Deutsche Bank Maintains Thesis on Whole Foods Citing Innovation
In a report published Monday, Deutsche Bank analyst Karen Short analyzed the Bull versus Bear thesis on Whole Foods Market (NASDAQ: WFM). The analyst maintained her Bullish view on the company, noting that Whole Foods is a "true innovator."
Short noted key issues by bears including the company's loss in market share and the growing competition in the natural/organic space. The analyst added that bears are often citing that Whole Food's margin structure is at risk, the margins will need to decrease below 34-35 percent, and the high probability that EPS will take a major hit once gross margins correct.
Deutsche Bank responded to these issues noting that the company's gross margins are not unsustainably high as Whole Foods is investing in price to improve its "relative price and value position." The analyst continued, specifying that the company continued to identify areas for cost savings which will assist in expanding operating margins.
Short also reported that slowing comps may be more related to new store growth and price investment cannibalization over increased competition. Deutsche Bank commented, "We expect the impact of cannibalization to abate in the coming quarters as WFM cycles 11 cannibalistic new store openings (incl. 6 Johnnie's). Furthermore, WFM's comp base will be getting younger over the next several quarters, which should provide a comp tailwind."
The analyst emphasized Whole Food's innovative programs including Engine 2 Diet, Health Starts Her, and the In-Store Health Eating Specialists. The report further examined the higher quality produce offering and labeled products. Short noted that the proprietary 365 Brand offers a "compelling value" in addition to the "Everyday Deal" specials and promotions.
Deutsche Bank has a Buy rating on Whole Foods with a $60.00 price target.
Shares of Whole Foods Market closed at $55.04 on Friday.
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