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Whole Foods (NASDAQ:WFM) reports their fiscal 3rd quarter after the closing bell tonight, with analyst consensus looking for $0.37 on just over $3 billion in revenues for expected year-over-year growth of 17.5% and 13%, which is consistent with prior quarters.

Comps are expected in the 7.5% range, also consistent with prior quarters. WFM provided a mid-quarter update and noted the specialty retailer is on track for comps in this range.

WFM is up 22% year-to-date (as of Tuesday's close) ahead of the SP 500.

The best leading indicator for WFM could be Starbuck's quarter, given the tight, positive correlation between SBUX and WFM comp's. SBUX reported 13% y/y sales growth on 8% worldwide comp growth, with 7% of that 8% being traffic driven. (I wish I had more time to show the correlation between SBUX and WFM comp's on a spreadsheet or table.)

Last quarter, revenues grew 13% driving 19% EPS growth on comp store growth of 6.9%, subdued thanks to Nemo and Sandy weather-related slowdowns in the Northeast.

We've modeled WFM's financials for years, and the fascinating aspect to the retailer, which is evidence of their success and widening consumer brand is that WFM has been able to gradually expand margins through the years, from an approximate 34% gross margin (NYSE:GM) to the 36% range, which has driven operating margin expansion from 3.5% to the 7% range.

Management has done a superb job.

The real question I have going forward is what is WFM's potential market share and what would be peak revenues and EPS for the successful specialty retailer ?

Back in 2005, WFM set a goal of $12 billion of revenues, which they have now exceeded. Forward revenue estimates for WFM for 2013, '14 and '15 are $13.0 billion, $14.8 billion and $17.1 billion, which still seems relatively small to WMT's $475 billion, half of which is grocery, and Amazon's looming entry into the same-day grocery delivery business.

Morningstar has an intrinsic value on WFM of $43 per share, which has been walked up from $30 per share over the last 2 years. Our own model carries a $75 intrinsic value on WFM, which if the reader splits the difference between the models puts WFM's fair value roughly in the $59 neighborhood, or where the stock is trading currently.

At $56 per share, WFM is currently trading at 39(x) the 2014 EPS estimate of $1.45 and 21(x) the current EPS consensus of $1.72 for expected y/y growth of 15% and 19%.

In addition WFM is trading at 15(x) 4-quarter trailing cash-flow and 1.52(x) price to 4-quarter trailing sales.

We cut our position in WFM in half in mid 2012, when growth stocks such as Chipotle (NYSE:CMG) and SBUX started to lag. We then re-purchased some additional WFM with the recent technical breakout over $52 per share, after the April '13 quarter's earnings.

From a portfolio management context, we have about a 1.5% - 2% position in WFM, which is a position we are comfortable with, given the stock's valuation.

We would prefer to buy add to the present position after a bigger correction and a washout in the stock, near a lower-risk but technically-sound support level.

WFM is a significant retail success story, which is still in-process thanks to strong management and superb execution. Valuation is the only issue, which is typically the case with growth stocks.

Source: Whole Foods Earnings Preview: Overvalued But Superb Execution