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By Nathan Slaughter

Whole Foods (WFMI) [$48.28] is an upscale grocery chain with approximately 190 stores featuring a wide selection of organic foods and specialty products.

Though sales in the traditional grocery business have been sluggish for years, Whole Foods has carved out a growing niche at the high-end of the market and has delivered impressive annual revenue growth of +20% over the past five years.

Last month, the shares were slammed after the company announced fourth-quarter results and near-term guidance that suggested a bit of a cool-down from the firm's red-hot pace of recent years. Earnings for the period quadrupled to $40 million [or $0.28 per share] on revenues that climbed +16% to $1.3 billion.

But while those numbers were essentially in-line with Wall Street's lofty targets, shareholders were disappointed with the firm's same-store sales results. After posting consistent double-digit quarterly improvements in that key department for the past three years, comps for the period were only up +8.6% -- down from a torrid +13.6% growth rate in last year's fourth quarter.

And with the company gearing up to face more competition, management is anticipating same-store sales growth of just +6%-8% in fiscal 2007 -- down from the +11% gain delivered this past year. That cautious outlook sent the shares tumbling nearly -25% to a fresh 52-week low of $46.26.

WFMI

However, this latest news appears to be more of a speed bump than a roadblock. The threat of increasing competition is real and should not be downplayed, but keep in mind that Whole Foods is still in its early growth stages. With just 190 stores located primarily in the nation's largest cities, WFMI still has ample room to grow, and the firm's ambitious expansion plans should continue to power revenues forward in the years ahead. In fact, WFMI has already signed 90 leases to develop new locations, which will increase store space by approximately 5 million square feet.

That square footage under development represents approximately 75% of the store space the company currently manages. In other words, Whole Foods is planning to nearly double its square footage in the coming years. In addition, management has bold plans to expand the firm's footprint in faster-growing markets overseas. That growth, along with solid results from its existing store base, should help annual sales double from the current $5.6 billion to as much as $12 billion by 2010.

This is clearly not a company that is just spinning its wheels. And while expenses associated with new store openings could bite into earnings over the next few quarters, Whole Foods is well positioned to continue generating healthy cash flows going forward.

Given the firm's extremely shareholder-friendly policies, much of that wealth will be returned to stockholders. After dishing out more than $350 million in dividends last year, management recently boosted its quarterly dividend payment by another +20% to $0.18 per share. The company has also stepped up its share repurchase program, and CEO John Mackey has voluntarily agreed to waive any stock option compensation and reduce his annual salary to just $1.

The company is by no means spiraling downward. Instead, its phenomenal growth rates have begun to decelerate slightly.

Furthermore, management is refreshingly candid, and corporate governance has never been a cause for concern. Also, the firm's earnings releases are some of the best I've encountered. Not only does the company break down its same-store sales figures by the age of its stores, but it is also one of only a handful on Wall Street to include a table dedicated specifically to economic value added [EVA] analysis -- reflective of the pervasive corporate culture of considering not just raw growth, but the cost of attaining that growth.

Whole Foods should deliver solid earnings growth of +20% annually over the next five years. Though 2007 is expected to be a "transitional" year, I believe this recent pullback represents an attractive entry point for WFMI.

Disclosure: Nathan Slaughter holds a position in WFMI
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Source: Whole Foods: A Healthy Choice for Investors