Whole Foods Market - Shares Are Selling Off As Company Is Priced For Perfection

| About: Whole Foods (WFM)

Shares of Whole Foods Market (WFM) ended the past trading week with losses of over 6%. On Wednesday after the market close, the natural and organic foods supermarket chain reported its fourth quarter results. Shares sold off on the back of a disappointing full year outlook for 2013.

Fourth Quarter Results

Whole Foods Market reported fourth quarter revenues of $2.91 billion, up 24% on the year, and in line with analysts estimates. Sales were positively driven by a 8.5% increase in comparable sales, with the remainder of sales growth driven by new store openings. Gross margins rose 76 basis points to 35.3% on lower occupancy costs and cost of goods sold.

Whole Foods reported a 36% increase in EBITDA to $252 million. Net income rose by 49% to $112.7 million, with diluted earnings per share up 44% to $0.60 per share. Earnings per share were in line with analysts expectations.

Whole Foods warned that comparable sales for the first five weeks of its first quarter of its fiscal 2013 fell to 7.3%. Sales were negatively impacted by Hurricane Sandy.

Whole Foods reported record full year results. The company generated revenues of $11.70 billion, on which it net earned $465.6 million, or $2.52 per diluted share. On the back of the strong results, Whole Foods Market increased its quarterly dividends by 43% to $0.20 per share.

The Company opened seven stores in the fourth quarter and has opened seven stores so far in the first quarter. Whole Foods Market currently has 342 stores.

Co-CEO and co-founder John Mackey commented on the results, "We ended the year with strong sales growth and record fourth quarter results, delivering the best year in our Company's 32-year history. The pace of new store openings and lease signings continues to increase, and our accelerated growth plans are on track. We expect healthy comparable store sales growth and continuing operating margin improvement in fiscal year 2013."


Whole Foods Market has opened 7 new stores so far this year, and it expects to open an additional three stores during the quarter. For the full year of its fiscal 2013, the company expects to open 32 to 34 new stores.

Full year revenues for its fiscal 2013 are expected to rise between 10 and 12%. Sales growth will be driven by an expected 6.5-8.5% increase in comparable sales growth.

Full year earnings per share are expected to come in between $2.83 and $2.87 per share, up from $2.52 for its fiscal 2012. Analysts expected Whole Foods to guide for annual profits of $2.90 per diluted share.


Whole Foods Market ended its fiscal year of 2012 with $1.5 billion in cash, restricted cash, equivalents and short term investments. The company operates with a mere $24 million in capital lease obligations for a net cash position of roughly $1.5 billion.

The market currently values Whole Foods Market at $17.0 billion, which implies a $15.8 billion valuation for the company's operating assets. This values the firm's operating assets at 1.3 times annual revenues and 33-34 times annual earnings.

Whole Foods Market currently pays a quarterly dividend of $0.20 per share, for an annual dividend yield of 0.9%.

Investment Thesis

Year to date, shares of Whole Foods Market have risen some 31%. Shares rose steadily from $70 in January to peak at $102 in October. Shares corrected on the back of the fourth quarter results, and are currently exchanging hands around $92 per share.

Shares of Whole Foods fell from $75 in 2005 to lows of $10 in 2008 and 2009 as investors feared that consumers would flee to discount food merchandise stores during the financial crisis. Shares ten-folded from that point in time reaching all time highs of $102 earlier this year. Between 2009 and 2012, Whole Foods Market increased its annual revenues from $8.0 billion to $11.7 billion. Net income tripled from $147 million to $466 million in 2012.

The market was pricing Whole Foods Market for perfection at $102 per share, and shares have fallen some 10% from that point in time. The company warns that hurricane Sandy could impact first quarter sales. Furthermore the targeted operating margin improvement of 20 to 30 basis points for 2013, is slightly disappointing. Operating margins are expected to rise to between 6.6% and 6.7% for the coming year.

The long term prospects remain good. Whole Foods sees potential for 1,000 stores over the long term. Whole Foods is targeting the opening of smaller stores with a size of 38 to 40 thousand square feet, which generate higher returns on investment and allows the company to accelerate its growth plan.

The supermarket landscape is being divided and it is net good for Whole Foods. Companies like Wal Mart (WMT) and Target (TGT) are focused on price-conscious consumers. The supermarket franchises focused on the middle-market like Supervalue (SVU) are getting squeezed in the meantime. Companies like Whole Foods are excelling at the high-end of the market.

Whole Foods long term prospects remain very good, yet I do not see compelling reasons to hold on to shares. Future earnings growth will be driven by comparable sales growth, new store openings and higher margins. The trends for healthier food and living will continue in the future, and public awareness for the problem remains on the rise. The problem is that the current valuation assumes a perfect execution of expansion in the medium to long term.

I would be a buyer on a significant dip, but refrain from initiating a long position at the current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.