Whole Foods Market (WFM, Financial) recently announced mixed results for the third-quarter 2014, posting earnings of $0.41 per share higher than earnings of $0.39 per share estimated by the analysts. But its revenue failed to meet the street expectations as it came in at $3.38 billion, slightly lower than the street forecasts of $3.39 billion for the third-quarter 2014. Nevertheless, the results were quite better in comparison to the same quarter a year earlier, with revenue and earnings growth of 10% and 8% respectively.
However, Whole Food Market has pulled down its outlook for the full year as the company expects to see sales increase for its established stores in the range of 4.1% to 4.4%, slightly inferior to its earlier guidelines of 5% to 5.5% rise in the established locations. Whole Foods Market has made changes to the high end of its diluted EPS guidance by $0.02 cents. The company now expects earnings per share in the range of $1.52 per share to $1.54 per share for the full year that guided its stock to down curve 3.6% to $37.70 aftermath.
In a challenging position
The stock is down approximately 32% for the last twelve months due to increased competition from rivals such as Walmart (WMT, Financial), Kroger (KR, Financial) and even drug stores in the organic and natural food categories with extensive offerings from the rivals in the niche market that once conquered by Whole Food Market. However, with shares down now the investors must consider this opportunity to buy more of the shares as the stock is estimated to grow at the CAGR of 12.65%, while Walmart and Kroger are expected to grow at the CAGR of 7.43% and 10.24% respectively for the next five years.
Moreover, Whole Foods Market’s business model is generating comparatively larger sales per gross square foot, strong yields on the invested capital, and robust cash flow for the company. In addition, the co-CEO, Walter Robb, of WFM recently said Whole Foods Market is observing greater signs of solidity in its sales trends and looks confident with its strategic advantages that should help the company build further momentum and generate growing returns on the invested capital in the long-run.
Whole Foods Market is aggressively practicing five key initiatives that should help WFM to carry forward this momentum in the future while delivering fine-looking returns to shareholders and investors. First, the company is planning to strategically invest in the new and existing stores that should possibly drive growth for its comps in the future. Whole Foods Market has approximately 116 new stores under its progressive pipeline, which is estimated to soon accomplish a positive Economic Value Added (EVA). The company remains well on track to inaugurate 38 new stores this year, which is about 10% rise in square footage growth, and it anticipates a strong increase in the square footage next year as well.
Will the situation improve?
The company is estimating its new and relocated stores to contribute approximately $1.0 billion in sales by the end of next year. The company is moving aggressively to complete 500 store marks in 2017 and sees an opportunity of inaugurating about 1200 Whole Food Market stores in the home market alone. The company has opened more than 33 stores in the last twelve months.
The second big priority the company is undertaking this year is to refresh more than 70% of its stores above 10 years long-standing. This refreshment for the stores includes design updates, updating, adding or remodeling venues and full store remodels. Whole Foods Market strongly believes that these refreshments to the stores will fetch the company comprehensively better results at its comps, boosting its performance and delivering strong returns to shareholders. This refreshment is expected to get completed by the end of 2016 or beginning of 2017.
Meanwhile, the company is also engaged in accelerating the value efforts, needed to boost sales for its comps over the coming years, which is its third priority. To quote few of them, the company of late initiated a competitive price match on most of its grocery substances at the national level. Further, the company sees potential opportunity to bring down the price gaps on productive value substances, develop a competitive structure of products at the entry-level price arguments and to accelerate advertising activities for these selected products. These strategic moves should certainly drive growth for the company and develop a competitive advantage over its peers going forward.
Whole Foods Market looks forward to its value efforts to deliver strong historical gross margin of 34% to 35% for number of years in future that will certainly boost its value position in a more meaningful manner. With the current gross margin rate of 35.7 since the beginning of the year till date the company has plenty of rooms to make productive correction and walk towards achieving this target.
Whole Foods Market is excited to initiate its first-ever national marketing and brand campaigning in the coming fall that makes its fourth strategic steps towards attaining strong growth and returning value to its shareholders and investors. With the growing competition in the industry, the company has decided to roll over its marketing campaign. The company has earned many ratings for various categories, such as 5-Step Animal Welfare ratings in meat, Eco-Scale ratings for cleaning products, sustainability ratings in seafood and GMO labeling that qualifies the company for the highest quality standard, and that should enhance value to this campaign yielding healthy margins to Whole Foods Market. This campaign is also expected to demonstrate its values, supporting its leadership with in-depth concentration on quality and transparency in the market.
Last but not least, the company is effectively involved in the digital roadmap in order to present customers with more choices and engross them to its stores across the country. WFM is extending its reach to customers freestanding the stores as it plans to facilitate the customers with the home delivery and customer pick up in 12 to 15 key markets and also remain well on track to launch its first online subscription club by the end of this calendar year. Further, the company is planning to provide a direct ship in various key categories should complement its growth.
Whole Food Market is also focusing on introducing its new Whole Food Market mobile app that should significantly enhance the customer involvement when they visit the stores. While these strategic investments are developed in order to boost growth, value, marketing and technology the company is also at the same time practicing various cost cutting initiatives that should add value to its overall growth and create value for shareholders going forward.
Ending remarks
Whole Food Market is currently trading at the trailing P/E of 25.66 and forward P/E of 22.51, which reflects reasonable valuations for the stock, along with PEG ratio of 1.99 that supports its growth in the future. Moreover, the company is fairly performing well with the profit and operating profit yields for the trailing twelve months of 4.11% and 6.71% respectively. Its ROE yield for the last twelve months stands at 15.06% to a rational position. WFM has operating cash flow of $1.05 billion and free cash flow of $408.12 million, which is quite enough to cover its total debt of $62.00 million, which is well mixed by most measures.
