Whole Foods Earnings Verdict: Peak Organic Trends?

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Whole Foods Market, Inc. (NASDAQ: WFM) may have just telegraphed the peak of the growth trends in organic and high-priced groceries. For years we have argued that investors need to think of Whole foods as a luxury goods destination rather than being in an industry dominated by low-margin supermarket stores. Now Whole Foods is finding again that growing pains come in measured steps, and the trends elsewhere may have even started catching up to the company.

In the latest quarterly earnings report, Whole Foods showed that same-store sales were up a mere 5.9%. That is great for other chains, but investors demand more of this luxury food giant.

The latest quarterly earnings came to $121 million, or $0.32 per share. Revenue growth was only 2% to $2.98 billion. We had estimates pegged at $0.31 in earnings per share, but the revenue expectations were $3.04 billion. That 2% sales growth was represented as being from the 13-week period last year and an increase of 11% on a comparative 12-week basis, so growth is perhaps better than it sounds on the surface.

Where things went further south is in future guidance. Fiscal 2014 earnings were forecast in a range of $1.65 to $1.69 in earnings per share with same-store sales growth of 5.5% to 7%. Thomson Reuters had estimates of $1.73 EPS.

Several things could be taking place here. First is that other organic and natural foods chains are selectively popping up in retail locations very close to Whole Foods. Trader Joe’s has done this as has The Fresh Market in locations in Houston. Another issue is that many of Whole Foods’ exact products can be purchased at chains like Kroger for far less money. By the way, neither of those are good for Whole Foods’s shareholders even if they are good developments for those of us who shop for food at Whole Foods.

Investors were not braced for this at all. Shares were up 1.25 at $64.47 at the close against a 52-week range of $40.70 to $65.59. Whole Foods even closed with a $24 billion market cap today and was valued at 37-times expected 2014 earnings per share before the new guidance. The consensus analyst price target was $59.65 prior to the earnings report. Now the stock is down about 8% at $59.33 in the after-hours reaction. Again, this was very unexpected but perhaps it will bring the valuation at least more in-line with what analysts were calling for.

Whole Foods made a mistake announcing a raise of the dividend up to $0.12 from $0.10 and a buyback plan of up to $500 million. Management should have saved that news for next week after the dust settled.

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