Whole Foods Plunges on Earnings Miss, Guidance Cut - Analyst Blog
February 13 2014 - 10:50AM
Zacks
Shares of Whole Foods
Market, Inc. (WFM) fell 7.5% during the aftermarket
trading session yesterday, following the company’s
lower-than-expected first-quarter fiscal 2014 results and a
conservative stance on sales and earnings outlook, thereafter.
Increasing competition and aggressive pricing weighed upon the
company’s performance as more and more companies are entering into
the Organic & Natural food business, specifically The
Kroger Co. (KR).
Looking at the numbers, the
quarterly earnings came in at 42 cents a share falling short of the
Zacks Consensus Estimate by a couple of cents but rising
approximately 8% from 39 cents earned in the prior-year quarter.
This natural and organic foods supermarket chain operator sustained
its top-line growth momentum with revenue climbing 10% to $4,239
million in the quarter, but coming below Zacks’ expectation of
$4,289 million.
Effective inventory management and
improved store-level performance helped the company sustain the
downturn and achieve improved sales and profit. Whole Foods has
been revamping its pricing strategy and concentrating more on value
offerings, while maintaining healthy margins.
Whole Foods stated that
comparable-store sales rose 5.4% in the quarter but fell short of
its expectation, and shriveled 50 basis points sequentially. For
the first 3 weeks of the second quarter, comparable-store sales
increased 5.6%.
Whole Foods indicated that gross
profit rose 10% to $1,485 million, whereas gross margin grew 6
basis points to 35% as a fall in occupancy costs as a percentage of
sales was partly offset by a rise in cost of goods sold as a
percentage of sales.
Store contribution jumped about 11%
to $408 million. As a percentage of sales, store contribution
increased 3 basis points to 9.6%.
Adjusted EBITDA for the quarter
rose 8% to $394 million, while adjusted EBITDA margin contracted 20
basis points to 9.3%. Operating income jumped 9% to $255 million,
whereas operating margin shriveled 10 basis points to 6%.
Stores Update
Whole Foods currently operates 373
stores. The company opened 10 outlets during the first quarter of
fiscal 2014. So far in the second quarter, the company has opened 2
stores, and plans to open 1 more store with 20 to 25 outlets slated
to open in the second half of the fiscal year.
The company plans to open 33 to 38
stores in fiscal 2014 and 38 to 45 stores in fiscal 2015. The
company opened 32 stores in fiscal 2013, after opening 25 outlets
in fiscal 2012. Moreover, it believes that there exists room for
1,200 stores in the long run, and expects to surpass the count of
500 stores in 2017.
Other Financial
Details
Whole Foods ended the quarter with
cash and cash equivalents of $271 million, long-term capital lease
obligations of $31 million, and shareholders’ equity of $3,963
million.
During the quarter, Whole Foods
generated cash flow from operations of $337 million and incurred
capital expenditures of $219 million, resulting in a free cash flow
of $118 million. The company paid $37 million in quarterly
dividends and bought back $62 million worth of shares. The company
still has the authority to repurchase shares worth $738
million.
The company has been utilizing its
cash flow for opening new stores, paying down debt and returning
cash to shareholders through dividends and share repurchases.
Strolling Through
Guidance
Since Nov 2013, Whole Foods lowered
its outlook for the second time. Management now projects an
escalation of 11% to 12% in total sales for fiscal 2014 on the back
of an expected 5.5% to 6.2% rise in comparable-store sales.
Earlier, management had forecasted
11% to 13% sales growth buoyed by a 5.5% to 7% rise in
comparable-store sales.
Management provided EBITDA guidance
of $1.32 billion to $1.37 billion, and projected operating margin
between 6.7% and 7%. The company anticipates capital expenditures
between $600 million and $650 million.
Management now envisions earnings
in the band of $1.58 to $1.65 per share, portraying a
year-over-year jump of 7% to 12%, down from a range of $1.65 to
$1.69 forecasted earlier. Analysts polled by Zacks, estimate fiscal
2014 earnings at $1.68, which may witness a downward revision in
the coming days.
Zacks Rank for Whole
Foods
Currently, Whole Foods carries a
Zacks Rank #4 (Sell) indicating lower-than-anticipated results on
both the earnings and revenue front as well as trimmed guidance for
the second consecutive quarter.
However, there are certain other
stocks that warrant a look, such as The Hain Celestial
Group, Inc. (HAIN) and Kraft Foods Group,
Inc. (KRFT) both carrying a Zacks Rank #2 (Buy).
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