Goldman is cutting its estimates and lowering its target to $26 for Whole Foods (WFMI). Absent a strategic shift that Goldman hopes would include a pullback in square footage growth, store-level cost reductions, and a lower dividend, the bank just doesn’t see many positives for the organic food retailer:
We believe the risk ahead of WFMI’s 3Q results on Tuesday, August 5, is more heavily skewed to the downside, despite the shares’ ~30% drop since 2Q earnings in May. This would be a function of another quarter of ID sales deceleration (to 4.5%) and earnings pressure ($0.31, down 12% yoy), but also recognition of subpar core profit growth in 2009.
While we think the current P/E multiple embeds some degree of this increasingly probable scenario, our new below-consensus 2009 EPS estimate of $1.45 might prove optimistic, especially if consumer spending continues to weaken and IDs moderate further.
Regarding the court ruling that subjects Whole Foods’ one-year-old acquisition of Wild Oats to further antitrust scrunity, Goldman sees it as only a minor risk, but still a “negative overhang”. The bank sees a complete unravelling of the deal as “unlikely”.
Goldman reiterates NEUTRAL on Whole Foods (WFMI), cuts target to $26.
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