Grocery Stocks: 2 to Buy, 2 to Leave on the Shelf

Picky shoppers will prevail in this low-margin sector

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WholeFoods Grocery Stocks: 2 to Buy, 2 to Leave on the ShelfLeave: Whole Foods Market

Whole Foods Market (WFM) shares tanked in after-hours trading Wednesday after the upscale organic chain missed analysts’ earnings estimates on the top line — despite beating the Street on profit.

WFM’s earnings, released after the market closed Wednesday, beat the Street by a penny (32 cents a share, compared to the 31-cent consensus). The bad news: Revenue came in at only $2.98 billion, below the expected $3.04 billion. But investors weren’t so much spooked by a penny here or there — the bigger issue is what the outlook for the chain is going forward.

WFM scaled back both full-year estimates for earnings and same-store sales. The chain had previously expected earnings to come in between $1.69 and $1.72; those estimates have been lowered to between $1.65 and $1.69. Same-store sales fell from 8.5% to 5.8% year-over-year. On Wednesday, Whole Foods revised its full-year projections downward to 5.5% – 7% from earlier estimates of 6.5% – 8%.

Let’s cut to the chase: WFM’s phenomenal growth is slowing — in large part because of competition. On the organic side, smaller players like Sprouts Farmers Market (SFM) and The Fresh Market (TFM) are gaining ground. WFM also faces price competition from mainstream grocers like Kroger and Safeway — not to mention mega-retailers like WalMart and even Amazon (AMZN) that are upping the ante in the grocery business.

The sky isn’t falling, though; WFM is just beginning to feel some of the pressures traditional grocers have had to contend with for years. Add to that the platinum valuation (it trades at nearly 37 times forward earnings) and a miserly current dividend yield of 0.6%, and I’d rather shop the store, not the stock.


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/grocery-stocks-2-buy-2-leave-shelf/.

©2014 InvestorPlace Media, LLC

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