Are Analysts Finally Cutting Whole Foods Price Targets Too Low?

Whole Foods Market Inc. (NASDAQ: WFM) just does not seem to be able to get it right on earnings. Its more modern store push is not yielding what the company would have wished for, and there are risks from its lower-priced concept coming ahead. Now it seems like every single earnings report comes with yet even further analyst price target cuts — even from the few analysts who have remained positive.

For the quarter, the organic and natural foods grocery chain reported diluted earnings per share of $0.16, and it posted revenues of $3.44 billion. That compared to the Thomson Reuters consensus estimates for adjusted EPS of $0.35 and $3.47 billion in revenues. A year ago, the company reported EPS of $0.35 on revenues of $3.26 billion.

Before just focusing on that earnings miss, there were items to consider here: the fourth-quarter results included a non-cash asset impairment charge of $46 million, or $0.08 off of EPS, and a restructuring charge of $34 million, or $0.06 off of EPS. Suddenly things do not seem so bad. Or are they?

For the full year, Whole Foods posted diluted EPS of $1.48 on revenues of $15.39 billion, compared with fiscal 2014 EPS of $1.56 on $14.19 billion in revenues. The consensus estimates called for adjusted EPS of $1.67 on revenues of $15.42 billion.

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24/7 Wall St. has frequently reported that the investing public should not to consider Whole Foods as a grocery store chain. Quite simply, Whole Foods is a luxury retail chain, because it is no longer focused just on organic foods but it charges a large premium versus peers. Its food sales and consumer staples sales come at a premium, even if they take EBT cards, and all you have to do is look at the cars in the parking lot and you will see that the average Whole Foods shopper has a higher base income than most other grocery chains — the company’s effort to reach down with smaller formats and lower prices for its 365 private label products notwithstanding.

Being a luxury chain generally comes with a premium valuation. Just one problem — or two problems: what happens when luxury chains get their lunch eaten by competition that sells the exact same good for a much lower price, and when the luxury chain has disappointing sales? What is happening here on the analyst coverage side is that analysts keep getting burned by backing or defending Whole Foods. Some value investors finally may start looking closer here, although they better be very conservative when making their forward earnings expectations.