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Whole Foods Market Inc. (WFM - Analyst Report), one of the leading natural and organic foods supermarkets, is slated to report its third-quarter 2012 financial results on July 25, 2012. The current Zacks Consensus Estimate for the quarter stands at 61 cents a share, reflecting an estimated year-over-year increase of about 22%. Revenue, as per the Zacks Consensus Estimate, is $2,733 million.

Second-Quarter Overview

Whole Foods’ quarterly earnings of 64 cents a share handily surpassed the Zacks Consensus Estimate of 59 cents, and jumped 25.5% from 51 cents earned in the prior-year quarter.

The company sustained its top-line growth momentum with revenue climbing 13.6% to $2,670.3 million in the quarter, and exceeding the Zacks Consensus Estimate of $2,649 million.

Guidance

The better-than-expected results prompted management to raise its expectations for fiscal 2012.

Whole Foods now expects an increase of 14.8%-15.6% in total sales, underpinned by expectations of an 8.2%-8.9% rise in comparable-store sales and a 7.8%-8.6% growth in identical-store sales.

The company forecasts earnings between $2.44 and $2.47 per share for fiscal 2012, reflecting year-over-year growth of 26% to 28%.

Agreement of Estimate Revisions

During the last 30 days, 2 out of 22 estimates have been revised upwards, while none were lowered for the upcoming quarter. Moreover, for fiscal 2012, 3 out of 24 estimates increased, while 1 decreased.   

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the upcoming quarter inched up a penny over the last 30 days. The analysts remain positive on the natural and organic food sector and Whole Foods, being the industry leader remains well positioned to gain from the positive trends of the sector.  The firms believe that Whole Foods is poised to gain market share from the traditional grocers through its affluent customer base.

The company’s focus on operational improvements will be a long-term positive and will likely enable Whole Foods to further augment earnings growth in fiscal 2012.

Positive Surprise History

With respect to earnings surprises, Whole Foods has topped the Zacks Consensus Estimate over the last four quarters in the range of 2.4% to 8.5%. The average remained at 5.9%, indicating that the company has surpassed the Zacks Consensus Estimate by the same magnitude in the trailing four quarters.

Our Take

Being one of the leading natural and organic foods supermarkets, Whole Foods Market with a strong brand image, and marketing and merchandising expertise, offers investors one of the strongest growth profiles in the industry. The stock is poised to surge once the economy revives and demand for healthier and natural food improves.

The stringent cost-control measures, effective inventory management, and improved store-level performance are driving earnings growth. Whole Foods has also been revamping its pricing strategy and concentrating more on value offerings, while maintaining healthy margins. In the last five fiscal years, gross margin has been in the range of 34% to 35%.

However, the grocery business is highly competitive and fragmented, and Whole Foods Market faces intense competition from big players, such as Safeway Inc (SWY - Analyst Report), The Kroger Company (KR - Analyst Report), and Supervalu Inc (SVU - Analyst Report), and other conventional retailers and specialty gourmet retailers with respect to price, aggressive store expansion, and promotional activities to drive traffic. This may dent the company’s sales and margins.

Currently, we have a long-term ‘Neutral’ rating on the stock. Moreover, Whole Foods holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.

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