Whole Foods Stumbles On Lower Outlook Amid Stiffer Competition
By: Martin Blanc
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Whole Foods Market, Inc. (WFM) yesterday announced earnings results for the third quarter of its fiscal year 2014 after the closing bell. The organic supermarket chain said its per-share earnings (EPS) rose 8% from the same quarter last year to $0.41, beating the Street’s estimates of $0.39. Revenues for the quarter came in at $3.4 billion, marginally higher than analysts’ estimates of $3.39 billion, and represented a 10.4% YoY increase. Despite the positive performance this quarter, however, shares of Whole Foods are down as much as 8% in after-hours trading, due to the lowered guidance estimates given by the company.

Despite beating analysts’ estimates in terms of overall revenue and earnings, one key figure which disappointed this quarter was the comparable-store sales, which grew only 3.9% in the latest quarter, below analysts’ expectations of a 4.6% increase. The shortfall was attributed largely to the timing of the Easter holiday this year, which fell in the company’s third fiscal quarter. Nonetheless, it only contributed a minor increase of 60 basis points in comparable-store sales.

The average price per item grew by approximately 2% in the quarter, which was lower than the rise on costs, which signals that Whole Foods was not passing on those higher costs to customers. But it also indicates increased competition from retail and supermarket  giants such as Wal-Mart Stores (WMT) and Kroger Co. (KR), which are now moving to offer expanded organic sections in their stores and focusing on health food items.

The company’s CEO, Walter Robb, was however adamant that the increase in comparable-store sales was healthy considering the overall economy and other factors: “Our 3.9% comp [comparable-store sales] increase reflects continued headwinds from our value efforts, cannibalization, competition, and the economy. Our comp increase was driven by approximately equal increases in transaction count and basket size.”

Weak Guidance

Whole Foods yesterday lowered the high-end of its EPS estimates for FY14 from an earlier range of $1.52-1.56 to $1.52-1.54. Analysts had expected an EPS of $1.53 for this fiscal year.

The company also lowered its expectations for sales growth from 10.5-11% to 9.6-9.9%, missing even the lower range of the previous estimates. The retailer also truncated full-year same-store sales estimates from a range of 5-5.5% to 4.1-4.4%. And considering that comparative-store sales have already failed to match analysts’ estimates for the quarter, this is not a positive sign for investors.

For the fourth quarter, the company’s estimates also fell short of the consensus projection. Whole Foods expects an EPS in the range of $0.31-0.33, which is lower than analysts’ consensus estimate of $0.34. Similarly, the consensus estimate for fourth-quarter sales growth is 11.6% YoY, whereas the company expects sales growth in the range of 8.5-9.5%.

The stock responded accordingly. Whole Foods shares are down 4.6% today in the first hour of trading on the Nasdaq.

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