Friday, January 19, 2007

Calls of Note Part 1

Couple of interesting comments on Whole Foods (NASDAQ:WFMI) this AM:

- Banc of America is reducing their 1Q EPS $0.02 to $0.41, FY07 $0.02 to $1.42, and FY08 $0.01 to $1.71. They now believe that WFMI's gross margin will deteriorate 25 bp in the 1Q compared to 15 bp previously. The reduction in gm estimate is due to WFMI's aggressive push to lower prices, particularly on dry grocery. Every 10 bp decrease in gm equates to approximately $0.01 in EPS.

Firm's CT pricing survey shows WFMI prices are down 3.9% from May. While observing prices in one store is certainly not conclusive, the survey seems to support company comments that it would aggressively lower prices to counter its 'Whole Paycheck' image. The survey could suggest more pressure on the gm (up to 40 bp); however, some of the lower pricing is likely being offset by the new UNFI contract and growth in higher margin prepared food items.

Theyhave also lowered comp est. to 6.5% from 7.5% as industry sources have indicated that comp stores sales remained 'challenging' in 1Q. Maintains Neutral and $45 tgt.

- JP Morgan is out defending the stock saying there is a wall-of-worry with WFMI, which, they think, is healthy and frankly makes the stock enticing at 3 1/2 year trough valuations and 52-week low.
Recent issues that have weighed on the stock reflect acceptable growing-pains, manageable competition, as well as, in firm's view, cyclical retail factors with sales. The sheer math of tough comparisons exacerbates this. The equity market over-compensates for these issues, in their opinion, while market sentiment is too negative (33% Buy ratings per Bloomberg). Reiterates Overweight. Long-term investors should start building positions.

They expect that same store sales will accelerate in the second half; the bottom will be this upcoming quarter, Q107E (6 to7% estimate).

Firm likens this investment to that of their former recommendation of food distributor, Sysco (SYY/N), which also took time to unveil during 2006 (firm's EPS estimates had been below consensus there, too). In the case of Whole Foods, free cash flow trends, as well as the addressable market, are larger, so their conviction level is higher here.

Notablecalls: While JPM's comments make perfect sense, BAC's estimate will most likely prevail in the s-t. Not saying WFMI is an outright short here but I would not want to be long the common here either.

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