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Whole Foods' EPS Matches, Rev Beats

WFM SVU KR

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Whole Foods Market Inc.’s (WFM - Analyst Report) fourth-quarter 2012 earnings of 60 cents a share came in line with the Zacks Consensus Estimate, and jumped substantially from 42 cents earned in the prior-year quarter. However, the Austin, Texas-based company reiterated its earnings per share outlook but raised its dividend payout.

The company seems to sustain its growth momentum in fiscal 2013 on the back of strong sales as shoppers are flocking to the grocery chain. The company has been gaining better market share as against other supermarket chains, defying economic apprehensions.

Let’s Unveil the Picture

Whole Foods, a leading natural and organic foods supermarket, sustained its top-line growth momentum with revenue climbing 23.6% to $2,910.3 million in the quarter, and also came ahead of the Zacks Consensus Estimate of $2,905 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 8.5% in the quarter, down from 8.7% in the prior-year quarter but up from 8.2% in the previous quarter. For the first five weeks of the first quarter of fiscal 2013, comparable-store sales jumped 7.3%.

The company also notified that identical-store sales climbed 8.3% in the quarter compared with 8.4% in the year-ago quarter and 8% in the preceding quarter. For the first five weeks of the first quarter of fiscal 2013, identical-store sales jumped 7.1%.

Management hinted that sales in the first five weeks of the first quarter of fiscal 2013 remains somewhat muted when compared with the fourth quarter of fiscal 2012 due to the impact of Hurricane Sandy that hit the northeast region.

Whole Foods indicated that gross profit rose 26.4% to $1,026.6 million, whereas gross margin grew 76 basis points to 35.3%. Store contribution soared 40.3% to $285.8 million. As a percentage of sales, store contribution increased 117 basis points to 9.8%.

Adjusted EBITDA for the quarter surged 36.2% to $275.6 million, whereas adjusted EBITDA margin expanded 90 basis points to 9.5%. Operating income for the quarter jumped 49.7% to $175.6 million, whereas operating margin increased 100 basis points to 6%.

Stores Update

Whole Foods currently operates 342 stores. The company opened 7 outlets during the fourth quarter of fiscal 2012. So far in the first quarter of fiscal 2013, the company has opened 7 stores, and plans to open 3 more stores.

The company plans to open 32 to 34 stores in fiscal 2013 and 33 to 38 stores in fiscal 2014. The company had opened 25 stores in fiscal 2012. The company believes that there exists room for 1,000 stores in the long run, and sees expansion opportunity in Canada and the United Kingdom.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $89 million, total long-term debt and capital lease obligations of $24.1 million, and shareholders’ equity of $3,802.5 million.

During the quarter, Whole Foods generated cash flow from operations of $188.8 million and incurred capital expenditures of $130.3 million, resulting in free cash flow of $58.6 million. The company paid $25.8 million in dividends during the quarter under review.

The company raised its quarterly dividend by 43% to 20 cents a share from 14 cents. The company will pay the dividend on January 29, 2013 to stakeholders of record as of January 18.

The company has been utilizing its cash flows for opening new stores, paying down debt and returning cash to shareholders through dividends and share repurchases.

Strolling through Guidance

White foods provided guidance for fiscal 2013. Management now projects an escalation of 10% to 12% in total sales on the back of an expected 6.5% to 8.5% rise in comparable-store sales and 6% to 8% growth in identical-store sales.

Management projects EBITDA in the range of $1.18 billion to $1.20 billion, and expects operating margin between 6.6% and 6.7%. The company now anticipates capital expenditures in the range of $565 million to $615 million.

Management reiterated its earnings forecast of $2.83 to $2.87 per share, portraying a year-over-year jump of 12% to 14%. Analysts polled by Zacks estimate fiscal 2013 earnings at $2.86.

Recommendation

Currently, we have a long-term Neutral recommendation on the stock. Moreover, Whole Foods, which competes with The Kroger Company (KR - Analyst Report) and Supervalu Inc. (SVU - Analyst Report), holds a Zacks #2 Rank that translates into a short-term Buy rating and well defines the company’s optimistic outlook.

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