Whole Foods' Q4 Earnings May Pique The Interest Of Turnaround Investors

Whole Foods Market, Inc. WFM's Q4 earnings update could “spark interest” from turnaround investors, with prospects of comps bottoming, cost cuts lending support to outlook and an improvement in governance, Credit Suisse’s Edward J. Kelly said in a report. He maintains an Outperform rating on the company, with a price target of $40.

Whole Foods reported its Q4 EPS at $0.28, ahead of Credit Suisse’s estimate of $0.23 and consensus expectation of $0.24. Comps declined 2.6 percent, versus expectation of a 2.0 percent decline, “with negative traffic offsetting basket growth,” analyst Kelly noted.

Apart from strong results, Whole Foods announced management changes and a dividend hike. As part of its management changes, the company eliminated its dual-CEO leadership structure and named co-founder John Mackey as the sole CEO, a Wall Street Journal article reported.

Takeaway

Whole Foods announced better-than-feared guidance, suggesting that cost cuts could support earnings “through another year of repositioning,” Kelly mentioned. Although quarter-to-date comps continue to be down 1.6 percent, comps have improved sequentially. Moreover, the recently announced management changes indicate that the board is getting more involved.

Although there are ongoing concerns, “food retail turnarounds are never clean and WFM is unlikely to be any different,” the analyst pointed out. He added, however, that Whole Foods had provided enough proof to believe that it was moving in a positive direction. Moreover, the stock’s risk/reward seems compelling, and downside is supported by “valuation, potential activist/M&A interest, and now minimal earnings risk with today's guidance.”

At last check, Whole Foods was up 3.47 percent at $29.50.