Whole Foods: Illuminating In A Dim Market

| About: Whole Foods (WFM)

This earnings season has not been a confidence instilling one. There have been a handful of companies that have exceeded expectations and many more that have fallen short. Whole Foods Market (WFM) has been one of the brighter spots in an otherwise mediocre economy. After its earnings call on Wednesday, the grocer stock ran up over 10%. There is much more reason to believe in Whole Foods Market than just one good quarter however. The grocer has a grip on the health food business that is here to stay in a business that is sure to become increasingly prevalent. As a momentum play, a long-term growth play, or a strategic aversion of Europe, Whole Foods does it all.

The jump in Whole Foods stock can be attributed to both its quarterly earnings and its revved-up outlook. The company reported earnings of $0.63 per share topping estimates of $0.61 per share, up from an EPS of $0.50 a year ago. Revenue rose 13.6% to $2.727 billion, slightly missing expectations of $2.733 billion. Inventory management and better store-level performance helped to shelter Whole Foods from a decline in consumer confidence. It is also notable that gross profit rose 15.6% to $981.4 million and comparable-store sales were up 8.2% with identical-store sales up 8%. To be fair, comparable-store sales did decline from 8.4% in the same quarter last year, but the small differential is insignificant and the takeaway is that strong same-store growth is continuing. Although Whole Foods did not beat estimates by all that much, amidst decreasing consumer confidence and a struggling economy the fact that consumers were willing to pay more money for products provided by Whole Foods is a signal of a strong customer base and a strong business.

No less important was Whole Foods' optimistic outlook including development of new stores and raised expectations. Currently Whole Foods Market operates 329 stores in the United States, United Kingdom, and Canada. The grocer opened a record nine outlets during the quarter and plans to create six more this year. They outlined a plan to build 25 in 2012, 28 to 32 in 2013, and 33 to 38 new stores in 2014. As a reference point Whole Foods only built 18 stores in 2011. In total, 76 stores are being developed (or potentially developed) including the six more planned for this year.

Whole Foods Market is expanding physically in terms of new stores, but also in same-store sales. Heightened expectations for fiscal 2012 include an increase to 8.6-8.9% comparable-store sales from original guidance of 8.2-8.9%, as well as a 15.6-15.8% total sales increase as opposed to original estimates of 14.8-15.6%. The company is also anticipating EPS to be between $2.51 and $2.52 in fiscal 2012 which would translate into year over year growth of 30%. EPS was previously expected to come in at $2.44-$2.47, showing a jump in confidence as it is now expected to rise anywhere from 4 to 8 cents. Whole Foods went further and announced initial guidance for 2013 as well. They expect a 13-14% increase in total sales, a 6.5-8.5% rise in comparable-store sales, and an EPS between $2.83 and $2.87 amounting to a year over year increase of 16 to 17%.

The quarter was strong and the outlook was even stronger. As a testament to the grocer's continued growth, forecasts were boosted up to be in the high range of prior expectations or surmounting them all together. Without becoming lost in the numbers, it is important to realize a couple of things. The company was able to beat expectations in this quarter and maintain its hold on the health food market despite the expense of its products in our gloomy economy. Subsequently the company extended its confidence for the rest of the year, and even to fiscal 2013.

Whole Foods success this quarter and growth projections are nothing new for it. Over the past few years Whole Foods has seen both revenue and earnings per share increase incrementally and consistently.

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With the chart provided by The Motley Fool, EPS growth is apparent particularly when seasonal patterns are noted. Total EPS is seen rising significantly and revenue has followed in a similar direction. Complimenting revenue and EPS progression is Whole Foods' solid balance sheet. The grocer has $4.29 billion in total assets with just $1.3 billion in total liabilities. Just as attractively, it holds only $18 million in debt. Whole Foods has exhibited excellent growth in the past few years and has constructed a spotless balance sheet to go along with its quarter and its outlook.

Whole Foods Market has found its niche with consumers and is positioned in the perfect business to continue to thrive. Its stores are located in urban areas and appeal to an increasingly large health-conscious crowd. Unfortunately not all Americans, or people in general, take an importance in their health (or can afford to) but the amount that do is on the rise. Just over one quarter of Americans are obese and efforts such as the First Lady's to inform the public in order to promote health will likely continue in order to combat obesity and unhealthiness. These campaigns bode well for Whole Foods. Similarly to what has happened in terms of declining cigarette use partially as a result of campaigns to educate about the dangers of smoking, information about the unhealthiness of fast food, chips, etc. will lead to health food becoming a necessity. Therefore, unlike many other trends, healthy and natural food is going to be around for a long time and Whole Foods is here to capitalize on it.

Whole Foods' lucrative business goes beyond its industry. As previously mentioned, their placement in urban areas has been an excellent strategy and is one of the reasons why they have not suffered from a halt in consumer spending. Even more appealing is the minimization of European risk. The grocer controls stores in America, Canada, and the United Kingdom, meaning that the problems in the European Union have little impact as no stores are located on the continent. Though some exposure exists, conditions in the U.K. are much more stable than they are in Western Europe, leaving Whole Foods relatively shielded from eurozone downside.

A testament to the strength of Whole Foods may have come from Starbucks' (SBUX) quarterly miss and bleak outlook. While Starbucks is a restaurant and coffee shop, it is on the high-end side and it was clear that consumer unwillingness to pay more for their coffee was part of the reason that they failed to reach estimates. Whole Foods, with its more expensive products, did not have this problem. As a result, it can be inferred that it has developed a stronger, more specific clientele that is willing to dish out more money for its healthier food. Whole Foods has executed an effective strategy and is perfectly located to succeed in holding its grip on its consumer base, as well as expanding to new customers in synchrony with the entirety of the health food industry.

Whole Foods Market has become one of the brightest spots in the stock market. Even though it is expensive with a P/E of 39.62, the stock is a few dollars off of its 52-week high and has more than enough growth to sustain this multiple. The grocer operates a strong influence in an up-and-coming health food industry that is sure to expand further. The stock has momentum coming out of earnings with plenty of optimism and very few negative catalysts to get in the way. Long-term, it operates an excellent business and its management team headed by co-founder and CEO John Mackey is well-qualified to lead the company to a successful future. As an additional incentive Whole Foods has little to fear from Europe with no stores on the continent. Its stock ran up after its earnings call but much of it was because of the selloff that occurred after Chipotle's (CMG) quarterly report. With that being said, it will continue to outperform the market and it is wise to stick with what is working and will continue to work. Whole Foods is an excellent stock and company with plenty of warranted optimism, making it a stellar buy.

Disclosure: I am long WFM.

Additional disclosure: Initiated my long position last week. Earnings information courtesy of Zacks Investment Research (community.nasdaq.com/News/2012-07/whole-...)