WFM Market Research & Analysis Report
Updated Apr 9, 2014

Growth and Balance Sheet

The company reported a net income of $158 million, or 42 cents diluted earnings per share, for the first quarter of fiscal year 2014 ending January 19. That's up from a net income of $146 million, or 39 cents diluted earnings per share for the same quarter last year. Revenues for the first quarter were record $4,239 million, up from $3,856 million for the same quarter last year. Comparable stores sales increased 5.4% over the same quarter last year and average weekly sales were $719,000 or sales per gross square foot of $983. The company opened 10 stores in the first quarter and has opened 2 so far in the second quarter and has planned one more for the second quarter and 20 to 25 new stores for the second half of the fiscal year. The company currently has 373 operating stores. Gross profit margin for the quarter was 35.03% compared to 34.96% for the same quarter last year, due to lower occupancy cost as percentage of sales. Operating profit margin for the quarter was 6.02% compared to 6.09% for the same quarter last year, due to increase in G&A expense reflecting investment in technology. Net cash provided by operating activities for the first quarter of fiscal year 2014 was $337 million, compared to $303 million for the same period last year. Free cash flow for the quarter totaled $118 million, down from $148 million for the same quarter last year. WFM forecasted second quarter EPS of fiscal year 2014 are expected to be from 35 cents to 42 cents, compared to actual EPS of 38 cents for the second quarter of fiscal year 2013. The financial strength indicators of the company are all at very satisfactory levels. The current ratio of 1.78 is better than the industry average of 1.05. Moreover, the quick ratio of 1.39 is again standing better than the industry average of 0.88. The long term debt to equity ratio of 0.78 is by far better than the industry average of 40.80. In terms of efficiency, the asset turnover ratio of 2.46 is better than the industry average of 1.39; also, the inventory turnover ratio of 19.96 is ahead than the industry average of 18.02; and the ROE of 15.00% is falling short to the industry average of 17.3%.

Valuation

WFM PE stands at 34.25 above the industry average of 26.62, and above the stock market average represented by the S&P 500 average of 17.69. The company is currently trading above maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 25.42x to 45.37x trailing 12-month earnings. WFM's current Price/Sales of 1.41 is above the average of its industry of 0.44. WFM’s head to head comparison to its main competitors shows that the company has the highest gross margin, which is also much higher than the industry average. Moreover, the operating margin is also higher than the competitors’ achieved margins, and well above the industry average. The quarterly revenue growth of the company is average when compared to the selected peers, and it is in line with the industry average. WFM trades at middle range P/E ratio in comparison to its main competitors, and it is the same case with the P/S ratio. WFM’s twelve trailing months EBITDA is $1.26 billion which is higher than the industry average EBITDA of $957.50 million. The stock is currently trading below its intrinsic value of $71.70, this suggests that the stock is currently undervalued at these levels. The beta of 0.72 implies lower volatility of the stock with respect to the S&P 500. WFM has shown very favorable earnings consistency over the last five years. Moreover, the company earnings have grown by 29.18% over the last five years. Also, the current quarter earnings in comparison to the same quarter last year have grown by 7.69%. The company Total Debt to Equity of 0.81 is below the required maximum, and it is also lower than the industry average of 65.9. WFM’s current price levels are above the maximum level, 21.65% below the 52 week high of $65.59, and the technical analysis give a neutral to negative view of the stock. The majority of the analyst ratings are hold and buy. WFM has a dividend payout ratio of 27% and trailing annual dividend yield of 0.80%.

About WFM

Whole Foods Market, Inc. (Whole Foods Market), is a retailer of natural and organic foods. The Company operates in one segment: natural and organic foods supermarkets. As of September 29, 2013, it operated 362 stores in the United States, Canada, and the United Kingdom. The Company's stores average 38,000 square feet in size and are supported by its Austin headquarters, regional offices, distribution centers, bakehouse facilities, commissary kitchens, seafood-processing facilities, meat and produce procurement centers, and a specialty coffee and tea procurement and roasting operation. In February 2014, Whole Foods Market Inc acquired leases from Safeway Inc for seven locations formerly operated as Dominick's stores.

Competitor Comparison

Whole Foods Market, Inc. (NasdaqGS: WFM) N.V.

Highlights

Whole Foods Market, Inc. operates as a retailer of natural and organic foods. The stock closed yesterday’s trading session at $51.38. In the past year, the stock has hit a 52-week low of $41.84 and 52-week high of $65.59. The intrinsic value of the stock is above the current price. WFM has a market cap of $19.11 billion and is part of the Services sector.

• Broad product offering      
• Focused growth strategy
• Strong focus on right sizing of the stores

• Overdependence on US market

WFM Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. WFM's 52 week high is $65.58, current price is $51.38, is 21.65% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.  The company has a P/E ratio of 34.25 the average industry P/E ratio is 26.62 and is above the S&P 500 P/E ratio of 17.69.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.55% of WFM stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

WFM is trading in the range of $49.53 - $55.91 in the past 30 days. The stock has been showing support around the level of $50 and resistance in the $65 range. The stock is trading below the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 44.44. As can be seen from the graph on page 1, the stock gapped up in May past the resistance and then all-time high of $50. After that the strong upward trend continued in the next months and reached the new all-time high of $65.59 where it faced resistance. After the October peak the stock has been in a downfall ever since. Just recently it fall back to $50 a significant resistance level in the past, now turned support. Has the stock found support there, it seems so. However there is a descending triangle forming, which is a continuation patter. If the stock falls below the $50 level, and closes below it for few days, it would a signal that the bears are still not over with the stock. On the other hand, if the winds go the other way, it might be a sign that the downfall is over. Our indicators give neutral to negative view of WFM.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 11 Buy, 6 Outperform, and 13 Hold.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. WFM’s annual EPS for the last 5 years were 0.425, 0.715, 0.97, 1.26 and 1.47 this type of earnings action is very favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry.  WFM’s Total Debt/Equity of 0.81 is below the required maximum, and it is well below the industry average of 65.9.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. WFM’s EPS growth for this quarter relative to the same quarter a year earlier is 7.69%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. WFM’s annual earnings growth rate over the past five years is 29.18%, above our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.