Tuesday, August 01, 2006

Color on quarter: Whole Foods (WFMI)

- Several firms are commenting on Whole Foods (NASDAQ:WFMI) after the company managed to put out the most confusing earnings release of the year. Even the analysts can't figure it out.

* Thomas Weisel Partners notes FY07 guidance was essentially in line with firm's preview; however, they believe the sales component is conservative. Firm views their FY07 sales estimate of 25%, with comps of 10%, as achievable given the acceleration in square footage growth and the additional week in FY07. It appears that Whole Foods is not anticipating any additional sales from the acceleration in square footage and/or is generally being conservative with its preliminary guidance. Because of their above-guidance FY07 sales estimate, the firm is anticipating that higher pre-opening expenses will only marginally pressure operating income growth. FY07 EPS estimate of $1.65 (19% y/y growth) is below firm's sales growth on slightly higher pre-opening expenses, higher stock-based compensation expense and lower interest income.

Given the solid 3Q06 results in a difficult consumer environment, solid guidance combined with the stock's 21% decline since May 1 (including the after market trading) versus the S&P retail index, down 10% during the same time period, the firm believes the valuation appears particularly attractive at 32x FY07 EPS estimate of $1.65 (using the after market stock price of $53.50). They believe Whole Foods is not an ordinary company. Thinks WFMI has a high multiple because, unlike nearly every other retailer, the company has more than 15 years of solid growth ahead. Maintains Outperform.

* Goldman Sachs notes Whole Foods reported solid 3Q sales and better-than-expected EPS but ambiguously tempered 2007 expectations on increased preopening costs. Firm is lowering their fiscal 2007 EPS estimate only $0.02 to $1.65, still 17% year-over-year growth. They had expected the shares, after having declined 28% year-to-date, to rally on the 3Q but instead they are down 6% in the aftermarket. They are not likely to trade much lower--the calendar 2006 P/E is 36--but a trading rally may have to wait until more clarity on preopening costs is provided on the 4Q call in November.

Factoring in the aftermarket decline, Whole Foods' shares have fallen 32% year-to-date, and now trade at 36 times calendar 2006 EPS, 15%-20% below two- and three-year historical averages--the multiple on calendar 2007 EPS is only 31. The PEG rate is also below two for the first time in over four years. Goldman is lowering their price target $3 to $67.34 largely to reflect lower near-term EPS and P/E multiples under firm's risk/reward approach. This would still represent upside of 24% from the aftermarket. At this point, investors must find a compelling entry point; this could well be below $50, a sub 30 muliple on next year. Maintains Neutral.

* JP Morgan says that fundamentally, Whole Foods still offers growth that is higher than all of the companies they cover (15-20% FY07E sales growth and likely a lower % in EPS - say roughly 15%). This affords the stock a higher multiple. In the short-term, though, comps have slowed slightly in 2H06E (9.4% for Q306, adjusted w/o Easter/July 4). See Table 4. Also, new store openings relative to a signed lease pipeline that is 86 deep, are taking longer than anticipated to physically open 3 of 4 new are expected at the end of Q406E and WFMI subtlety stepped away from its 15-20% sq. ft. growth rate target for FY07E (just set at the end of Q206). All in, there is not likely material risk to EPS forecasts, while double-digit growth is sustainable. This is more than the firm can say for most companies. The stock is simply too expensive, particularly given subtle changes to current expectations in comps and sq.Maintains Underweight.

* Citigroup is lowering their tgt to $60 from $70. Maintains Hold.

Notablecalls: NOTE TO WFMI MANAGEMENT: STOP ISSUING CONFUSING PRESS RELEASES. EVENTUALLY IT WILL KILL YOUR MKT MULTIPLE! What do I think the stock will do? I think it stays in the $50-$55 range.