Oppenheimer Expecting 'Another Sluggish Quarter' Out Of Whole Foods

In a report published Monday, Oppenheimer analyst Rupesh Parikh previewed Whole Foods Market, Inc. WFM's second quarter results (scheduled for Wednesday), noting that the company is likely to report "another sluggish quarter" but shares are still "appropriate" for long-term investors.

According to Parikh's estimate, Whole Foods is expected to report a second quarter comp of around 2.5 percent, falling short of the 2.9 percent the Street is estimating. The analyst is also expecting Whole Foods to earn $0.45 in the quarter (matching the Street's estimate) due to "more moderate" gross margin declines and/or expense controls.

The analyst also noted that store checks has given him a sense of a less aggressive promotional and price investment environment versus the same time a year ago. This, along with a much easier margin comparison from last year's LIFO charge could "help drive upside" in margins.

Looking past the second quarter, Parikh noted that about two-thirds of Whole Foods' business is in the perishables category, with bakery and prepared foods representing roughly 20 percent of sales. The company could likely see growth from this segment as restaurant sales (food services and drinking places) have increased in the high single digits in recent months which bodes well for its "extensive" prepared foods offerings.

Finally, Parikh argued that over the long-term, Whole Foods has the potential to navigate an increasingly competitive environment despite near-term issues including limited details on the company's new store concept and existing initiatives "yet to take hold."

Shares remain Outperform rated with a price target lowered to $48 from a previous $50 to reflect "increased risks" with the company's new strategy and "what appears to be a step up" in the competitive environment for natural and organic products.