It’s Getting Real with Whole Foods (WFM) – results are fine but the stock is still very expensive

November 2, 2011

Whole Foods is a tremendous retail concept and the company is a pioneer in terms of promoting a healthier lifestyle. Whole Foods is also able to do this profitably, much more so than other retailers. It was historically unheard of for a food retailer to achieve a 35% gross margin. Whole Foods earns high margins (for a food retailer) while also growing very fast. The investment community is fully aware of this though (many analysts, the ones that do their own shopping anyway, likely shop at Whole Foods) and the stock has been bid up to a valuation that leaves little room for imperfection.

The current quarter was operationally pretty good. Identical store sales grew by 8.4% which represents the strongest rate of 2-year ident growth post the financial crisis. Gross margins were healthy and increased excluding the LIFO-charge swing, and operating profit grew by over 16%. Whole Foods has paid back all its debt and grew pre-tax profit by 25% as a result. The tax rate was down on the quarter though which along with relatively high general administrative and pre-opening expenses makes the quarter imperfect. Along with the imperfections in the current quarter, Whole Foods also left next year EPS guidance unchanged at a range of: $2.21-$2.26. Priced at over 31x earnings perfection in the current quarter and a guide higher for next year’s earnings were needed to drive the stock higher. Whole Foods shares are down almost 6% in the after-market.

The sell-off in the aftermarket simply reflects some of the premium or luster coming off Whole Foods shares. There will be bidders down below at certain multiples. For perspective, at this time last year, Whole Foods guided to EPS of $1.66-$1.71. The company ultimately earned $1.93 and beat their own guidance by 13%. Perhaps this should be factored in to a certain extent when thinking about what they will actually earn in the next fiscal year relative to the guidance of $2.26.


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