Long Arugula: Whole Foods Is Killing It, As High-End Shoppers Are Out In Force


Last night, Whole Foods (WFMI) delivered one of the most hopeful signals we’ve seen yet for the comeback of the consumer by beating earnings and lifting guidance.

Here’s a quick take from JPMorgan retail analyst Charles Grom:

1Q wrap. WFMI reported 1Q10 EPS of $0.32, which was $0.04 ahead of our estimate and $0.06 above Street consensus. However, this included a $0.04 store closure reserve adjustment, which the company had previously not disclosed: as such, the pro forma EPS was closer to $0.36 – a big beat, in our view. On the top line, total sales increased 7.0% to $2.6 billion supported by the aforementioned +2.5% ID and NSP of 71.6% (vs. TTM avg. of 66.7%). On GPM, WFMI was able to drive 84 bps of total expansion (ex. 14 bps of LIFO benefit) on better purchasing and distribution, shrink improvement, and better inventory management. Moving down the P&L, on direct store expenses (DSE; as a % of sales) Whole Foods did experience 12 bps of deleverage driven by an increase in healthcare costs. On an absolute dollar basis, DSE increased 7.7% year over year – slightly above total sales growth. Turning to G&A, the company experienced 5 bps of improvement as a result of centralized cost control efforts (ex. FTC legal costs). Finally, pre-opening and relocation expenses delevered by 26 basis points, but we point out that WFMI would have enjoyed 12 bps of improvement if not for a $10.1 million store closure reserve adjustment.

Raising our 2010 EPS outlook to $1.30. We’re raising our FY10 EPS estimate by $0.18 from $1.12 to $1.30 (ahead of company guidance of $1.20-1.25), flowing through yesterday’s beat and assuming ongoing top-line and margin improvement. Our new estimate is predicated on ID sales of positive 4.1% in FY10 (guidance of 2.9-4.9%) vs. negative 4.2% in FY09. Turning to operating margin, we are now modelling 67 basis point of expansion (ex. LIFO, charges) to 4.6%, above guidance of 4.3-4.5% (which looks conservative, in our view provided the aforementioned opportunities to reduce expenses). On GPM we are modelling 58 bps of expansion to 34.8% of sales (ex. LIFO). Turning to total SG&A we are modelling 7 basis points of improvement (2 bps improvement bps on direct store expenses, 3 bps delverage on G&A, and 8 bps improvement on pre-opening and relocation). Finally, our 2Q10-4Q10 estimates are upwardly revised to $0.36, $0.36, $0.25 from $0.28, $0.33, and $0.24, respectively, and our December 2010 price target is raised to $39 from $32.

Grom also notes that margins are well below peak, and that a long-term cost cutting program remains in place.

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