Whole Foods Fails to Escape Guidance Trap, Valuation Still Sky High

Whole Foods reported quarterly sales up 10% to a record $4.2 billion, with comparable store sales increasing 5.4% on top of a 7.2% increase a year ago. Operating income was $255 million, or 6.0% of sales, and its diluted earnings per share rose by 7% to $0.42. Thomson Reuters was calling for estimates of $4.29 billion in sales and $0.44 in earnings per share.

The upscale and organic grocer generated $118 million in free cash flow and ended the quarter with total cash and cash equivalents of about $1.5 billion. For the quarter, gross profit increased six basis points to 35.0% of sales.

Guidance is everything here. Whole Foods now expects sales growth of 11% to 12%, comparable store sales growth of 5.5% to 6.2%, and diluted earnings per share of $1.58 to $1.65 for all of 2014. The consensus estimate is $1.68 per share in earnings. We would point out that the 11% to 12% total sales growth translates to a range of $14.33 billion to $14.47 billion in 2014 revenues – shy of the $14.51 billion expected. Lower guidance is not going to impress new investors here.

The company’s outlook statement said,

“The Company is lowering the top end of its sales growth ranges based on year-to-date trends. Additionally, the lower end of the Company’s sales and earnings guidance reflects a year-over-year decrease in gross margin for the remainder of the year, while the high end assumes gross margin is relatively flat, reflecting the Company’s ongoing value strategy and a tough 36.2% year-ago comparison.”

Guidance may be soft this time around, but the company is still targeting serious growth ahead. Whole Foods opened 10 stores in the first quarter and has opened two stores so far in the second quarter. It further expects to open one additional store in the second quarter, with another 20 to 25 stores expected in the second half of the year. Here is the long-term goal – Whole Foods currently has 373 stores totaling approximately 14.2 million square feet, but it considers 1,200 stores to be a reasonable indication of its market opportunity in the United States over the long term.

Whole Foods shares closed down 0.75% at $55.46 on Wednesday ahead of earnings, and the after-hours had shares down over 5.5% at $52.30. This stock has traded in a range of $40.70 to $65.59 over the last year. Despite having sold off handily from the highs, Whole Foods Still trades at 34-times expected 2014 earnings based upon its close.

We would expect that the consensus analyst target price of $62 might come with some slight downside to it after Wednesday. We would also ask investors to remember to evaluate Whole Foods more like a luxury retailer more than just as a traditional grocery store, otherwise the valuations may baffle you.