Whole Foods (WFM) Price Deflation Should Be Better Than Feared - RBC

RBC Capital analyst, William Kirk, raised his same store sales estimate on Whole Foods Market (NASDAQ: WFM) to be more in line with consensus and EPS that is two cents ahead of consensus on lower than expected food deflation. No change to Outperform rating or $37 PT.

After conducting quarterly work on Whole Foods, RBC is adjusting (slight raise) the comparable store estimate (-2.0% from -2.5%). This puts us in-line with consensus (-2.1%). The analyst is projecting EPS of $0.42, which is slightly ahead of consensus expectation of $0.40.

In 4Q'15, Total Food at Home CPI was +0.2%, down from +0.9% in 3Q’15 and +3.4% during 4Q’14 one year ago. While Produce (Fruits & Vegetables) is inflecting positively (improved to +0.8% in 4Q from -1.0% in 3Q), Protein turned deflationary in November (-0.7% in 4Q vs. +2.1% in 3Q) and Dairy deflation accelerated (-3.5% in 4Q vs. -2.2% in 3Q). The analyst believes, however, that Whole Foods is relatively insulated from the recent challenges seen in conventional dairy and beef. RBC's Consumer Panel work shows less net sales growth deceleration than consensus implies, indicating that numbers are achievable.

While it will mute earnings, they believe increased spending is the only way to combat competitive headwinds. Conventional grocers have been a major headwind to comparable store sales, but Whole Foods' valuation (~7x EV/NTM EBITDA after a rebase) is already consistent with that segment. They believe this, combined with low near-term expectations, puts a floor on WFM as the company: 1) cuts costs; 2) innovates/differentiates quicker; 3) invests in price; 4) increases marketing; 5) improves digital capabilities; 6) rolls-out tech platforms; 7) launches 365 stores; 8) moderates sqft growth; and 9) maintains culture.

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 $29.38 yesterday.

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