Wedbush: Whole Foods Market Showed Better-Than-Expected Margins

Kurt Frederick of Wedbush reiterated on Thursday a Neutral rating and $40 price target on

following the company's fourth-quarter results that were released after Wednesday's trading session. Whole Foods margin contract of 30 basis points to 35.4 percent was higher than the 35.0 percent Frederick expected. In addition, a lower share count helped drive earnings per share upside of $0.03 to $0.35. Frederick notes that the company is off to a "solid start" in fiscal 2015. Specifically, a national advertising campaign, home deliver, store remodels and produce price investment in key markets all indicate the company's guidance of sales growth of 9 percent on low- to mid-single-digit same-store sales remains on track. In fact, the analyst adds that a planned remodel of 70 percent of stores over 10 years old could help boost same-store sales. However, a Neutral rating is justified as the company's expected price investments and competitive pressures may offset accelerating square footage growth. “Given Whole Foods' leading position in the natural and organic category, accelerating store growth and strong balance sheet, partially offset by increased competition, we believe shares of WFM should trade at an approximate 10% premium to the peer group,” Frederick concluded. “Thus, using an EV/ 2015E EBITDA ratio of 9.5x, we generate our $40 PT.”