Being one of the leading natural and organic foods supermarkets, Whole Foods Market Inc. (WFM) with a strong brand image, and marketing and merchandising expertise, offers investors one of the strongest growth profiles in the industry. The stock is poised to surge once the economy revives and demand for healthier and natural food improves.
The Driving Forces
The stringent cost-control measures, effective inventory management, and improved store-level performance are driving earnings growth. 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 34% to 34.9%.
Whole Foods has been spurring sales through new store openings, acquisitions and comparable store sales growth. Given the fragmented food retailing industry, the company has a track record of successfully integrating regional acquisitions. The company has been gaining market share compared with other supermarket chains.
The company has been prudent in opening new stores, having opened 15 and 16 stores, in fiscal 2009 and 2010, respectively, it plans to open 18 stores in fiscal 2011.
Whole Foods hinted that it wants to accelerate the pace of store openings in the coming years with current plans being 24 to 27 new stores for 2012 and 28 to 32 more stores for 2013. The company believes that there exists room for 1,000 stores in the long run, and sees expansion opportunities in Canada and the United Kingdom as well.
Active Management of Cash flows
Whole Foods has been also actively managing its cash flows, by generating healthy free cash and making prudent capital investments. The company’s strong liquidity, positions it to drive future growth. The company during third-quarter 2011 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.
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 remaining under its term loan.
The company has been utilizing its cash flows for the opening of stores, paying down debt and returning cash to shareholders through dividends. With the term loan fully repaid, management may intend to employ its cash flows in executing faster growth, hiking dividend and repurchasing of shares.
Brighter Outlook
Whole Foods’ better-than-expected third-quarter 2011 results on the heels of strong sales as shoppers flocked to the grocery chain, prompted management to lift its outlook. The quarterly earnings of 50 cents a share beat the Zacks Consensus Estimate of 48 cents, and surged 31.6% from 38 cents earned in the prior-year quarter.
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.
Whole Foods, which competes with The Kroger Company (KR), 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 company at its last earnings call 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. Management projected earnings between $2.21 and $2.26 per share for fiscal 2012.
In Conclusion
Whole Foods’ strong fundamentals and favorable outlook compel us to hold our bullish stance on the stock even in a dwindling market. We currently, maintain our long-term Outperform recommendation on the stock.
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