How Lousy Weather Could Affect Whole Foods Even More

NEW YORK (TheStreet) - Winter weather could hit Whole Foods Market (WFM) in the gut when the organic grocery chain reports first-quarter earnings on Wednesday.

Wall Street consensus numbers are calling for the Austin, Texas-based company to report earnings per share of 44 cents on revenue of $4.29 billion, up 11% from the year-earlier quarter, according to Thomson Reuters.

Investors have already been concerned over Whole Foods slowing sales growth numbers, owing it to growing competition in the organic and specialty food space from the likes of Fairway Market (FWM), Sprouts (SFM), Fresh Market (TFM), privately-held Trader Joes and even Kroger (KR).

WFM Chart WFM data by YCharts

However, shares of Whole Foods have held in over the past six months, while Fairway, Sprouts and Fresh Market have also lost significant share.

Whole Foods shares are down 0.43% over the last six months. Shares of Sprouts are down 11%, Fresh Market is down 41%, while Fairway is down 68% since Aug. 9, 2013. Fairway went public last April.

Whole Foods already lowered its expectations for 2014 sales growth in November, forecasting growth between 11% and 13% down from 12% to 14%, previously. It also said that comparable store sales for the year were expected to range between 5.5% and 7%, down from 6.5% and 8%, previously.

Multiple snowstorms of late across regions where many Whole Foods stores are located are likely to have impacted not only first-quarter earnings but second quarter as well, which could force the company to further cut its outlook.

Whole Foods announced last week that it had acquired the leases of seven Safeway (SWY) locations in Chicago that were formerly operated under the Dominick's brand. The company expects the locations to remain closed for remodeling in 2014 and re-open as new Whole Foods Market stores in 2015.

The company said last week that the transaction is expected to be "slightly dilutive" to 2014 earnings, however analysts are expecting earnings dilution to be higher than that.

That said, adding on to the growing mobile payments trend, Whole Foods announced early Tuesday that it has partnered with Square to bring Square Register and Square Stand to select Whole Foods stores around the country. Users also can use their smartphones to pay with Square Wallet, making shopping for goods that much easier, faster and convenient.

"We know shoppers are relying more and more on technology for their purchases," Whole Food's co-CEO Walter Robb said in a statement. "Square's focus on improving and simplifying commerce opens up tremendous opportunities to evolve our customer experience."

Whole Foods will report after the bell on Wednesday.

Here's what analysts are saying:

Ken Goldman, JPMorgan Chase (Overweight; $61 PT)

"Though we appreciate the difficulty in being overly optimistic on a retailer with potentially decelerating comps, we are taking a long-term approach. Over time, healthy eating will continue to be one of the better growth stories in the US, we believe, and WFM is the best pure-play way to play this trend. Competitors likely will continue to take share, but even if comps slow to ~5% on a run-rate basis, the shares have significant upside potential over the next few years, by our measure."

Kelly Bania, BMO Capital Markets, (Outperform; $68 PT)

"We forecast WFM F1Q14 EPS of $0.45 vs. consensus of $0.44, based on comps of 5.8% - suggesting stable trends following the +5.8% previously reported quarter-to- date comps for the first five weeks of the quarter (through Nov. 3) however, we believe expectations are for comps as low as 5% based on recent weakness in the stock."

"Potential negatives include a shortened holiday season (which could weigh on F1Q14 comps but not likely quarter-to-date comps) and ongoing cannibalization pressure in Boston (~20 stores as of 2012), while weather could be a wild-card and could impact quarter-to- date comps."

Bania trimmed earnings estimates for the year by 2 cents to $1.65 a share due to higher pre-opening store expenses associated with the Dominick's transition.

Karen Short, Deutsche Bank (Buy; $70 PT)

"WFM's shares are down 8.5% year-to-date vs. -5.0% for the S&P 500 and are now trading at 11x our EV/FY15E EBITDA, in-line with its 10-year average. Despite the YTD underperformance, we are cautious on the stock heading into 1Q earnings on 2/12. We believe the weather-related disruption has likely persisted into 2Q, and we expect updated guidance to reflect the dilution associated with the acquisition of seven SWY stores in Chicago (higher pre-opening expense in 4Q14 than previously expected), some potential for inventory write-downs (spoilage) associated with the storms in Toronto, and gross margins more in-line with the 34%-35% long-term target (they have been running above). Although a weaker-than-consensus comp in 1Q14 and into 2Q14 appears to be widely expected, a lower gross margin could feed the thesis that WFM's gross margin structure is 'too high.' We disagree with this thesis/fear given the sales mix which is much more heavily skewed to higher margin prepared food versus any and every competitor. In addition, our analysis indicates WFM could match [Kroger] (not necessarily a realistic comp from a competitive perspective) on up to 3,000 SKUs (reducing prices on identical SKUs by 13.4%) and still maintain their stated 34%-35% gross margin goal. We believe the negative thesis on the stock reflects a price investment well above this range."

Short lowered estimates by a penny to 43 cents a share and same-store sales comps to 4.2% from 6% in a Feb. 5 note.

Mark Wiltamuth, Jefferies (Buy; $68 PT)

"In the wake of Whole Foods' same store sales slowdown last quarter, we have fielded a number of investor questions around whether or not the organic/natural retail marketplace is getting too crowded. Are these retailers bumping into each other? Our analysis shows that the head to head competitive overlaps are not that onerous."

"Rather than focusing on potential head-to-head collisions within the natural/organic industry, we believe investors should focus on the opportunity for the natural/organic grocers to add stores as the organic trend continues to expand. We estimate that natural/organic food sales are currently only 6.5-7.0% of the broader grocery market."

--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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