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Summary

  • Consensus analyst estimate of revenue shows that in the next two years Whole Food Market is expected to continue the healthy growth it showed for the past nine years.
  • Owing to an evolving competitive landscape, in the next two quarters the company is not expected to continue its previous double digit average bottom line growth.
  • The company needs to protect its strong brand image by adapting to the changes in the growing whole food market.

Revenue Expectations of the Market

Second quarter earnings for 2014 are due to be released. The following is a summary of what the market expects from Whole Foods Market (NASDAQ:WFM). The summary is based on the estimates of 27 analysts covering WFM. The market expects that the revenue for the quarter of June 14 will be $3.39 billion on average. This is a 10.80% increase from the previous year's level of $3.06 billion.

The most optimistic estimate expects revenues of $3.42 billion reflecting a growth of 11.17% and the most conservative estimate expects revenue of $3.25 billion reflecting a growth of 6.2%. The highest estimate is just above the average revenue forecast which shows that more analysts' forecasts lie close to the upper end of the range than the lower end of the range. Thus we can have greater reliance on the average figure of revenue forecasted.

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Source: Yahoo Finance

From the next quarter ending September 14th, the average market expectation is that revenues would grow by 11.80% compared to revenue in the same quarter last year. The market's consensus revenue estimate is 3.33%.

The market expects almost the same level of percentage revenue growth as it expects from the last two quarters of the current year Consensus estimate of the current full year of $14.28 billion compared to $12.92 billion last year reflecting a growth of 10.60%. The most optimistic analyst estimates revenue of $14.35 billion is 11% above the previous year's level. The most conservative estimate expects a YOY growth of about 8%. There is a narrow range between the analysts' estimates.

In the next fiscal year ending Sept 2015, consensus analyst estimate for revenue is $16.09 billion which is 12.60% above this year's consensus revenue estimate.

If we compare the company's estimated revenue growth rates with the historical growth rates, we see that analysts do not estimate the revenue growth rate diverging from the last nine years' revenue CAGR of about 11%. As more consumers purchase organic food as opposed to non-organic food, WFM and its established brand known for premium organic food, is expected to benefit from the trend.

However, as more consumers are moving towards the organic food, WFM has begun to face more competition as more players are entering the organic food market. The entry of Wal-Mart (NYSE:WMT) will surely have an impact on WFM's growth. It's critical for WFM to differentiate itself from WMT that has a higher focus on value rather than to quality. There is the risk of stagnating growth if WFM fails to bring new ideas and innovation in its product, business processes, branding and marketing.

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Source: Morningstar.com

Earning Expectations of the Market

Now let us analyze analysts' estimates regarding top line translation in to the bottom line. Here we see something that needs to be considered carefully. In the upcoming earnings release the analysts' consensus EPS estimate is just 2.6% above the EPS of the same quarter last year. The average analysts' estimate for the EPS is $0.39. This growth is much lower than the 10.80% revenue growth that analysts expect. Thus healthy top-line performance is not expected to flow down to the bottom line. This small growth in the EPS is expected to make the stock price more volatile if an earnings surprise occurs. Unfortunately there is a higher chance of a decline in the stock price due to a negative surprise than an upward move due to a positive surprise.

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Source: Yahoo Finance

In the next quarter ending September 14th, consensus analysts' estimate expects a YOY growth of 6.25%. This is much better growth compared to the current quarter's EPS estimate. The EPS estimate for full year ending September 2014 reflected the fact that analysts do not expect the same double digit growth that is expected from the top line. Consensus analysts' estimate for the EPS depicts a 4% growth YOY as opposed to 10.6% top line growth. For the next year ending September 2015, analysts' consensus estimate shows a 13% growth compared to the current year's consensus estimate.

If we compare the consensus EPS estimate for the next two quarters and full year ending September 2014 we see that the expected growth rates are much lower than the past nine year's EPS CAGR of around 11%. With growing competition, WFM needs to adapt its strategy to the evolving competitive environment and seriously focus on ways to keep up its EPS growth in the coming years.

Target Price Estimate

Despite competition becoming more and more intense our outlook of WFM is positive. We believe that WFM has established a strong brand image of high quality organic food that is not easy to replicate. Analysts' target price estimate depicts a positive outlook for WFM.

Is price attractive?

WFM's price-to-earnings ratio is 24.60 which is quite high. It means that investors need to invest $25.60 per $1 of earnings. The P/E ratio is higher than the industry and the S&P 500 but is lower than the sector. Building expected growth to our relative analysis using the PEG ratio tells us that WFM is attractively priced. Scaling P/E ratio with expected growth gives us a PEG ratio of 1.82 times that is lower than the industry, sector, and the S&P 500.

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Conclusion

WFM has established itself as a premium whole food seller and its strong brand image is expected to create growth in the coming years. Gaining growth is not easy with the evolving competitive environment but we expect that WFM will adapt itself and will be able to make its way through challenging conditions. The top line is expected to continue the past trend of growth but the bottom line is expected to face challenges due to rising costs of food and rising cost of staying afloat amidst competition. However WFM is expected to recover the required growth in the next year. WFM's stock is attractively priced and complemented by target price estimates. WFM is a good investment opportunity for medium and long-term investors.

Source: Whole Foods Market - Investing In A Growing Top Line