Whole Foods Still a Picture of Health

 | Aug 01, 2013 | 1:00 PM EDT
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After the close Wednesday, Whole Foods (WFM) beat the consensus estimate by $0.01, but investors thought the top line was slightly below estimates. Analysts had expected $3.09 billion in revenue, and the company reported just $3.06 billion. In after-hours trading, the stock fell by less than 2%.

Last month, I was bullish on Whole Foods. I thought recent efforts by management to shed the "Whole Paycheck" label were beginning to work. I believed the benefits of these changes would begin to trickle down, and that the company would get into a better competitive position. I thought Street earnings estimates were low, especially in the out years.

Now, despite the slightly less-than-expected revenue -- which I regard as "noise" -- I think my thesis is still on track.

In the quarter, Whole Foods managed to lift gross margin to 36.6%, up from 36.4% in the prior quarter -- and 61 basis points higher year over year. The company is trying to lower occupancy and cost of goods sold. Operating margin held steady at 7.5%. Revenue rose 12.1% to $3.06 billion, and same-store sales increased 7.5%, toward the high end of guidance.

The company also said it was on track to open a total of 32 stores during fiscal 2013 (ending September). Whole Foods opened six new locations during the quarter and now has 349 Markets. The company expects to open between 33 and 38 new locations next year.

Management also said it expects full-year sales growth of 12% to 14%, and comps of between 6.5% and 8%. Next year, earnings are expected to grow between 17% and 18%.

Despite the stock's high valuation, at 32x next year's profit estimates of $1.72 per share, Whole Foods continues to perform at a very high level. It should be relatively easy for the company to get to next year's revenue estimate of $14.8 billion with an additional 35 new stores. Whole Foods is just one-third of the way towards its long-term goal of 1,000 stores and that gives the stock plenty of room to run (even if it's unlikely it will ever get to 1,000 stores).

The company is able to still comp at between 6% and 8%, the eating-healthy trend is not slowing down and competitors haven't been able to make any progress so far. Given all this, Whole Foods still looks healthy for you.

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