WFMI Whole Foods Market, Inc. (MM)

Whole Foods Market Inc. (WFMI), which will now trade under the symbol ‘WFM’ with effect from May 6, 2011, recently posted better-than-expected second-quarter 2011 results on the back of strong sales as shoppers flocked to the grocery chain, thereby encouraging it to lift its outlook.

Let’s Dig Deep

Austin, Texas based company – Whole Foods – said that quarterly earnings of 51 cents a share surpassed the Zacks Consensus Estimate of 46 cents, and jumped 30.8% from 39 cents earned in the prior-year quarter.

However, management cautioned that the company may not register similar level year-over-year earnings growth in the second half of 2011, as attained in the first half due to the rise in pre-opening and relocation expenses, and increase in average shares outstanding of about 8 million.

Whole Foods, one of the leading natural and organic foods supermarkets, sustained its top-line growth momentum with revenue climbing 11.6% to $2,350.5 million in the quarter but falling short of the Zacks Consensus Estimate of $2,369 million.

Consumers, who had cut back their spending during the recession, are now returning to the chain. However, rising gasoline and food prices remain a matter of concern, since passing on increased costs to customers through price rise, may boomerang through a shift from higher priced organic products to cheaper private label brands. Therefore, the company must be observant while passing on extra burden to the consumers.

Effective inventory management and improved store-level performance have helped the company sustain the downturn and achieve improved sales and profit. Whole Foods has been revamping its pricing strategy and concentrating more on value offerings, while maintaining healthy margins. In the last five fiscal years, gross margin has been in the range of 34% to 34.9%.

Whole Foods said that comparable-store sales rose 7.8% in the quarter compared with 8.7% in the prior-year quarter and 9.1% in the previous quarter. In the first five weeks of third-quarter 2011, comparable-store sales jumped 8.1%.

The company also notified that identical-store sales climbed 7.8% in the quarter compared to an increase of 9.1% in the previous quarter, and portrayed a 10-basis point improvement over the year-earlier quarter. In the first five weeks of third-quarter 2011, comparable-store sales jumped 7.9%.

Management hinted that a shift in the Easter holiday to April 24 this year from April 4 in the prior year hurt comparable and identical store sales by 50 basis points.

Whole Foods indicated that adjusted EBITDA for the quarter surged 14.2% to $208.4 million, whereas EBITDA margin expanded 20 basis points to 8.9%. Operating income for the quarter jumped 19.2% to $142.1 million, whereas operating margin increased 30 basis points to 6%.

Stores Update

Whole Foods currently operates 304 stores. The company opened 3 stores, including 1 relocation, during the quarter, and plans to open 6 more stores, including 2 relocations, in third-quarter 2011. The company plans to open 10 more stores in fiscal 2011, 20 stores in 2012, 22 stores in 2013 and 9 stores in 2014.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $162.1 million, total long-term debt and capital lease obligations of $208.2 million, shareholders’ equity of $2,702.7 million. During the quarter, Whole Foods paid down $200 million of its term loan. Following the second quarter results, Whole Foods further paid down the $190 million balance remaining under its term loan.

Whole Foods during the quarter generated cash flow from operations of $149.8 million and incurred capital expenditures of $78.6 million, resulting in free cash flow of $71.2 million.

The company has been utilizing its cash flows in the opening of stores, paying down debt and returning cash to shareholders through dividends. With the term loan fully repaid, management now intends to employ its cash flows in executing faster growth, hiking dividend and repurchasing of shares.

Management Guidance

Whole Foods now expects an increase of 11.7%-12.6% in total sales, driven by a 7.9%-8.9% rise in comparable-store sales and a 7.8%-8.7% growth in identical-store sales in fiscal 2011. Earlier, management had projected an increase of 10.7%-12.8% in total sales, driven by a 7.2%-9.2% rise in comparable-store sales and a 7%-9% growth in identical-store sales.

Management now projects EBITDA in the range of $827 million to $837 million for fiscal 2011, up from $800 million to $815 million previously forecasted.

The company expects an operating margin of 5.4% for fiscal 2011, up from 5.2% anticipated earlier.

Whole Foods guided earnings in the range of $1.87 to $1.90 per share for fiscal 2011. The company had previously forecasted fiscal 2011 earnings in the range of $1.76 to $1.80 per share. The current Zacks Consensus Estimate for the year is $1.81. Following this, a positive sentiment may be palpable among the analysts, and we could witness a rise in the Zacks Consensus Estimates.

Capital expenditures are anticipated in the range of $350 million to $400 million for fiscal 2011.

Currently, we have a long-term Neutral rating on the stock. However, Whole Foods, which competes with The Kroger Company (KR), holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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