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Whole Foods Market Inc.’s (WFM - Analyst Report) healthy performance in the second quarter of 2012 was followed by better-than-expected third quarter results. The company seems to be sustaining its growth momentum in fiscal 2012 on the back of strong sales as shoppers are flocking to the grocery chain.
The company has been gaining better market share against other supermarket chains, defying economic fears.
These boosted management’s expectations about the company’s performance in 2012, which was quite evident from an upbeat outlook. The shares of the company rose $9.82 or 11.6% to $94.35 in after-market trading hours on Wednesday.
Let’s Unveil the Picture
Austin, Texas-based Whole Foods said that quarterly earnings of 63 cents a share beat the Zacks Consensus Estimate by a couple of cents, and jumped substantially from 50 cents earned in the prior-year quarter.
Whole Foods, one of the leading natural and organic foods supermarkets, sustained its top-line growth momentum, with revenue climbing 13.6% to $2,727.3 million in the quarter, but falling short of the Zacks Consensus Estimate of $2,733 million.
Consumers, who had cut back their spending during the recession, are now gradually returning to the chain.
Effective inventory management and improved store-level performance have helped the company sustain the downturn and achieve improved sales and profit. Whole Foods has 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%.
Whole Foods said that comparable-store sales rose 8.2% in the quarter, down from 8.4% in the prior-year quarter and 9.5% in the previous quarter. For the first three weeks of the fourth quarter, comparable-store sales jumped 9.7%.
The company also notified that identical-store sales climbed 8% in the quarter compared with 8.1% in the prior-year quarter and 9% in the previous quarter. For the first three weeks of the fourth quarter, identical-store sales rose 9.5%.
The shift of the Easter holiday into the second quarter this year from the third quarter in the last year, adversely impacted comparable and identical store sales by 62 basis points.
Whole Foods indicated that gross profit rose 15.6% to $981.4 million, whereas gross margin grew 62 basis points to 36%. Store contribution soared 27.9% to $291.5 million. As a percentage of sales, store contribution increased 119 basis points to 10.7%.
EBITDA for the quarter surged 26% to $260.6 million, whereas EBITDA margin expanded 94 basis points to 9.6%. Operating income for the quarter jumped 33.8% to $188.2 million, whereas operating margin increased 100 basis points to 6.9%.
Whole Foods currently operates 329 stores. The company opened a record 9 outlets during the quarter, and relocated one store. So far in the fourth quarter, the company has opened 1 store, and plans to open 6 more stores.
The company plans to open 25 stores in 2012, 28 to 32 stores in 2013 and 33 to 38 stores in 2014. The company had opened 18 stores in fiscal 2011. In total, there are 76 stores in the development pipeline. The company believes that there exists a room for 1,000 stores in the long run, and sees expansion opportunity in Canada and the United Kingdom as well.
Other Financial Details
Whole Foods ended the quarter with cash and cash equivalents of $135.5 million, total long-term debt and capital lease obligations of $19.1 million, and shareholders’ equity of $3,641.3 million.
During the quarter, Whole Foods generated cash flow from operations of $211.3 million and incurred capital expenditures of $112.7 million, resulting in free cash flow of $98.6 million. The company paid $25.6 million in dividends and bought back shares worth $25 million during the quarter under review.
The company has been utilizing its cash flows in the opening of stores, paying down debt and returning cash to shareholders through dividends and share repurchases.
Strolling Through Guidance
The better-than-expected results, prompted management to raise its expectations for fiscal 2012, which is a 53-week year.
Whole Foods now expects an increase of 15.6–15.8% in total sales, underpinned by expectations of an 8.6–8.8% rise in comparable-store sales and an 8.2–8.4% growth in identical-store sales in fiscal 2012. Management projects EBITDA in the range of $1.05 billion to $1.06 billion, and expects operating margin to be 6.4%. The company now anticipates capital expenditures in the range of $440 million to $450 million.
The company predicts earnings between $2.51 and $2.52 per share for fiscal 2012, reflecting a year-over-year growth of 30% to 31%. Analysts polled by Zacks, estimate fiscal 2012 earnings at $2.52.
Earlier, Whole Foods had projected 14.8–15.6% increase in total sales, driven by expectations of 8.2–8.9% rise in comparable-store sales and 7.8–8.6% growth in identical-store sales in fiscal 2012. EBITDA was forecasted in the range of $1.03 billion to $1.04 billion, and operating margin was expected to be 6.3%.
The company had projected capital expenditures in the range of $410 million to $460 million. The company had previously predicted earnings between $2.44 and $2.47 per share for fiscal 2012.
Whole Foods went one step further, and provided initial guidance for fiscal 2013. Management now projects an increase of 13–14% in total sales on the back of an expected 6.5–8.5% rise in comparable-store sales and 6–8% growth in identical-store sales.
Earnings per share are forecasted in the range of $2.83 to $2.87, portraying a year-over-year jump of 16% to 17%. The current Zacks Consensus Estimate for fiscal 2013 is $2.84.
Currently, we have a long-term Neutral recommendation on the stock. Moreover, Whole Foods, which competes with The Kroger Company (KR - Analyst Report), holds a Zacks #2 Rank that translates into a short-term Buy rating, and well defines the company’s optimistic outlook.