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Whole Foods Plunges on Earnings Miss, Guidance Cut

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Shares of Whole Foods Market, Inc. fell 7.5% during the aftermarket trading session yesterday, following the company’s lower-than-expected first-quarter fiscal 2014 results and a conservative stance on sales and earnings outlook, thereafter. Increasing competition and aggressive pricing weighed upon the company’s performance as more and more companies are entering into the Organic & Natural food business, specifically The Kroger Co. (KR - Free Report) .

Looking at the numbers, the quarterly earnings came in at 42 cents a share falling short of the Zacks Consensus Estimate by a couple of cents but rising approximately 8% from 39 cents earned in the prior-year quarter. This natural and organic foods supermarket chain operator sustained its top-line growth momentum with revenue climbing 10% to $4,239 million in the quarter, but coming below Zacks’ expectation of $4,289 million.

Effective inventory management and improved store-level performance 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.

Whole Foods stated that comparable-store sales rose 5.4% in the quarter but fell short of its expectation, and shriveled 50 basis points sequentially. For the first 3 weeks of the second quarter, comparable-store sales increased 5.6%.

Whole Foods indicated that gross profit rose 10% to $1,485 million, whereas gross margin grew 6 basis points to 35% as a fall in occupancy costs as a percentage of sales was partly offset by a rise in cost of goods sold as a percentage of sales.

Store contribution jumped about 11% to $408 million. As a percentage of sales, store contribution increased 3 basis points to 9.6%.

Adjusted EBITDA for the quarter rose 8% to $394 million, while adjusted EBITDA margin contracted 20 basis points to 9.3%. Operating income jumped 9% to $255 million, whereas operating margin shriveled 10 basis points to 6%.

Stores Update

Whole Foods currently operates 373 stores. The company opened 10 outlets during the first quarter of fiscal 2014. So far in the second quarter, the company has opened 2 stores, and plans to open 1 more store with 20 to 25 outlets slated to open in the second half of the fiscal year.

The company plans to open 33 to 38 stores in fiscal 2014 and 38 to 45 stores in fiscal 2015. The company opened 32 stores in fiscal 2013, after opening 25 outlets in fiscal 2012. Moreover, it believes that there exists room for 1,200 stores in the long run, and expects to surpass the count of 500 stores in 2017.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $271 million, long-term capital lease obligations of $31 million, and shareholders’ equity of $3,963 million.

During the quarter, Whole Foods generated cash flow from operations of $337 million and incurred capital expenditures of $219 million, resulting in a free cash flow of $118 million. The company paid $37 million in quarterly dividends and bought back $62 million worth of shares. The company still has the authority to repurchase shares worth $738 million.

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

Strolling Through Guidance

Since Nov 2013, Whole Foods lowered its outlook for the second time. Management now projects an escalation of 11% to 12% in total sales for fiscal 2014 on the back of an expected 5.5% to 6.2% rise in comparable-store sales.

Earlier, management had forecasted 11% to 13% sales growth buoyed by a 5.5% to 7% rise in comparable-store sales.

Management provided EBITDA guidance of $1.32 billion to $1.37 billion, and projected operating margin between 6.7% and 7%. The company anticipates capital expenditures between $600 million and $650 million.

Management now envisions earnings in the band of $1.58 to $1.65 per share, portraying a year-over-year jump of 7% to 12%, down from a range of $1.65 to $1.69 forecasted earlier. Analysts polled by Zacks, estimate fiscal 2014 earnings at $1.68, which may witness a downward revision in the coming days.

Zacks Rank for Whole Foods

Currently, Whole Foods carries a Zacks Rank #4 (Sell) indicating lower-than-anticipated results on both the earnings and revenue front as well as trimmed guidance for the second consecutive quarter.

However, there are certain other stocks that warrant a look, such as The Hain Celestial Group, Inc. (HAIN - Free Report) and Kraft Foods Group, Inc. both carrying a Zacks Rank #2 (Buy).

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