Morgan Stanley's Bullish Outlook For Whole Foods Market

Morgan Stanley analyst Vincent Sinisi gave Whole Foods Market WFM an Overweight rating and provided several catalysts as justification.

Future success is widely debated as many investors fear that Whole Foods will have to make drastic across the board price cuts. Sinisi believes, however, that there will be targeted price reductions. He forecasts cuts will be on high-velocity items and on items with high customer price awareness.

Sinisi notes that by introducing “lower priced (but still high quality) alternatives into categories where largely premium, organic products had previously been available … the highest end products will keep their premium pricing and major price cuts may not be required.”

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Aside from competitive pricing, the note suggests there is even more room to leverage expenses. Whole Foods growing square footage was forecasted to be 10 to 11 percent annually versus five to eight percent over the past five years. This vamp up in growth should consequently result in more buying power.

There are also more areas to leverage expenses including: in-store labor, technology efficiencies and opportunities in prepared food.

Sinisi sees 2014 as an inflection year for Whole Foods suggesting, “the positive effect from price investments will be felt with a lag”. In the years to come we should expect Whole Food shares to live up to its rating as we see EPS growth accelerating from 16 percent in 2015 to 18+ percent in 2018.

Whole Food Market shares are trading flat Wednesday morning at $38.20.