Monday, December 18, 2006

Calls of Note Part 2

- JP Morgan continues to be positive on Whole Foods (NASDAQ:WFMI) saying the market over-compensates for a recent comp slowdown (currently 6-8%) and under-appreciates the likelihood of 20-30% secular top line growth and 15-20%+ EPS growth beyond 2007E.

Acceleration in 2H07E/2008E is likely while EPS estimates already materially reflect an "investment" year in 2007E. The market also over-compensates for trends that are related to the rest of retail. Management was frank with its comments about competition and cannibalization, yet too conservative with respect to the sheer math of tough comparisons and trends they've seen out of other retailers. This is reminiscent of 2003, which turned out to be a good buying opportunity for the stock. An extreme case of the recent comp slowdown - such as to 2-3% is not on the horizon. In fact, JPM estimates that 6% will be the bottom. WFMI reported a 6.8% comp for the 5 weeks in October on top of 13.6% last year.

Over the long-run, the market under-estimates the likelihood of 20%+ square footage growth - particularly in 2008E and thereafter. The new stores entering the comp base should be at least 5-6% of the comp base in 07E, 7-8% in 08E and 11-12% in 09E providing support for total company comps going forward. High single-digit sustainable comps (say 8%) with 20%+ square footage growth exceeds the top-line organic growth rates of all of firm's stocks, and supports an otherwise high valuation (27.3x CY2008E ). At 1.22x current sales and 27.3x 2008E EPS, WFMI is attractive. JPM reiterates Overweight rating.

Notablecalls: Nothing really new here. Investors either take the leap of faith or they don't. Expect to see moderate buy interest following the note. Think that soon enough WFMI will be a $50 stock again.

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