Things You Need To Know Before Whole Foods' (WFM) Q2 Earnings

Of late, grocery chains have been going through a rough patch. Analysts believe that the industry-wide weakness is hurting the margins of supermarket chains. Stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds plaguing these providers of daily need items.

The Zacks categorized Retail-Supermarkets industry has increased 5% in the past six months, and has underperformed both the S&P 500 and the Dow Jones Industrial Average that gained 10.8% and 13%, respectively. In fact, it also underperformed the broader Retail-Wholesale sector’s increase of 13.4%.

Per the latest Earnings Preview report as of May 5, Retail-Wholesale sector is likely to witness earnings decline of 2.2% but revenue growth of 3.3%. Let’s take a closer look as to how Whole Foods Market, Inc. (NASDAQ:WFM) is expected to contribute to the sector’s performance.

Despite prevailing headwinds, Whole Foods has been quite resilient and increased roughly 22% in the said time frame, clearly outpacing the industry and the broader market. In fact, the stock has moved up just ahead of its second-quarter fiscal 2017 earnings release, which is slated to be announced on May 10. In the past five days, the stock has jumped approximately 1.8%.

Which Way are Estimates Treading?

In the last quarter, Whole Foods reported in-line earnings. In the trailing four quarters, the company outperformed the Zacks Consensus Estimate by an average of 6%. Let’s look at earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company.

The current Zacks Consensus Estimate for the quarter under review has been stable in the last 30 days, and is currently pegged at 37 cents, down from 44 cents reported in the year-ago quarter. Analysts polled by Zacks expect revenues of $3,726 million compared with $3,696 million in the prior-year period. Well the obvious question that comes to mind, will Whole Foods be able to post positive earnings surprise in the quarter to be reported.

Strategic Initiatives Raise Optimism

Whole Foods has been revamping pricing strategy and concentrating on value offerings in view of heightened competition as more companies are entering and expanding their presence in the Organic & Natural food business. These players include The Kroger Co. (NYSE:KR) , Sprouts Farmers Market, Inc. (NASDAQ:SFM) and Wal-Mart Stores Inc. (NYSE:WMT) .

We note that this Austin, TX-based company is leaving no stone unturned to reach its target customers, whether through national marketing and branding campaigns, home delivery services, store expansion or the adoption of a digital route such as the launch of digital coupon within its Whole Foods Market mobile app. Moreover, it introduced a new “uniquely-branded store concept”, "365 by Whole Foods Market". The new chain is equipped with innovative technology, compelling products at value prices and a modern look to target millennials as well as stave off competition.

Concerns

Whole Foods has been grappling with waning comparable-store sales (comps) performance since the past six quarters. Comps declined 2.4% in the first quarter of fiscal 2017. Comps had fallen 2.6%, 2.6%, 3% and 1.8% in the fourth, third, second and first quarters fiscal 2016, respectively, and 0.2% in the final quarter fiscal 2015. During the first three weeks of the second quarter of fiscal 2017, comps dropped 3.2%.

Although Whole Foods reported in-line earnings during the first quarter of fiscal 2017, it failed to contain the decline in the bottom line. We observed that after falling 14% and 6.7% in the third and fourth quarter of fiscal 2016, earnings per share plunged 15.2% in the first quarter of fiscal 2017. The company’s top-line improved but lagged the Zacks Consensus Estimate for the second straight quarter.

Whole Foods Market, Inc. Price, Consensus and EPS Surprise

Whole Foods Market, Inc. Price, Consensus and EPS Surprise | Whole Foods Market, Inc. Quote

What the Zacks Model Unveils?

Well our proven model does not conclusively show that Whole Foods is likely to beat earnings estimates this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here.

Whole Foods has an Earnings ESP of +2.70% as the Most Accurate estimate stands at 38 cents, while the Zacks Consensus Estimate is pegged at 37 cents. However, the company carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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