BMO Capital Downgrades Whole Foods Market (WFM) to Market Perform

BMO Capital downgraded Whole Foods Market (NASDAQ: WFM) from Outperform to Market Perform with a price target of $40.00 (from $65.00) following Q2 results, noting the competitive environment is sverwhelming the outlook.

Analyst Kelly Bania comments, "We are downgrading WFM shares to Market Perform as we believe we have likely underestimated the nature of the accelerating competitive environment, which has resulted in a more uncertain outlook for comps (still planned ~6% long term) despite a much more bleak long-term gross margin outlook (expected to decline 25-30bps annually through fiscal 2018). Importantly, we believe a more cautious approach to WFM shares is prudent given 1) the company’s plans to continue accelerating new store growth in spite of weakening comp trends (sq. footage growth expected to increase to 11% by fiscal 2018, up from 8-9% in fiscal 2013); 2) company plans to lower operating expenses by 30-40bps annually through fiscal 2018 while still investing in technology initiatives, which in our view, risks negatively impacting the customer experience and may impede the company’s ability to continue innovating its differentiated in-store experience; 3) risk that a continuation of price investments may take longer than expected to result in a favorable customer response absent a more aggressive advertising & marketing approach; and 4) risk that continued product innovations (in areas such as Non-GMO, more transparent conventional produce standards, etc.) may not resonate with a broad enough subset of customers near term, which may be required to help reinvigorate comp growth in an increasingly competitive environment for WFM’s core natural and organic products."

The firm cut FY 2014 EPS from $1.62 to $1.54 and FY 2015 EPS from $1.90 to $1.74.

For an analyst ratings summary and ratings history on Whole Foods Market click here. For more ratings news on Whole Foods Market click here.

Shares of Whole Foods Market closed at $47.95 yesterday.

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