Market Overview

Whole Foods Falls on Lower Than Expected Q1 Sales; Weak Forecast

Whole Foods (NASDAQ: WFM), which has been a favored Wall Street growth story since the financial crisis, saw its shares plunge on Thursday after the company reported first quarter sales that missed analysts' consensus and issued a cautious outlook. The stock, which is up better than 121 percent over the last five years, was down around 10 percent in afternoon trade on Thursday.

Investors were reacting to expectations for falling profit margins at the high-end, organic grocery chain. The company guided for lower profit margins over the next three quarters as it tries to expand its appeal across a wider demographic.

Whole Foods has been able to excel while other grocery chains have been crippled by depressed margins and slowing sales because of a consumer base that skews towards affluence and health-conscious living. This has allowed the grocer to charge a premium for fresh, organic food.

While the company certainly does not want to turn its back on its core demographic market, Whole Foods is trying to position itself to appeal to a more cost-conscious segment consumers. In the latest quarter, however, customer traffic slowed, suggesting that Whole Foods is struggling to broaden its appeal.

"We know that one of the keys to broadening our appeal and growing our sales over the longer term is to improve our relative value positioning," co-Chief Executive Walter Robb said on a conference call. "As such, we are not forecasting an improvement in gross margin this year."

Whole Foods said that it does not expect to produce the same level of earnings per share growth over the remainder of the fiscal year as it did in the first-quarter. The company, however, backed its previous guidance for fiscal 2013 calling for EPS of $2.83-2.87 on revenue growth of 12-14 percent. This compares to current consensus of $2.90 on revenue of $13.13 billion for the full-year.

In the first quarter, Whole Foods reported net income of $146 million or $0.78 per share, compared to $118 million or $0.65 per share, in last year's corresponding period. This beat analysts' consensus estimates of $0.77 by a penny.

Sales in the quarter were up 13.7 percent to $3.86 billion from $3.39 billion in last year's first-quarter. This came up slightly light compared to Wall Street consensus revenue estimates of $3.87 billion.

Comparable store sales in the period were up 7.2 percent while gross margins rose 22 basis points to 35.0 percent. Whole Foods said that it opened 10 new stores in the first-quarter and that it currently has 35 stores totaling 13.1 million square feet of retail space.

In the wake of the report, Credit Suisse analysts modestly lowered their EPS estimates for the next three years. The analysts reiterated their Neutral rating on the shares and $90 price target, but wrote that "WFM seems to have transitioned away from being a beat and raise story."

They added, "while the company's underlying fundamentals remain strong and its long-term outlook is positive, we struggle with valuation, especially against the backdrop of increased economic uncertainty and slowing momentum."

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