Friday, November 03, 2006

Several firms commenting Whole Foods Market (NASDAQ:WFMI) following disappointing results issued last night.

- Morgan Stanley notes Whole Foods reported in-line EPS for 4Q; however, comps have decelerated, and store pre-opening expenses will be up far more than Street expectations. These two negatives prompt them to sharply reduce 2007 estimates. Given WFMI's premium valuation, they expect reactionary selling in early trading.

Firm believes WFMI shares will likely give up the valuation recovery posted since August. Looking at historical valuation bottoms, they expect shares to bottom out at 27-30x calendar 2007 P/E ($42-$47). As the bar has now been reset for this "transition year", and comp expectations have
now dropped to 6-8% (from double digits last few years) firm believes near-term EPS estimate risk has been flushed out. As they are attracted to Whole Food's long-term 20% earnings growth story, if shares get to 30x or below, firm recommends investors use the lower valuations to add to positions.

Price tgt goes to $63 from $70; F2007 EPS to $1.50 from $1.65.

- Goldman Sachs saying Whole Foods' transition to more square footage-driven top-line growth is proving much more painful than they (or the Street) had expected. Preopening costs could well double in 2007 even as comp growth moderates to a more normalized 7%-8%. As a result, EPS growth will likely remain below trend for the next two years. Firm is reducing their 2007 EPS estimate $0.12 to $1.53 and their 2008 forecast $0.16 to $1.77--they look for $2.15 in 2009. Firm believes the shares could trade below $50 tomorrow. Firm is lowering price target $7 or 11% to $59.86; would be inclined to take a hard look at the shares at or below $45.

- Bear Stearns the most negative out there, saying that multiple compression likely to follow downward earning revisions. Firm has had trouble recommending WFMI at multiples well above it 15 to 20% normalized growth. While growth retailers can trade at multiples more than double its growth rate during periods of earnings acceleration, inevitably those multiples revert back to the mean as the growth rate slows. WFMI appears to be entering that deceleration period, which likely will result in a re-assessment of the valuation premium. While WFMI may be able to re-accelerate its growth sometime during 2008, firm is not sure growth investors will be willing to wait that long, or at least not at the same premium. Applying a more conservative multiple of 20x to 25x PE to our new F2007 EPS of $1.48 implies a price range of $30 to $37, indicating significant downside still exists.

Notablecalls: Have to agree with Bear Stearns here. I dont feel like paying 30x EPS for mid-teens (and slowing) growth. The stock was trading at $50-$52 after expecting 15-20% growth for F2007 in August. With 13-17% growth expectation now, don't think the stock should trade higher than it was back then. Expecting lower price today than in the afterhours yesterday, most probably going sub-$50.

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