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Whole Foods Downgraded to Neutral

On Feb 14, 2013, we downgraded our recommendation on Whole Foods Market, Inc. (WFM - Analyst Report), the natural and organic foods supermarket, to Neutral based on the company’s cautious stance for the remainder part of fiscal 2013. The stock currently holds a Zacks Rank #3 (Hold).

Why the Downgrade?

Whole Foods has been witnessing downward estimate revisions since the company came out with its first-quarter fiscal 2013 results and provided a conservative outlook for the remaining quarters. The company’s first-quarter earnings of 78 cents a share jumped 20% year over year and came a penny ahead of the Zacks Consensus Estimate. Revenue of $3,856 million rose 13.7% but fell short of the Zacks Consensus Estimate of $3,875 million.

Management hinted that the rate of growth in earnings per share in the remaining part of the fiscal 2013 would not be at a similar level as that of the first quarter as gross margin would remain under pressure, primarily in the second and third quarters. This is due to tough year-over-year comparison, along with competitive pricing strategy to gain market share against other supermarket chains.

The Zacks Consensus Estimates for fiscal 2013 fell by 1% to $2.87 per share over the last 7 days. For the second and third quarter, the Zacks Consensus Estimates dropped by 1.4% and 1.3% to 73 cents and 74 cents, respectively, over the same time frame.

Causes for Concern

We observe that comparable and identical store sales growth trend is softening. Whole Foods said that comparable-store sales rose 7.2% in the quarter, down from 8.7% in the prior-year quarter and from 8.5% in the previous quarter. Identical-store sales climbed 7.1% in the quarter compared with 8.2% in the year-ago quarter and 8.3% in the preceding quarter.

Consequently, Whole Foods narrowed its sales outlook. Whole Foods now projects an escalation of 10% to 11% in total sales compared with 10% to 12% growth forecasted earlier.

Other Stocks to Consider

There are certain other stocks that warrant a look, such as Flowers Foods, Inc. (FLO - Snapshot Report) and J&J Snack Foods Corp. (JJSF - Snapshot Report), both of which hold a Zacks Rank #1 (Strong Buy) and are expected to continue with their upbeat performances. Another stock that should be merited is The Hershey Company (HSY - Analyst Report), which holds a Zacks Rank #2 (Buy).

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