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Whole Foods Beats Earnings Estimate

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Whole Foods Market, Inc.’s second-quarter fiscal 2013 earnings of 76 cents a share beat the Zacks Consensus Estimate of 73 cents, and surged 19% from 64 cents earned in the prior-year quarter as shoppers flocked to the grocery chain. The Austin, Texas-based company, which will undergo a two-for-one stock split later this month, also raised its earnings-per-share projection.

Despite a competitive pricing strategy to gain market share against other supermarket chains, Whole Foods was able to post better-than-expected results. This facilitated its shares to soar 8.2% or $7.60 to $100.40 during after-market trading hours.

Let’s Unveil the Picture

Whole Foods, a leading natural and organic foods supermarket, sustained its top-line growth momentum with revenue climbing 13.3% to $3,027 million in the quarter, but falling short of the Zacks Consensus Estimate of $3,049 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. In the last 3 fiscal years, gross margin has been in the range of 34.8% – 35.5%.

Whole Foods stated that comparable-store sales rose 6.9% in the quarter, down from 8.9% in the prior-year quarter and 7.2% in the previous quarter. For the first 3 weeks of the third quarter, comparable-store sales jumped 9.4%.

The company also notified that identical-store sales climbed 6.6% in the quarter compared with 8.5% in the year-ago quarter and 7.1% in the preceding quarter. For the first 3 weeks of the third quarter, identical-store sales jumped 9%.

It seems that comparable and identical store sales growth trend is softening. Consequently, Whole Foods narrowed the range of comparable and identical store sales growth for the fiscal year.

Whole Foods indicated that gross profit rose 13.5% to $1,101 million, whereas gross margin grew 5 basis points to 36.4% as occupancy costs shriveled as a percentage of sales.

Management anticipates a major increase in pre-opening and relocation costs in the fourth quarter due to 12 new store openings coupled with a significant number of store openings in the first quarter of fiscal 2014.

Store contribution soared 15.3% to $332 million. As a percentage of sales, store contribution increased 63 basis points to 11.3%.

Adjusted EBITDA for the quarter soared 18.2% to $325 million, whereas adjusted EBITDA margin expanded 40 basis points to 10.7%. Operating income for the quarter jumped 20% to $228 million, whereas operating margin increased 40 basis points to 7.5%.

Stores Update

Whole Foods currently operates 349 stores. The company opened 6 outlets during the second quarter of fiscal 2013. So far in the third quarter, the company has opened 1 store, and plans to open 3 more stores. In the fourth quarter, it plans to open 12 stores.

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

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $202 million, long-term capital lease obligations of $26 million, and shareholders’ equity of $3,632 million.

During the quarter, Whole Foods generated cash flow from operations of $287 million and incurred capital expenditures of $109 million, resulting in free cash flow of $178 million. The company paid $37 million in quarterly dividends and bought back $37 million of shares.

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

Whole Foods continues to project an escalation of 10% to 11% in total sales for fiscal 2013 on the back of an expected 6.7% to 7.5% rise in comparable-store sales and 6.5% to 7.2% growth in identical-store sales.

Earlier, management forecasted a 6.6% to 8% rise in comparable-store sales and 6.3% to 7.7% jump in identical-store sales.

Management provided EBITDA guidance of $1.19 billion to $1.20 billion, and projected operating margin of 6.7%. The company continues to anticipate capital expenditures between $565 million and $615 million.

Management now envisions earnings between $2.86 and $2.89 per share, portraying a year-over-year jump of 13% to 15%, up from a range of $2.83 to $2.87 forecasted earlier. Analysts polled by Zacks, estimate fiscal 2013 earnings at $2.87. Consequently, we could witness an improvement in the Zacks Consensus Estimate in the coming days.

Zacks Rank for Whole Foods

Currently, Whole Foods carries a Zacks Rank #4 (Sell). However, there are certain other stocks that warrant a look, such as Flowers Foods, Inc. (FLO - Free Report) , which holds a Zacks Rank #1 (Strong Buy) and is expected to continue with its upbeat performance. Other stocks that should be merited are J&J Snack Foods Corp. (JJSF - Free Report) and The Hain Celestial Group, Inc. (HAIN - Free Report) , both of which sport a Zacks Rank #2 (Buy).

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