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Hiccup shouldn't slow Whole Foods
Earnings and sales fall short, but the company announces a bag-full of shareholder friendly initiatives. With the shares falling, it's time for smart investors to buy.
By Robert Walberg
One reason Whole Foods Market (WFMI, news, msgs) is so wildly successful is that it knows how to treat its customers. Service is prompt, courteous and efficient. One reason the stock has been so wildly successful is that the company knows how to treat its shareholders.
Before announcing its fourth quarter earnings, the company revealed plans to increase its quarterly dividend by 20%, to thirty cents per share; pay a special dividend of $4 per share; and buy back up to $200 million of its stock over the next four years. Management also announced a 2-for-1 stock split. Quite a nice menu for shareholders.
News on the sales and earnings front wasnt as cheery, however, as earnings (after one-time charges and using a historical tax rate of 40%) of 52 cents a share fell one cent shy of street estimates, and sales of $1.12 billion were narrowly below the consensus forecast of $1.13 billion. Comparable-store sales growth of 13.4% was down from 15.2% growth posted last quarter, but still ahead of management estimates. The stock market wasn't pleased after Whole Foods reported those results after Wednesday's close, knocking 4% off the stock in post-close trading.
$12 billion by 2010
Buoyed by the strength in its same-store sales and by modest growth in total store space, management raised its sales guidance for fiscal year 2006 from 18% to 21% and upped its 2010 sales goal to $12 billion from $10 billion. On top of the promising sales forecasts, the company also trumpeted the fact that it generated a hefty $77 million in cash flow from operations.
Basically, Whole Foods continues to hit on all cylinders, even if it did narrowly miss sales and earnings targets. Considering that the stock trades at a whopping 60 times the previous 12 months earnings, the knee-jerk reaction might be to focus on the bad news and dump the stock.
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As investors get over any disappointment over the narrow sales miss, though, the stock should come roaring back. Over the past two years, Whole Foods has seen its stock trade lower after an earnings report on only two occasions. In each instance, the stock has recaptured its losses and moved to higher ground within three months. Within six months, the stock was up considerably.
With valuations as high as they are now, investors shouldnt expect Whole Foods to post the kind of returns that it has over the past 52-weeks. But as long as management remains committed to providing customers with a unique shopping experience, and shareholders with increased value, I see no reason to bet against the stock.
Paying up groceries, and the stock
Just as Starbucks (SBUX, news, msgs) changed the coffee buying experience, Whole Foods is redefining grocery shopping. Consumers are more than happy to pay a few extra dollars to get a wide selection of healthier meat, poultry and dairy options. The fresh--foods section is also much more appealing than at more traditional grocery chains run by Albertsons Inc. (ABS, news, msgs), Kroger (KR, news, msgs) and Safeway (SWY, news, msgs). And Whole Foods' service blows away that of its competitors.
For growth investors, the good news is that Whole Foods is just getting started. The company ended fiscal year 2005 with 179 stores in the United States, Canada and the United Kingdom. By contrast Kroger, Albertsons and Safeway operate approximately 2,532, 2,487 and 1,800 stores respectively. Obviously, Whole Foods is still a baby, with years and years of double digit growth ahead of it.
In fact, the company continues to add to its store development pipeline and recently signed nine new store leases representing approximately 549,000 square feet. Assuming these new stores experience similar success, top-line growth at Whole Foods is almost certain to remain in the 20% area for the foreseeable future.
So even though the company trades at considerable premiums to the rest of the industry on a price-to-earnings and price-to-sales basis, theres nobody else in the industry coming close to its growth rates. Consequently, any near-term price dip associated with todays earnings should be seen as a long-term buying opportunity for growth-oriented investors.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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