America's transition to healthier eating has been led by natural and organic grocers, with the largest of these being Whole Foods Market (NASDAQ: WFM). The grocery giant will soon release its first earnings report of fiscal 2014 and a beat could propel the stock back toward its 52-week high. Let's take a look at the current expectations and decide if now is the time to buy Whole Foods or if we should wait for the stock to move lower.
The organic grocer
Whole Foods is the leading retailer of natural and organic foods in the United States. It was the first national "Certified Organic" grocer, and it has become one of the largest proponents of healthier lifestyles. The company currently operates 367 locations in the United States, Canada, and the United Kingdom.
The last time out
Whole Foods released its fourth-quarter report after the market closed on Nov. 6. The results were mixed in comparison with analyst estimates:
|Earnings per share||$0.32||$0.31|
|Revenue||$2.98 billion||$3.04 billion|
Whole Foods' earnings per share increased 6.7% and revenue rose 2.2% year-over-year, driven by comparable-store sales growth of 5.9%. However, this is a clouded comparison, as the fourth quarter of 2012 contained an extra week; on a 12-week comparative basis, earnings per share rose 16% and revenue rose 11% year-over-year. These results, paired with those of the previous three quarters, made for the best year in Whole Foods' 35-year history. However, before investors could celebrate, the company cut its outlook for fiscal 2014. Here is what the company now expects:
|Metric||New Guidance||Previous Guidance|
|Earnings per share||$1.65-$1.69||$1.69-$1.72|
|Comparable-store sales growth||5%-6.5%||6%-7.5%|
The change was not that drastic and it would result in another record year for the company, but negativity set in which has sent the stock about 20% lower. With this said, if Whole Foods can kick off fiscal 2014 with a first-quarter beat, maybe analysts will get back on its side and cause investors to pile in.
Expectations & what to watch for
Whole Foods' first-quarter results are due out after the market closes on Feb. 12 and the current expectations call for growth on both the top and bottom lines. Here's an overview of the consensus analyst estimates:
|Earnings per share||$0.44||$0.39|
|Revenue||$4.31 billion||$3.86 billion|
These estimates would result in earnings per share increasing 12.8% and revenue increasing 11.7% year-over-year. The expectations seem well within reach and I expect the company will surpass them due to better-than-expected comparable-store sales, driven by the holidays; I believe that the many holidays during the quarter will have increased customer traffic and caused an increase in the average ticket price.
Other than the key financial statistics, it will be important to watch for the number of stores the company added during the quarter and the number of stores it plans to open in the next three. Expansion will be a key driver for Whole Foods, so it is important that it meets its previous guidance of 33-38 openings during the year. If earnings come in at or above expectations and expansion is on pace, I think Whole Foods will push back toward its 52-week high.
A struggling competitor
The Fresh Market (NASDAQ:TFM) has been one of the worst performers in the industry and this has been a result of its inability to meet earnings expectations. In the most recent earnings release on Nov. 21, it missed estimates on both the top and bottom lines; here's what was reported:
|Earnings Per Share||$0.23||$0.26|
|Revenue||$364.50 million||$378.57 million|
To make matters worse, the Fresh Market then cut its outlook which caused the stock to drop 14% in its next trading session. It now sits more than 35% below its 52-week high and it could move much lower if it continues to disappoint. I do not believe The Fresh Market should be touched in today's market, because earnings are key and too much negativity surrounds the stock.
From hot to not
Sprouts Farmers Market (NASDAQ:SFM) went public on Aug. 1 and it turned out to be one of the hottest IPOs of the year; Sprouts' shares were priced at $18, but surged more than 122% to $40.11 in the first day of trading. In its first earnings release, Sprouts blew away the estimates with earnings per share of $0.13 on revenue of $633.60 million versus expectations which called for earnings of $0.10 per share on revenue of $620.16 million. Even with the better-than-expected results, the stock fell over 1% in the trading day and the decline continued after company insiders announced the sale of more than 17 million shares.
Sprouts now sits more than 20% below its level before the earnings report and over 28% below its 52-week high. I believe the negativity of insider selling has been priced in and the stock is ready to push back toward its 52-week high. I believe that Sprouts is the second-best investment option in the industry behind Whole Foods.
The Foolish bottom line
Whole Foods is an American powerhouse trading well below its highs, which creates a rare opportunity for investors. It is set to release its first-quarter report in just a few days and I believe the current expectations are well within reach. I expect the stock to begin its rise back toward its previous highs and continue moving higher, driven by expansion and earnings growth. Investors should consider initiating a position in the stock right now and adding to it on any weakness following the report.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Joseph Solitro owns shares of Whole Foods Market. The Motley Fool recommends The Fresh Market and Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.