Whole Foods: More Profits on the Shelves

 | Jun 18, 2013 | 12:00 PM EDT
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On April 2, I thought Whole Foods (WFM) was the victim of poor investor sentiment. At the time the stock was $42.26. Sentiment changed apparently when the company reported a strong third quarter. The stock took off like a rocket ship. Despite being 10 points higher now, I still think Whole Foods investors can chow down on more profits..

 (Editors Note: The stock had a 2:1 split on May 30)

In the first half of the year, Hurricane Sandy had an impact on the company's results.

Investors freaked out over things like a smaller-than-average basket size and lower-than-expected same store sales. Investors also thought gross margins were under pressure.

I thought it was bunk. To me, Whole Foods problems were temporary and the second half of the year would see a rebound. On May 7, WFM reported a strong third quarter and investor's previous concerns melted away. The company beat third quarter by $0.03 and raised fiscal year 2013 guidance. Revenue rose 13.4% to $3.03 billion.

 Whole Foods even managed to revise second quarter same store sales up to 6.9% from 6.8%. Third quarter comp store results of 9.4% blew away even the most optimistic forecast. If that wasn't enough, management confirmed that fourth quarter operating margin would come in at 6.7%, about five basis points better than expected.

Basically, none of the bears' concerns materialized. It seems to me, fourth quarter guidance is too low. I think management was being intentionally conservative because the first half of the year was so difficult.  But the fourth really isn't that important right now. It's June. June is when investors start looking toward next year. When Whole Foods reports its fourth quarter and its fiscal 2013-year end in September, I think management will increase fiscal 2014 guidance.

Street estimates are woefully low. Assuming Whole Foods isn't hit by another hurricane, the 2014 estimate seems low. Take fiscal 2013. The company will probably post revenue growth of about 11.5% and just over $13 billion in revenue. Next year, analysts are projecting growth of 14.3%.  But in 2012, Whole Foods managed to grow revenue 15.7%. 

Management has learned a lot of lessons from the recession. In 2009, WFM grew just 0.98%. The company made a concerted effort to reduce prices and has worked hard to get rid of the "Whole Paycheck" moniker. Whole Foods also is in the process of adding smaller market stores.

With lower prices and more stores, the company should be able to greatly expand its footprint over the next five years. The lessons learned from the recession should start kicking in -- like new ways to expand margins and reducing expenses. I think WFM can easily reach the mid $60 by this time next year. If I'm right, investors will have plenty of profits to chew on.

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