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Health-focused grocery store chain Whole Foods (NASDAQ:WFM) posted a strong second quarter. Sales growth remained robust, as the firm grew sales 13% year-over-year to $3 billion, roughly in-line with consensus expectations. Earnings per share rose 19% year-over-year to $0.76 per share, modestly exceeding consensus estimates. Free cash flow remained relatively strong at $326 million year-to-date, marginally higher than the $303 million the firm generated during the same time period in the prior year.

New store growth remains solid, as Whole Foods added 6 new locations during the year. With just 349 stores in the US, we think the firm remains a long way from its market potential of well over 1,000 domestically. In fact, same-store sales at stores across all ages continue to grow at such a brisk pace, with the oldest stores still growing sales over 5% during the quarter. New stores will likely cause some cannibalization, so the 6.9% comp may face some modest pressure going forward.

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Whole Foods expects to open 32 new stores this year, and it will open 33-38 new stores in fiscal year 2014. If the company opens a conservative 35 stores annually, we could experience another 20 years of solid new store growth, giving the firm a tremendously long (and profitable) runway. From what we've gathered monitoring the company, management is flexible in entering new markets and did a fantastic job during the second quarter opening a smaller format in South Bend, Indiana. Our projections for future growth could even prove conservative.

On the cost side, Whole Foods remains the industry leader in gross margins, as it posted a 10 basis point increase to 36.4%. This gross margin remains close to 1,000 basis points higher than that of its peers, and we do not believe compression lies ahead. In fact, during the past several years, we've seen margins consistently increase in a volatile food cost environment. Improvements in shrink and inventory management have helped the company achieve a superior cost structure.

Whole Foods was also productive on the cost side, keeping direct store expenses relatively flat at 25.4% of sales. G&A was also kept in check, growing just $5 million on an absolute basis to $91 million and only registering 3% of sales. Overall, the firm's operating margin was a strong 6.7%.

In addition to announcing solid results, the company announced a 2-for-1 stock split. Although some believe a stock split attracts additional retail investors and thus boosts the share price, it's very important to note that stock splits do not alter the value of a company.

Looking ahead, the firm narrowed its same-store sales forecast to 6.7%-7.5% from 6.6%-8.0%. Whole Foods also raised its earnings per share outlook to $2.86-$2.89 compared to $2.83-$2.87 (not reflecting the stock split). The increase in the outlook is relatively immaterial, but it does reflect the company's confidence in the business. All things considered, we thought Whole Foods' quarter was superb, but we think shares look fairly valued. We would need to see a substantial pullback before adding shares to the portfolio of our Best Ideas Newsletter.

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.

Source: Whole Foods' Stellar Growth Continues