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Whole Foods (WFM) Q2 Earnings Meet, Sales Beat Estimates

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Whole Foods Market, Inc. posted second-quarter fiscal 2017 adjusted earnings of 37 cents a share that came in line with the Zacks Consensus Estimate but declined roughly 16% from 44 cents delivered in the year-ago quarter. The top line improved 1.1% year over year to $3,737 million, and came marginally ahead of the Zacks Consensus Estimate of $3,725 million, after missing the same in the preceding two quarters.

The company witnessed a 2.8% dip in comparable-store sales (comps) during the quarter, following a 2.4% decline in the preceding quarter. This was the seventh consecutive quarter of comps decline.

Dismal comps performance compelled management to trim sales and earnings forecasts for the fiscal year. Analysts believe stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds plaguing the sector. The company, which appointed Keith Manbeck as its new CFO and named five new board members, also announced turnaround strategy and cost-containment plan.

During the quarter under review, adjusted EBITDA fell 10.5% to $316 million, while adjusted EBITDA margin contracted 110 basis points to 8.5%. Whole Foods envisions EBITDA margin of approximately 8% during fiscal 2017.

Shares of this Austin, TX-based company rose 2.7% during after-market trading hours yesterday. We noticed that so far this year, the stock has increased 20.3% compared with the Zacks categorized Retail-Supermarkets industry’s jump of 7.3%.

Store Update

Whole Foods currently operates over 460 stores in the U.S., Canada and U.K. The company opened six outlets during the reported quarter, comprising two relocations and shuttered nine stores. So far in the third quarter, the company has opened three outlets, including one Whole Foods Market 365 store. The company plans to open three more stores, including one relocation. It projects square footage growth of about 5% net of closures for fiscal 2017, representing approximately 30 new outlets, including up to seven relocations and three “365” outlets.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $412 million, total long-term debt and capital lease obligations of $1,049 million and shareholders’ equity of $3,359 million.

During the quarter, the company generated cash flow from operations of $340 million and incurred capital expenditures of $131 million, resulting in free cash flow of $209 million. Management now anticipates fiscal 2017 capital expenditures to be about 4% of sales. The company paid $45 million in quarterly dividends.

The company hiked its quarterly dividend by 29% to 18 cents a share and also announced a new share buyback program of $1.25 billion that replaces the existing one.

Strategic Initiatives

Whole Foods has been revamping pricing strategy, concentrating on value offerings and affinity programs, and unifying purchasing structure in view of heightened competition as more companies are entering and expanding their presence in the Organic & Natural food business. These players include The Kroger Co. (KR - Free Report) , Sprouts Farmers Market, Inc. (SFM - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) . The company also expects to generate $300 million additional cost savings by fiscal 2020 on the back of supply chain efficiencies and optimum utilization and standardization of labor force.

We note that the company is leaving no stone unturned to reach target customers, whether through national marketing and branding campaigns, home delivery services, store expansion or the adoption of a digital route such as the launch of digital coupon within its Whole Foods Market mobile app. Moreover, it introduced a new “uniquely-branded store concept”, "365 by Whole Foods Market". The new chain is equipped with innovative technology, compelling products at value prices along with a modern look to target millennials and stave off competition.

With the launch of the “365” smaller format sister chain, Whole Foods intends to turn things around in its favor. However, analysts are concerned whether the new store model will prove to be a game changer and aid Whole Foods retain market share amid stiff competition without cannibalizing its own business. For quite some time now, the company has been working on lowering prices, upgrading technology and containing costs. However, costs related to the implementation of category management will hurt operating margin by 85 basis points during the fiscal year.

 

Guidance at a Glance

Taking into account the strategic endeavors, management expects to deliver positive comps and register earnings growth by fiscal 2018. For fiscal 2020, Whole Foods envisions total sales of more than $18 billion, comps growth of over 2%, EBITDA margin of above 9.5% and cash flow from operations of over $1.2 billion.

Whole Foods now projects sales growth of 1% or above and expects comps to decline as much as 2.5% for fiscal 2017. Management now envisions earnings per share of $1.30 or more for the fiscal year. The current Zacks Consensus Estimate is pegged at $1.33, which is likely to witness a correction in the coming days.

Earlier, Whole Foods had envisioned sales growth of 1.5% or above and earnings per share of $1.33 or more for the fiscal year.

Whole Foods currently carries a Zacks Rank #4 (Sell).

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