Whole Foods Market (NASDAQ: WFM), the world's leader in natural and organic foods with more than 375 stores in North America and the United Kingdom, has watched its stock fall sharply in 2014 and weak earnings have been a primary reason for this. The company has just announced that it will release its third-quarter earnings on July 30 and investors are left wondering if it will disappoint by missing the estimates once again or if the tides will finally turn in a positive direction. Let's take a look at Whole Foods' most recent release and the expectations for the upcoming report to determine whether its darkest days are behind it and whether its stock represents a long-term investment opportunity today.
The not-so-healthy results
On May 6, Whole Foods released its second-quarter earnings, and the results fell short of the consensus estimates. Here's a summary:
|Earnings per share||$0.38||$0.41||$0.38|
|Revenue||$3.32 billion||$3.35 billion||$3.03 billion|
Earnings per share remained unchanged and revenue increased 9.6% year over year, driven by comparable-store sales rising 4.5%; this increase in comparable-store sales included impressive 18.6% growth at stores open for less than two years.
Gross profit increased 8.2% to $1.19 billion and operating profit increased 1.3% to $231 million, as Whole Foods' gross margin contracted 50 basis points to 35.9% and its operating margin contracted 50 basis points to 7%; these weak results stemmed from cost of sales and occupancy expenses increasing 10.6% and general and administrative expenses increasing 17.6%.
Whole Foods' cash flow from operations totaled $282 million and it invested $143 million in capital expenditures, including six new stores, which resulted in free cash flow of $139 million. The company used its free cash flow and the $290 million in cash and cash equivalents it had to begin the quarter to repurchase $55 million worth of its common stock and pay $45 million in dividends. Whole Foods ended the quarter with $305 million in cash and cash equivalents, so it could accelerate repurchases or raise its dividend in the second half.
Overall, it was a very disappointing quarter for Whole Foods, and as a result, it lowered its full-year outlook on fiscal 2014; its stock responded by plummeting 18.81% in the next trading session and it has not been able to recoup any of these losses in the weeks since then.
What to expect when Whole Foods is expecting
Whole Foods will release its third-quarter results after the market closes on July 30, and the current expectations call for moderate growth. Here's an overview:
|Earnings per share||$0.39||$0.38|
|Revenue||$3.40 billion||$3.06 billion|
These expectations call for earnings per share to increase 2.6% and revenue to increase 11.1% year over year, which would result in a record-setting performance and improve on its weak second-quarter results, but this is still well below the 20% earnings growth and 12.1% revenue growth it showed in the third quarter a year ago. Key metrics aside, here are four other things to watch for:
- Fourth-Quarter Outlook: It will be highly important for Whole Foods to provide guidance for the fourth quarter that meets analysts' expectations; currently, the consensus estimates call for earnings per share of $0.34 and revenue of $3.32 billion, representing year-over-year growth of 6.3% and 11.4%, respectively.
- Full-Year Outlook: Along with a satisfactory outlook on the fourth quarter, it will be crucial for Whole Foods to reaffirm its full-year outlook and avoid yet another reduction; this outlook, provided in the second-quarter report, called for earnings per share in the range of $1.52-$1.56, which would result in growth of 3%-6% from fiscal 2013, along with revenue growth of 10.5%-11% and comparable-store sales growth of 5%-5.5%.
- Gross Margin: Whole Foods expanded its gross margin in each year from 2009 to 2013 as it went from 34.3% to 35.8%, but expects this trend to reverse in 2014; it forecast a margin of 35.5% for fiscal 2014 and expects it to decline each year to an estimated 34.45% in fiscal 2018. This contraction stems from increased competition in the space, which has forced Whole Foods to lower prices to remain competitive. Investors must note that the gross margin will contract, but they should simply monitor it to make sure that it does not fall quicker than anticipated.
- Expansion: Watch for the number of new stores opened during the quarter and make sure Whole Foods is on pace to reach its goal of 36-39 new stores for the year. There have been 18 new stores opened to date, and the company noted that it plans to open seven new stores in the third quarter and 11-14 in the fourth quarter, so make sure that it achieves the addition of seven new stores. Expansion will be one of the key drivers of Whole Foods' growth over the long term.
The Foolish bottom line
Whole Foods was once one of the most loved stocks in the market, but its fall from glory happened quickly because of weak earnings. With its shares still trading erratically, the company has scheduled the release of its third-quarter results for July 30, and although the estimates seem attainable, investors might do best to avoid placing an investment in it today. Instead, as a Foolish investor consider simply waiting for the company to release its report, and then use all of the information provided to make an educated decision on whether or not Whole Foods is worthy of your hard-earned money.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and 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.