Whole Foods to Outperform

Being one of the leading natural and organic foods supermarkets, Whole Foods Market Inc. (WFMI) offers investors one of the strongest growth profiles in the industry with its strong brand image and marketing and merchandising expertise. The stock is poised to surge as the demand for healthier and natural food improves.

Whole Foods has been spurring its revenues through new store openings, acquisitions and comparable-store sales growth. Given the food retailing industry is highly fragmented, the company has been able to maintain a track record of successful integration of its regional acquisitions.

The stringent cost-control measures, effective inventory management, and improved store-level performance are driving earnings growth. Whole Foods recently posted better-than-expected first-quarter 2011 results on the back of strong sales as shoppers flocked to the grocery chain.

The quarterly earnings of 51 cents a share surpassed the Zacks Consensus Estimate of 45 cents, and jumped 59.4% from 32 cents earned in the prior-year quarter. Whole Foods sustained its top-line growth momentum with revenue climbing 13.8% to $3,003.7 million in the quarter and comfortably surpassing the Zacks Consensus Estimate of $2,953 million.

Whole Foods now expects an increase of 10.7%-12.8% in total sales, driven by a 7.2%-9.2% rise in comparable-store sales and a 7%-9% growth in identical-store sales in fiscal 2011. Earlier, Whole Foods expected an increase of 10%-12% in total sales, driven by a 5.5%-7.5% rise in comparable-store sales and a 5%-7% growth in identical-store sales.

Management guided earnings in the range of $1.76 to $1.80 per share for fiscal 2011. Whole Foods had previously forecasted fiscal 2011 earnings in the range of $1.66 to $1.71 per share.

Whole Foods also has been revamping its pricing strategy and concentrating more on value offerings, while maintaining healthy margins. In the last five fiscal years, gross margin has been in the range of approximately 34% to 35%.

Whole Foods has been prudent in opening new stores with 15 stores in fiscal 2009 and 16 in 2010. However, Whole Foods hinted that it wants to accelerate its pace in the coming years with a target of 17 new stores in fiscal 2011 and 20 in fiscal 2012 with a moderate target of 18 more stores in 2013.

Whole Foods’ strong financial performance and disciplined capital expenditures have helped in generating healthy free cash flow consistently, which have aided in reinstating the dividend payout.

Currently, we have a long-term Outperform rating on the stock. Moreover, Whole Foods, which faces stiff competition from other supermarket operators such as The Kroger Company (KR) and Supervalu Inc. (SVU), holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

WHOLE FOODS MKT (WFMI): Free Stock Analysis Report

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