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Whole Foods Disputes Growth Concerns with Solid Numbers

Monday - 5/13/2013, 3:53pm  ET

Whole Foods Market , the largest player in the organic and natural food retail industry, owns and operates a chain of natural and organic foods supermarkets. Whole Foods provides investors an opportunity to invest in the secular growth trend in the organic and all-natural food industry.

Solid second quarter

On May 7, Whole Foods reported solid second quarter numbers. Same-store sales increased 6.9%, and sales jumped 9.4%. The demand for fresh and healthy foods continues to grow, and the company continues to expand its efforts to lower prices and add more locations to capture more customers beyond its upscale shoppers.

The management now forecasts net income of $2.86-$2.89 per share for fiscal year 2013, increased from $2.83-$2.87 per share. Analysts, on average, are expecting net income of $2.87 per share. With 349 stores already in operation, Whole Foods expects to open 32 stores in the current fiscal year and 33-38 more in fiscal 2014.

Whole Foods will conduct a two-for-one stock split at the end of May. Shareholders of record on May 17 will get a stock dividend on May 29 and receive one new share for every share they own, where the stock will trade at the post-split price on May 30.

Competition

The net income for Whole Foods increased 20% to $142 million (76 cents per share), beating analysts’ estimate of 73 cents per share despite lowering prices to compete with mainstream grocers, such as Kroger and Safeway . Kroger, with a market cap of $18.22 billion, is a retailer in the United States that operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. With its competitive position, Kroger is once again expanding its store base and operating margin after a long-term decline. Kroger’s share price has been on a run since July.

Safeway, with a market cap of $5.82 billion, operates a retail food and drug chain in the U.S. and Canada. With increasing competition from lower-cost operators, Safeway rolled out the “just for u” initiative to improve its loyalty program. Safeway’s share price had also been on a run since August, 2012. However, with a disappointing first quarter report, the price pulled back nearly 14% on April 25.

Fundamentally, Whole Foods has higher margins and returns compared to industry averages. Whole Foods continues to enjoy higher revenue growth (three year average) of 13.4% compared to the average of 3.9%. Whole Foods’ cash position remains strong and continues to generate solid free cash flow. Year to date, Whole Foods has generated over $326 million of free cash flow, and the company has paid $434 million in quarterly and special dividends to shareholders and repurchased $63 million of common stock. Whole Foods’ current forward P/E of 26.5 is justified with its solid revenue growth.

As for the share price performance, Whole Foods has been very bullish since early April. Analysts currently have a mean target price of $102.32. Whole Foods is also currently trading above its key 50 and 200-day moving average levels.

Bottom line

With continued strong same-store sales and increasing store expansion in 2014, Whole Foods remains a promising bet in the organic and all-natural food industry, supported by a solid cash position. More upside is expected for Whole Foods in the coming years.

It's hard to believe that a grocery store could book investors more than 30 times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this premium report on the company, The Motley Fool walks through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. So make sure to claim your copy today by clicking here.

This article was originally published as Whole Foods Disputes Growth Concerns with Solid Numberson Fool.com

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