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Market Update

Competition Is Heating Up in Whole Foods’ Niche

The high-end grocer may be facing more competition, but the sell-off could present investors with a buying opportunity, says Morningstar’s Ken Perkins.

Mentioned:

 Whole Foods Market (WFM) reported second-quarter results that were below our expectations, and in its second-quarter earnings release, the firm provided a very detailed five-year outlook for store/square footage growth, sales growth, operating profit margin, EBITDA margin, earnings per share, and return on invested capital.

Most notably, management see the potential for 6% annual same-store sales growth, gross margins in line with historical margins (about 35%), operating margin expanding to 7.0%, and return on invested capital averaging in the mid-teens. There are many puts and takes to management’s near-term guidance and long-term vision (which we delve into below), but overall, our $45 fair value estimate is unlikely to change by a significant amount because modestly lower free cash flow forecasts will be mostly offset by the positive impact of the time value of money. After falling from the mid-$50 range, shares trade in three-star territory and could present investors with a buying opportunity if the sell-off continues.

Ken Perkins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.