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Factors to Consider Before Whole Foods' (WFM) Q3 Earnings

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Of late, grocery chains have been going through a rough patch. Analysts believe that the industry-wide weakness is hurting the margins of supermarket chains. Stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds plaguing these providers of daily need items. This is quite evident from the industry’s decline of 0.4% in the past three months. In the same time frame, the broader Retail-Wholesale sector has gained 3.9%.

Let’s take a closer look as to how Whole Foods Market, Inc. , which recently accepted the buyout offer of Amazon.com Inc. (AMZN - Free Report) , is expected to contribute to the sector’s performance. Whole Foodsis slated to release third-quarter fiscal 2017 results on Jul 26. Let’s see how things are shaping up prior to this announcement.

Which Way are Estimates Treading?

Let’s look at earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. The current Zacks Consensus Estimate for the quarter under review has been stable in the last 30 days, and is currently pegged at 34 cents down from 37 cents reported in the year-ago quarter. Analysts polled by Zacks expect revenues of $3,721 million compared with $3,703 million in the prior-year period. Well the obvious question that comes to mind, will Whole Foods be able to post positive earnings surprise in the quarter to be reported.

Whole Foods Market, Inc. Price, Consensus and EPS Surprise

 

Whole Foods Market, Inc. Price, Consensus and EPS Surprise | Whole Foods Market, Inc. Quote

Strategic Initiatives Raise Optimism

Whole Foods has been revamping pricing strategy and concentrating on value offerings in view of heightened competition as more companies are entering and expanding their presence in the Organic & Natural food business. These players include The Kroger Co. (KR - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) .

We note that this Austin, TX-based company is leaving no stone unturned to reach its target customers, whether through national marketing and branding campaigns, home delivery services, store expansion or the adoption of a digital route such as the launch of digital coupon within its Whole Foods Market mobile app. Moreover, it introduced a new “uniquely-branded store concept”, "365 by Whole Foods Market". The new chain is equipped with innovative technology, compelling products at value prices and a modern look to target millennials as well as stave off competition.

Further, we believe that the deal with Amazon would provide Whole Foods a competitive edge. At one end it will allow the company to reach a wider customer base that prefer shopping online, while on the other end it will help lower procurement costs, given Amazon’s huge bargaining power. Not to forget, Amazon’s technological prowess could be of significant advantage to Whole Foods against its peers – who are aggressively expanding their online presence – and could help lower operating costs.

Concerns

Whole Foods has been grappling with waning comparable-store sales performance since the last seven quarters. The company witnessed a 2.8% dip in comparable-store sales during the second quarter of fiscal 2017, following a 2.4% decline in the preceding quarter. Comparable-store sales had fallen 2.6%, 2.6%, 3% and 1.8% in the fourth, third, second and first quarters of fiscal 2016, respectively, and 0.2% in the final quarter of fiscal 2015. Management expects comps to decline as much as 2.5% during fiscal 2017.

Further, the company reported in-line earnings during the second quarter of fiscal 2017 but it failed to contain the decline in the bottom line. We observed that after declining 14% and 6.7% in the third and fourth quarters of fiscal 2016, earnings per share plunged 15.2% and 16% in the first and second quarters of fiscal 2017.

What the Zacks Model Unveils?

Well our proven model does not conclusively show that Whole Foods is likely to beat earnings estimates this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Whole Foods has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 34 cents. Whole Foods’ Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise. You can see the complete list of today’s Zacks #1 Rank stocks here.

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