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Tickers in this Article: KR, WFM
Whole Foods Market Inc.'s (WFM) healthy performance in the first quarter of 2012 was followed by a better-than-expected second quarter results. The company carried the growth momentum into fiscal 2012 on the back of strong sales as shoppers flocked to the grocery chain. The company has been gaining a better market share versus other supermarket chains. These boosted management's expectations about the company's performance in 2012. 

Let's Unveil the Picture

Austin, Texas-based Whole Foods said that quarterly earnings of 64 cents a share beat the Zacks Consensus Estimate of 59 cents, and jumped 25.5% from 51 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 13.6% to $2,670.3 million in the quarter, which also came ahead of the Zacks Consensus Estimate of $2,649 million.

Consumers, who had cut back their spending during the recession, are now gradually returning to the chain. However, rising gasoline and food prices remain matters of concern, since passing on increased costs to customers through price increases may boomerang through a shift of customers' preference from higher-priced organic products to cheaper private-label brands. Therefore, the company must be careful while passing on the 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 35%.

Whole Foods said that comparable-store sales rose 9.5% in the quarter, up from 7.8% in the prior-year quarter and 8.7% in the previous quarter. For the five-week period ended April 29 (including the last two weeks of the second quarter and the first three weeks of the third quarter), comparable-store sales jumped 8.2%.

The company also notified that identical-store sales climbed 9% in the quarter compared with 7.8% in the prior-year quarter and 8.2% in the previous quarter. For the five-week period ended April 29 (including the last two weeks of the second quarter and the first three weeks of the third quarter), identical-store sales rose 7.8%.

The shift of the Easter holiday into the second quarter this year compared with the third quarter in the last year, benefited comparable and identical store sales by 55 basis points.

Whole Foods indicated that gross profit rose 15.8% to $969.7 million, whereas gross margin grew 70 basis points to 36.3%. Store contribution soared 26.1% to $287.9 million. As a percentage of sales, store contribution increased 107 basis points to 10.8%.

EBITDA for the quarter surged 24.4% to $259.2 million, whereas EBITDA margin expanded 80 basis points to 9.7%. Operating income for the quarter jumped 33.2% to $189.4 million, whereas operating margin increased 110 basis points to 7.1%.

Stores Update

Whole Foods currently operates 324 stores. The company opened 3 stores during the quarter, and plans to open 9 stores in the third quarter of 2012. So far in the third quarter, the company has opened 4 stores, and plans to open 5 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 had opened 18 stores in fiscal 2011. In total, there are 70 stores in the development pipeline. 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.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $175.4 million, total long-term debt and capital lease obligations of $19.2 million, shareholders' equity of $3,455 million.

During the quarter, Whole Foods generated cash flow from operations of $255.8 million and incurred capital expenditures of $101.9 million, resulting in free cash flow of $153.9 million. The company paid $25.2 million in dividends during the quarter under review.

The company has been utilizing its cash flows in the opening of stores, paying down debt and returning cash to shareholders through dividends and share repurchases.

Strolling through Guidance

The better-than-expected results prompted management to raise its expectations for fiscal 2012.

Whole Foods now expects an increase of 14.8%-15.6% in total sales, underpinned by expectations of an 8.2%-8.9% rise in comparable-store sales and a 7.8%-8.6% growth in identical-store sales in fiscal 2012. Management projects EBITDA in the range of $1.03 billion to $1.04 billion, and expects operating margin to be 6.3%. The company continues to expect capital expenditures in the range of $410 million to $460 million.

The company predicts earnings between $2.44 and $2.47 per share for fiscal 2012, reflecting year-over-year growth of 26% to 28%. Analysts polled by Zacks, estimate fiscal 2012 earnings to be $2.46.

Earlier, Whole Foods had projected 13.5%-15% increase in total sales, driven by expectations of 7.3%-8.8% rise in comparable-store sales and a 7%-8.5% growth in identical-store sales in fiscal 2012. EBITDA was forecasted to be in the range of $980 million to $995 million, and operating margin was expected to be 5.9%. The company had previously predicted earnings between $2.28 and $2.32 per share for fiscal 2012.

Recommendation

Currently, we have a long-term Neutral recommendation on the stock. Moreover, Whole Foods, which competes with The Kroger Company (KR), holds a Zacks #2 Rank that translates into a short-term Buy rating and well defines the company's optimistic outlook.

 
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