Whole Foods Market (Nasdaq:WFM) doesn't really run sales, but another quarterly disappointment has put the shares that much closer to a potential value. Whole Foods continues to enjoy good loyalty and a customer base of above-average affluence, and that should pay off down the road. That said, it's clear that these shares aren't exactly cheap by conventional standards and still very sensitive to relative modest shortfalls in reported results.

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Fiscal First Quarter Pretty Good, but not Quite Good Enough
If Whole Foods were a normal company with a normal stock and normal expectations, I'd say this was a pretty successful quarter. As it was, though, the company came up a bit short and those shortfalls were magnified in the market.

Revenue rose almost 14% this quarter, which was actually just a bit better than most analysts expected. The incremental growth came from square footage, though, and the comp growth of 7.2% was mildly disappointing (the First Call average estimate was 7.8%).

Margins were pretty solid. At 34.7%, gross margin improved slightly from last year and came in about in-line with most expectations, technically missing the First Call number by 18 basis points. Operating income rose 24% and was actually higher than the average estimate, as operating margin improved more than a half point from last year.

Is It Really the Economy?
Whole Foods blamed the softer comp and slightly disappointing guidance on a somewhat softer macro environment. I'm not sure I really accept that.

First, Whole Foods isn't as expensive as commonly believed relative to other retailers like Harris Teeter (NYSE:HTSI) or Kroger (NYSE:KR), and there hasn't been much complaining recently from supermarket operators.

Secondly, natural/organic food companies like Annie's (NYSE:BNNY) and Hain Celestial (Nasdaq:HAIN) have been doing pretty well lately too, so it's not like consumer are turning away from higher-priced food in general. Maybe the weakness is coming from harder-to-compare areas like prepared foods or maybe Whole Foods is seeing customers shift from their store brands to the aforementioned Annie's.

SEE: Will Your Wallet Love Eating Organic?

Will Whole Foods' Big Plans Annoy Investors Who Want Bigger Capital Returns?
A Jefferies analyst recently noted that Whole Foods has filed a number of trademarks that seem to relate to mobile, e-commerce, store-pickup and delivery businesses. That suggests that Whole Foods may be thinking of new ways to leverage its existing store base and distribution system.

I don't think Whole Foods is necessarily looking to go the route of Peapod or FreshDirect, but I don't see why selling products like vitamins through an e-commerce site wouldn't be viable. Likewise, with supermarkets like Harris Teeter stepping up their pickup services, it may be increasingly important for Whole Foods to offer these services. Unfortunately for some shareholders, these ventures require capital to build and support, and many would likely prefer to see bigger dividends or buybacks.

The Bottom Line
Given where Whole Foods' store base is today and what the market could likely support, I think Whole Foods could produce double-digit revenue growth for at least the next decade. That growth is going to keep a lid on free cash flow margin expansion, but it should build long-term value.

SEE: Free Cash Flow: Free, But Not Always Easy

With 10% revenue growth supporting a slightly higher free cash flow growth rate, I could see a fair value of about $86 on these shares today. As an aside, at constant free cash flow margin rates, each incremental 1% of long-term revenue growth is worth about $5.50 per share in the valuation.

At these prices, I'm not inclined to buy Whole Foods, but this is about as close to a buy as the shares have been in some time. I would probably be incrementally more interested in the Annie's story today, but if investors sour further on Whole Foods, I may just have to consider doing a little shopping of my own.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.