.
