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Whole Foods Market: Favorable Trends May Aid Results

 February 11, 2013 02:06 PM


(By Mani) Whole Foods Market, Inc. (NASDAQ: WFM) is expected to report higher earnings when it reports first-quarter financial results on Feb.13.

Austin, Texas-based, Whole Foods is a food retailer focused on natural and organic foods. The company, which currently represents 1 percent of the total US food retail market, is one of the top 10 food and drug retailers in the US in terms of sales.

Wall Street, on average, expects the company to earn 77 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies 18 percent growth from last year, when it earned 65 cents a share. The company's earnings have managed to top the Street's view thrice in the past four quarters.

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Quarterly revenues are expected to grow 13.9 percent to $3.86 billion from $3.39 billion in the same quarter last year. In the past four quarters, revenue growth has been in double digits, rising by an average of 15.9 percent.

The company should benefit from new stores, which is giving more productivity. Whole Foods Market has generated strong new store productivity since 2009.

"We do not expect upside to top-line this quarter but believe a modest earnings beat is possible," RBC Capital Markets analyst Edward Aaron said in a client note.

Gross margin would be one of the key metric to watch. In the past, Whole Foods generated higher margins due to its efficient inventory management. Its days of inventory are now below 20 on a first-in-first-out (FIFO) basis, which is the lowest it has ever been. This has been attributed to better inventory management as well as the effect of smaller stores generating high traffic. Investors should be expecting a similar trend this quarter.

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In addition, investors would keep an eye on the full-year outlook given that the industry is set to benefit from strong spending from core industry spenders – consumers who spend at least half of their total grocery spending on natural/organic products.

An RBC survey shows that 42 percent of core industry spenders are expected to increase spending in the natural/organic industry over the next few months, versus 39 percent in September.

For the full year 2013, the company sees earnings of $2.83 to $2.87 per share while analysts currently expect earnings of $2.89 per share for fiscal year 2013. The company sees full year 2013 sales growth of 12 to 14 percent on a comparable store sales growth of 6.5 to 8.5 percent.

"While we do not expect any significant guidance revisions, we do believe the full-year EPS guidance range of $2.83-$2.87 will ultimately be exceeded," Aaron noted.

For the fourth quarter of 2012, Austin, Texas-based Whole Foods' profit rose to $112.73 million, or 60 cents per share, from $75.48 million, or 42 cents per share, last year. Excluding the impact of an extra week, adjusted earnings for the quarter were 56 cents per share. Quarterly sales grew 24 percent to $2.91 billion. Excluding the extra one-week, sales were $2.69 billion.

Comparable store sales for the quarter increased 8.5 percent. Gross margins for the three-month period advanced 76 basis points to 35.3 percent, driven by improvements in both cost of goods sold and occupancy costs as a percent of sales.

Shares of Whole Foods Market, which has a market cap of $17 billion, has been trading between $79.58 and $101.86 during the past 52-weeks. They have gained 16 percent in the past one-year

Out of the 26 analysts covering the stock, 18 of them rate the stock as a "buy" or "strong buy," while nine analysts recommend "hold." There were no "sell" ratings on the stock.

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