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

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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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