Whole Foods Market Inc. (WFM) recently posted better-than-expected third-quarter 2011 results on the heels of strong sales as shoppers flocked to the grocery chain, thereby lifting its outlook. The company has been gaining market share compared with other supermarket chains.
Let’s Dig Deep
Austin, Texas based company – Whole Foods – said that quarterly earnings of 50 cents a share surpassed the Zacks Consensus Estimate of 48 cents, and jumped 31.6% from 38 cents earned in the prior-year quarter.
Whole Foods, one of the leading natural and organic foods supermarkets, sustained its top-line growth momentum with revenue climbing 10.9% to $2,399.8 million in the quarter but falling short of the Zacks Consensus Estimate of $2,411 million.
Consumers, who had cut back on their spending during the recession, are now returning to the chain. However, rising gasoline and food prices remain a matter of concern, since passing on increased costs to customers through price rise, may boomerang through a shift from higher priced organic products to cheaper private label brands. Therefore, the company must be observant while passing on extra burden to the consumers.
Effective inventory management and improved store-level performance have helped the company sustain the downturn and achieve improved sales and profit. Whole Foods 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 34% to 34.9%.
Whole Foods said that comparable-store sales rose 8.4% in the quarter compared with 8.8% in the prior-year quarter and 7.8% in the previous quarter. In the first three weeks of fourth-quarter 2011, comparable-store sales jumped 9.5%.
The company also notified that identical-store sales climbed 8.1% in the quarter compared with 8.4% in the prior-year quarter and 7.8% in the previous quarter. In the first three weeks of fourth-quarter 2011, comparable-store sales jumped 9.3%.
Management hinted that a shift in the Easter holiday to April 24 this year from April 4 in the prior-year favorably impacted the comparable and identical store sales by 60 basis points.
Whole Foods indicated that adjusted EBITDA for the quarter surged 15% to $206.9 million, whereas EBITDA margin expanded 30 basis points to 8.6%. Operating income for the quarter jumped 21.7% to $140.6 million, whereas operating margin increased 60 basis points to 5.9%.
Stores Update
Whole Foods currently operates 309 stores. The company opened 7 stores, including 3 relocations during the quarter. So far, in the fourth quarter, the company has opened 2 stores, which includes 1 relocation, and plans to open 3 more stores, including 1 relocation. The company plans to open 24 to 27 stores in 2012 and 28 to 32 stores in 2013. The company believes that there exists a room for 1,000 stores in the long run, and sees expansion opportunity in Canada and the United Kingdom as well.
Other Financial Details
Whole Foods ended the quarter with cash and cash equivalents of $289.1 million, total long-term debt and capital lease obligations of $18 million, shareholders’ equity of $2,845.1 million. During the quarter, Whole Foods paid down $190 million, which was the balance remaining under its term loan.
Whole Foods during the quarter generated cash flow from operations of $192.4 million and incurred capital expenditures of $102 million, resulting in free cash flow of $90.4 million.
The company has been utilizing its cash flows in the opening of stores, paying down debt and returning cash to shareholders through dividends. With the term loan fully repaid, management may want to employ its cash flows in executing faster growth, hiking dividend and repurchasing of shares.
Management Guidance
Whole Foods now expects an increase of 12.2%-12.4% in total sales, driven by an 8.5%-8.7% rise in comparable-store sales and an 8.3%-8.6% growth in identical-store sales in fiscal 2011. Earlier, management had projected an increase of 11.7%-12.6% in total sales, driven by a 7.9%-8.9% rise in comparable-store sales and a 7.8%-8.7% growth in identical-store sales.
Management now projects EBITDA in the range of $833 million to $836 million for fiscal 2011, up from $827 million to $837 million previously forecasted.
The company continues to expect an operating margin of 5.4% for fiscal 2011.
Capital expenditures are anticipated in the range of $375 million to $385 million for fiscal 2011 compared with $350 million to $400 million projected earlier.
Whole Foods guided earnings in the range of $1.91 to $1.92 per share for fiscal 2011. The company had previously forecasted earnings in the range of $1.87 to $1.90 per share. The current Zacks Consensus Estimate for the year is $1.90.
Whole Foods has also provided an initial fiscal 2012 outlook. The company expects an increase of 13%-15% in total sales, underpinned by a 6.8%-8.8% rise in comparable-store sales and a 6.5%-8.5% growth in identical-store sales in fiscal 2011. Management projects EBITDA in the range of $960 million to $980 million, and expects operating margin between 5.7% and 5.8%. Capital expenditures are forecasted to be in the range of $410 million to $460 million.
The company predicts earnings between $2.21 and $2.26 per share for fiscal 2012. The current Zacks Consensus Estimate for the year is $2.17.
Given the increase in fiscal 2011 earnings outlook and the announcement of fiscal 2012 guidance, a positive sentiment may be palpable among the analysts, and we could witness a rise in the Zacks Consensus Estimates in the coming days.
Currently, we have a long-term ‘Neutral’ rating on the stock. However, Whole Foods, which competes with The Kroger Company (KR), holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.
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