Will You Be Buying What Whole Foods Sells in Its Earnings?
NEW YORK (TheStreet) -- Specialty grocery store Whole Foods (WFM) , known for selling organic and natural products, will report fiscal first-quarter 2015 results Wednesday after market close. More consumers are eating better and healthier, which should benefit Whole Foods but the retailer is also facing stiff competition.
Whole Foods management is fighting this competition by targeting secondary markets with smaller stores, which the company says will help it increase traffic and make its stores more productive. This concept has worked for both Chipotle Mexican Grill (CMG) - Get Report and Starbucks (SBUX) - Get Report . But it's also risky.
Whole Foods, Austin, Texas, may cannibalize its existing stores and/or invest in locations where cheaper alternatives like Kroger (KR) - Get Report or a Wal-Mart (WMT) - Get Report exist. Wal-Mart, through its Wild Oats organic product offering, has also embraced natural and organic foods and in some cases its Wild Oats brand costs 25% less than comparable products at Whole Foods.
Whole Foods shares aren't cheap either.
The stock is trading at a trailing price-to-earnings ratio of 34, which is 14 points higher than the average P/E of companies in the S&P 500 (SPX) .
This fact is not lost on analysts, who rate Whole Foods stock a consensus hold. The stock's average 12-month price target of $48 implies a potential decline of 9.33% from Monday's closing price of $52.94.
On Wednesday, for the quarter ending in December, analysts will be looking for earnings of 45 cents per share on revenue of $4.67 billion, representing year-over-year increases of 7% and 10%, respectively. For the full year, analysts expect Whole Foods to earnings $1.72 per share, up 10% year over year, while full-year revenue is projected to climb 10.7% year over year to $15.71 billion.
These numbers don't project dominance from a stock that is trading at a premium multiple to the market.
For instance, Kroger, which has also begun to sell organic and natural foods, is growing earnings and revenue at 18% and 10% year over year, respectively. Both figures outperform Whole Foods. Yet, Kroger stock trades at a P/E that is 12 points lower than Whole Foods.
What's more, Kroger has a consensus buy rating and is projected to grow earnings at an annual rate of 11.5% over the next five years -- just like Whole Foods. So Whole Foods shareholders must question what they are paying this premium for?
Seeing Whole Foods stock soar almost 40% in the last six months, investors should be smart and lock in their profits now and wait to hear what management says Wednesday about the outlook for 2015.
TheStreet Ratings team rates WHOLE FOODS MARKET INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate WHOLE FOODS MARKET INC (WFM) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."
You can view the full analysis from the report here: WFM Ratings Report
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
