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Whole Foods Plunges: What Wall Street's Saying

Stocks in this article: WFM

NEW YORK (TheStreet) - Shares of Whole Foods Market (WFM) were plunging 7.5% to $51.27 after reporting disappointing firsts-quarter results last night that spooked investors.

The organic and specialty foods store said late Wednesday it earned a profit of $158 million, or 42 cents a share for its fiscal first quarter ending Jan. 19, compared to consensus estimates of 44 cents a share.

Revenue also came in light at $4.24 billion, up 10% from the year-earlier quarter, compared to the $4.29 billion expected by analysts, according to Thomson Reuters.

Whole Foods' miss on both profit and revenue estimates, as well as store comparable sales growth, further fueled Wall Street's thesis that Whole Foods is having a tough time against competition. It's likely that the rough winter is also hurting traffic and sales.

Same store sales grew 5.4%, last year's 7.2% growth, and below Wall Street's forecast.

On top of that the company tightened (and lowered) its 2014 outlook for sales and earnings.

TheStreet's Jim Cramer makes a great case for the stock in his Real Money article this morning, in which he said: "Ultimately, had the analysts not raised expectations with their recent pushes, this stock would barely be hit. But they did raise those expectations and now we have the damage that simply must occur."

"So, I think the stock marks time here until we know more. It remains a terrific growth company, just not as terrific as it was. So, shareholders have to pay the price, the reduced price, for the reduced earnings where it's neither here nor there short term, but deserves a better price long term simply because I believe that the quarter represents a trough decline and there won't be another cut expected," Cramer said.

Here's what other Wall Street analysts are saying about Whole Foods on Wednesday.

Scott Van Winkle, Canaccord Genuity (Buy; $63 PT)

The softer Q1 results vs. our forecast were primarily driven by a lower-than-expected operating margin. The gross margin expanded modestly, but less than we had assumed, and a lack of leverage on expenses contributed to the lower operating margin than we had assumed. While investor concerns centered around comparable store sales this quarter, the 5.4% Q1 comp came in roughly at the midpoint of most bullish and bearish expectations, and while the 5.6% quarter-to-date comp in Q2 is up 40bps off the late Q1 trough, the lower FY14 comp outlook implies relative near-term consistency vs. current trends. We had assumed a stronger start to calendar 2014 thus far. Continued price investment, as average price per item is down over 100bps sequentially in Q1, and the widely reported softer consumer environment appear to be the primary near-term challenges.

Ajay Jain, Cantor Fitzgerald (Hold: $48 PT)

The factors that contributed to Whole Foods' latest earnings miss and guidance cut were not surprising to us. We feel that competitive pricing pressures are underpinning both the slowdown in comps and lack of more meaningful gross margin expansion. While comps should typically moderate based on a more rapid rate of square footage growth, we have noted that new store sales productivity has also been on the decline over the past four quarters. While we still question whether WFM investors should pay 30x forward PE for 10% EPS growth in FY:14, the increase in square footage may provide a foundation for stronger earnings growth beginning next year.

Kelly Bania, BMO Capital Markets (Outperform: $65 PT)

Despite slightly softer comps relative to recent years, we continue to believe that WFM comps are likely to re-accelerate as: 1) the company's strategic price investments gain traction & support sales growth (typically a 9-12 month lag); 2) weather & the potential impacts of a shortened holiday play less of a factor; & 3) the impact of cannibalization stabilizes. Importantly, F2Q14 quarter-to-date comps have already accelerated to 5.6%. However, due to an Easter calendar shift, we have lowered our F2Q14 comp forecast to 5.0% (implies 5.5- 5.6% ex the calendar shift) and raised our F3Q14 comp forecast to 6.1% (also implies 5.5-5.6% excluding the shift). Our F4Q14 comp remains 6% given easier comparisons resulting in a full-year comp of 5.6% (down from 6% previously) and toward the low end of revised guidance of 5.5-6.2% (vs 5.5-7.0% prior).

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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