Whole Foods (WFM) Beats On Q4 Earnings, Hikes Dividend

After reporting in-line earnings in the third quarter, Whole Foods Market, Inc. (NASDAQ:WFM) ended fiscal 2016 with a positive earnings surprise, consequently sending shares up over 3% during after-market trading hours on Nov 2. This natural and organic foods supermarket chain posted fourth-quarter earnings of 28 cents a share that beat the Zacks Consensus Estimate of 24 cents. However, the figure declined 6.7% from 30 cents delivered in the year-ago quarter.

The company’s top line improved 1.7% year over year to $3,497 million in the quarter but came marginally below the Zacks Consensus Estimate of $3,507 million.

Whole Foods witnessed a 2.6% dip in comparable-store sales (comps) during the quarter, following an equivalent rate of decline in the preceding quarter. During the first five weeks of first-quarter fiscal 2017, comps slipped 1.6%. Analysts believe stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds with which the sector is grappling.

Whole Foods has been revamping its 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 and stave off competition.

With the launch of the “365” smaller format sister chain, Whole Foods intends to turn things around in its favor. However, analysts are concerned whether the new store model will prove to be a game changer and aid Whole Foods retain market share amid stiff competition without cannibalizing its own business.

For quite some time now, Whole Foods has been working on lowering prices, upgrading technology and containing costs. As part of this strategy, the company had reduced its headcount by a significant number. Management aims to lower its cost structure by a run rate of $300 million by the end of fiscal 2017.

During the quarter under review, adjusted EBITDA surged 38% to $298 million, while adjusted EBITDA margin expanded 220 basis points to 8.5%. Whole Foods envisions EBITDA margin of approximately 8.2% during fiscal 2017.

Store Update

Whole Foods currently operates 464 stores in the U.S., Canada and U.K. The company opened five outlets during the reported quarter, comprising two “365 by Whole Foods Market” outlet and one relocation. So far in first-quarter fiscal 2017, the company has opened nine Whole Foods Market stores, including one relocation and plans to open five more outlets, in the remaining part of the quarter.

In first-half fiscal 2017, the company plans to inaugurate up to 22 stores. It projects square footage growth of approximately 6% for fiscal 2017, representing approximately 30 new outlets, including up to six relocations and four “365” outlets.

Other Financial Details

Whole Foods ended the quarter with cash and cash equivalents of $351 million, total long-term debt and capital lease obligations of $1,051 million and shareholders’ equity of $3,224 million.

During the quarter, Whole Foods generated cash flow from operations of $352 million and incurred capital expenditures of $195 million, resulting in free cash flow of $157 million. Management now anticipates fiscal 2017 capital expenditures to be 4% of sales.

The company paid $44 million in quarterly dividends and bought back $15 million worth of shares. Further, the Board of Directors hiked the quarterly dividend to 14 cents a share from 13.5 cents. The next dividend will be paid on Jan 24, 2017 to stockholders of record as of Jan 13, 2017.

WHOLE FOODS MKT Price, Consensus and EPS Surprise

WHOLE FOODS MKT Price, Consensus and EPS Surprise | WHOLE FOODS MKT Quote

Guidance at a Glance

Whole Foods now projects sales growth of 2.5–4.5% for fiscal 2017. However, management anticipates comps to range from flat to down 2%. Management now envisions earnings per share of $1.42 or more for the quarter. The current Zacks Consensus Estimate for the quarter is pegged at $1.48, which is likely to witness a correction in the coming days.

Whole Foods currently carries a Zacks Rank #4 (Sell),

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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