Whole Foods: More Indigestion Ahead

 | Nov 07, 2013 | 9:00 AM EST
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Whole Foods (WFM) reported a decent fourth quarter after the close, but lowered fiscal 2014 guidance. The stock declined almost 10% after hours.

I was bullish on the shares of Whole Foods on Aug. 1. If you recall, investors were disappointed in the third quarter and the stock sold off the entire month of August. But after a month in the doghouse, the stock bounced back and rallied 27%. 

Whole Foods reported fourth-quarter earnings of $0.32 per share on revenue of $2.98 billion. Revenue rose 2.3%, year-over-year. Analysts were looking for about 2% more revenue. The difference was probably because July 4 fell into the third quarter this year. The company said that its sales rose 5.9% at locations open at least a year. That was slower than the 7.5% gain in the third quarter and lower than the 8.5% gain from a year ago. During the quarter, the company opened 12 new stores.

Management guided fiscal 2014 sales up 11 to 13%, down from 12% to14%. The company also said it sees comparable store sales of 5.5%-7%, below previous expectations of 6.5% to 8%. Whole Foods expects to open between 33 and 38 new stores and relocate another two or three.

Investors freaked out when they saw the more moderate comp store numbers on lower gross margins. But if you've been paying attention, management has been working hard all year to lower gross margins to drive traffic. They are trying to shed the "Whole Paycheck" moniker by lowering prices. The company has begun to add less expensive brands and to offer more discounts.

Management sounded cautious on the call, but the board of directors was confident enough in the company's future to raise the dividend. They also added an additional $500 million to its existing $300 million stock buyback plan.

I would find Whole Foods' shares more attractive in the mid-$40s. I think the company still has a lot of restructuring ahead and it needs to bring down its gross margin further to build traffic. Supermarkets like Safeway (SWY) and Kroger (KR) are taking market share as Americans hold their wallets tighter.

For investors holding the shares of Whole Foods, I think there is more indigestion ahead.

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