Valuation and Gravity Catch Up to Whole Foods on Earnings and Guidance

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Whole Foods Market Inc. (NASDAQ: WFM) may be a great company at selling great products at a premium, and it may be able to have far higher margins that traditional grocery stores. Now it appears as though valuation concerns are coming up with its quarterly earnings report. We would caution that valuations remain at a steep premium here, and that is true even after the drop in the share price.

The organic and natural foods retailer reported earnings of $0.78 per share on $3.86 billion in revenue. Thomson Reuters had the consensus estimates of $0.77 EPS and $3.87 billion in revenue. Same-store sales were up over 7% and the company is still targeting 32 to 34 new stores in 2013.

What is hurting besides the revenues reported is that guidance is looking a tad more down to earth. The company is now expecting sales growth of 10% to 11% with identical store sales growth of 6.3% to 7.7%. The company said it is maintaining full 2013 guidance of $2.83 to $2.87 per share versus estimates of $2.90 EPS. On a 52-week to 52-week basis, the company continues to expect sales growth of 12% to 14% and diluted earnings per share growth of 14% to 16%.

This is a case where valuation has caught up to reality. At the company’s top-end of guidance, Whole Foods has a forward P/E ratio of more than 33 for 2013 and its closing bell market cap at $96.90 is right at $18 billion.

Shares are indicated down about 6% around $92.00, and the consensus analyst target before earnings was $106.30.

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