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Shares of Whole Foods Market (NASDAQ:WFM) fell nearly 10% over the past trading week on the back of a poorly received third quarter earnings report, followed by a Goldman Sachs (NYSE:GS) downgrade later that week.

Goldman is right, but they were probably too optimistic going into the report. Even after last week's sell-off, shares are too expensive to my taste to pick some of them up at these levels.

Fourth Quarter Results

Whole Foods Market generated fourth quarter revenues of $2.98 billion, up just 2.2% on the year before. Analysts were looking for revenues of $3.04 billion.

On a comparative 12-week basis, revenues rose by 10.8% on the year before. Comparable store sales rose by 5.9%, with identical store sales increasing by 5.5%. Same-store sales came in far below the growth rates of around 7% reported in the first nine months of the year, and below Wall Street expectations.

Net earnings rose by 7.1% to $121 million, as diluted earnings per share inched up by two cents to $0.32 per share. Earnings came in a penny ahead of expectations.

Earnings growth was driven by gross profit margin expansion, which increased by 37 basis points to 35.6% of total sales. Direct store expenses fell by 6 basis points to 25.4% of revenues.

CEO John Mackey commented on the fourth quarter performance, "We reported record fourth quarter operating results which contributed to the best fiscal year performance in our Company's 35-year history."

Outlook

Given the cautious developments in the fourth quarter, Whole Foods has lowered its full-year revenue guidance for 2014 from 12-14% to 11-13%. This is entirely driven by a 1% reduction in the expected comparable store sales growth, now seen between 5.5 and 7.0%.

As a result, earnings per share are now seen between $1.65 and $1.69 per share, down from a previously guided $1.69 to $1.72 per share. Consensus estimates for next year stood at $1.73 per share.

Goldman Is Becoming Cautious

Analysts at Goldman Sachs downgraded the firm from "Buy" to "Neutral," lowering the price target by nine dollars to $57 per share.

The bank still sees Whole Foods as a secular winner with the continued opportunity for store growth and margin expansion. Yet the company is lowering its estimates, to reflect the softer top-line trajectory.

Analyst Grambling notes that shares still trade at 34 times the downwardly revised earnings per share estimates, warranting a neutral rating. As such the bank looks for a better entry point.

On the back of the disappointing developments, Goldman has lowered its full-year earnings target for 2014 from $1.79 to $1.71 per share, and 2015's estimates from $2.19 to $2.03 per share.

Valuation

Whole Foods Market ended its fiscal 2013 with $1.4 billion in cash, equivalents and short-term investments. The company operates without the assumption of debt, and a very modest amount of capital lease obligations.

Revenues for the fiscal year came in at $12.92 billion, up 10.4% on the year before. Earnings rose by 18.2% to $551 million.

Trading around $58 per share, the market values Whole Foods Market at $21.5 billion, or operating assets at $20 billion. This values operations of the firm at 1.5-1.6 times annual revenues and 36 times earnings.

To somewhat soften the pain for shareholders given the disappointing earnings reports, Whole Foods has increased its quarterly dividend by 20% to $0.12 per share, for a modest dividend yield of 0.8%.

Some Historical Perspective

Whole Foods is still very much a long-term success story and the recent pullback seems nothing more than a bump on the road. After peaking around $40 per share in 2005, shares have fallen to lows of $6 by 2008.

Ever since, shares have roughly ten-folded to highs of $65 earlier this year. Even after a recent 10-12% correction, shares are still trading with year-to-date gains of 27%.

Between the fiscal year of 2010 and 2013, Whole Foods has increased its annual revenues by a cumulative 43% from $9.0 to $12.9 billion. Net earnings more than doubled to $551 million in the meantime. Note that the outstanding share base increased by some 10% over the same time frame.

Investment Thesis

It seems that Whole Foods is facing a lot more competition, resulting in slower comparable store sales growth, making the company more reliant upon new store openings to drive further revenue growth. Over the past quarter, Whole Foods was forced to engage in price cuts to fence off competition from traditional retailers like Kroger (NYSE:KR), Costco Wholesale (NASDAQ:COST) and Wal-Mart (NYSE:WMT), all boosting their offerings of fresh and organic foods. Other focused competitors like Fairway Group (NASDAQ:FWM) and Sprouts Farmers Market (NASDAQ:SFM) have been rapidly opening stores as well.

The company opened 12 stores in the final quarter, marking a total of 32 store openings for the year, boosting the store count to 367 stores. On multiple occasions, Whole Foods indicated that it sees potential for a 1,000 stores in the long run.

To somewhat soften the pain for shareholders amidst weakening comparable growth, Whole Foods hiked its dividend by 20%, for still a modest 0.8% dividend yield. On top of that came a share repurchase program being authorized with a value of $500 million, sufficient to retire 2.5% of the current share base.

As recent as the start of October, I last took a look at the prospects for Whole Foods. I concluded that while I like the very long-term prospects of Whole Foods, I don't see catalysts which could spur even more upside potential in the short term. Following the article, shares did advance a little further, to be followed by last week's aggressive sell-off.

I was surprised by the aggressiveness of Jefferies to attach a $70 price target for the shares, given the fact that shares traded already at nearly 40 times earnings. To further realize the 1,000 store base, Whole Foods needs to focus on store openings, and I don't see such a store count happening before 2025.

I concluded that even if Whole Foods could be a $50 billion business by 2025, while earning $2-3 billion per annum, the valuation already reflects a lot of good news, a bit too much. The bumps on the road seems to have materialized already over the past quarter with the aggressive deceleration of same-store sales growth.

Don't short the stock on the high valuation today, as the company can "grow" into the valuation in the long term. Shares remain too expensive to my taste, for a long-term position. Even if healthy growth continues, expected returns are mediocre.

Source: Whole Foods Market - Too Expensive, Even After A 10% Correction