WFMI Summary: A Mixed Bag

To read Jordan Kahn's preview of the Whole Foods conference call, click here.

Whole Foods (WFMI - commentary - Trade Now) reported mixed results, with EPS coming in 2 cents ahead of estimates at 20 cents, while revenue was a touch light at $1.83 billion. Comp-store sales were in-line at a drop of 0.9%, and identical-store sales decreased 2.3%.

Gross margins were solid at 34.2%, vs. 33.3% in the year-ago period. The company generated $113 million in cash from operations, $50.5 million of which resulted in free cash flow, and cash at the end of the quarter had grown to $501 million.

Management said that every region showed improvement and says it is seeing progress in California, but no color beyond that. The company saw a decline in the average basket size, as well as the average prices, but some of this could have come from the fact that food inflation slowed significantly during the quarter. The company opened three stores during the quarter (including Santa Cruz and New York City), with plans to open 16 new stores in fiscal 2010. The new stores in its pipeline will average 45,000 square feet.

The CEO made bullish comments, stating, "We believe our sales have stabilized and officially turned the corner." He also gave an update on how the current quarter has progressed, even though it is only five weeks old, which is rare. For the first five weeks of the quarter so far, total sales are up a solid 5%, while comp-store sales are up 1.6%.

Despite the strong start to the quarter, management doesn't seem to want to get aggressive with guidance. For 2010, the company expects sales growth of 5%-8% (vs. 6% consensus), comp-store sales growth of 1%-4% and identical-store sales growth of 0%-3%. Also, given the difficult comps it faces in 2010, and the fact that the company sees little near-term improvement in the economy, it expects operating margins to be in-line with the 4.1% level achieved in fiscal 2009. Last, EPS is expected to come in the range of $1.05-$1.10 vs. consensus estimates of $1.11.

This guidance is quite conservative, and in this environment it will not be greeted well by the investment community. The stock may have only seen a slight downtick on the top-line miss, if the company had raised guidance. But missing revenue estimates and lowering guidance for the full year will put this stock in the penalty box for a while, starting tonight.

---

At time of publication, Kahn had no positions in the stocks mentioned.

Jordan Kahn, CFA, is a portfolio manager with Beverly Investment Advisors, a Beverly Hills, Calif., money manager. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Kahn appreciates your feedback; click here to send him an email.