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Recently, we have upgraded our long-term recommendation on Whole Foods Market Inc. (WFM - Analyst Report) to ‘Outperform’ from ‘Neutral’. The long-term recommendation was upgraded mainly due to the company’s strategic initiatives like cost containment efforts, effective inventory management and its plans to improve store-level performance, which is believed to be accretive to its long-term growth.

Whole Foods reported its fiscal fourth-quarter 2012 (ended September 30, 2012) financial results some days back. Earnings increased roughly 43.0% to 60 cents a share, which were in line with the Zacks Consensus Estimate. The year-over-year strong growth in earnings was driven by robust sales as shoppers flocked the grocery chain for natural and organic products.

Moreover, sales climbed 23.6% to $2,910.3 million, outpacing the Zacks Consensus Estimate of $2,905 million. The company has been boosting its sales through new store openings, acquisitions and comparable store sales growth.

Further, 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%.

Additionally, we observed that Whole Foods has been actively managing its cash flows by generating significant free cash and making prudent capital investments. The company’s solid liquidity positions it to drive future growth. The company, during fourth-quarter 2012, generated cash flow from operations of $188.8 million. Moreover, it raised its dividend payout by 43% to 20 cents a share.

Whole Foods portrays a very strong valuation compared to its peers. The stock trades at a 12-month forward P/E of 31.6x, which is at a premium of 272.2% compared with its peer group average. On a price-to-book ratio shares are currently trading at 4.4x, a 266.7% premium to the peer group average of 1.20x. The company’s long-term estimated earnings per share growth rate also remain sturdy at 18.0% versus 11.0% growth of its peer group.

Whole Foods is one of the leading natural and organic foods supermarkets with a healthy brand image and marketing and merchandising expertise, which offers investors one of the strongest growth profiles in the industry.

Based on the above analysis, we believe Whole Foods has a sturdy fundamental outlook and we expect it to continue accelerating revenue and earnings growth over the next few quarters.

However, Whole Foods, which competes with The Kroger Co. (KR - Analyst Report), carries a Zacks #3 Rank implying short-term Hold rating for the next 1-3 months.

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