Friday, February 10, 2006

Whole Foods Spoils Expectations

Shares of Whole Foods (WFMI) nosedived more than 10% Thursday after the upscale grocer of natural/organic foods reported earnings that missed Wall Street estimates.

1Q EPS rose 26% to $58.3 million, or 40 cents a share, compared with last year's income of $46.2 million, or 34 cents a share. Total sales jumped 22% to $1.67 billion while same store comps ran up over 13%

While we like how the grocer recently hiked up its dividend, this is a stock we told you to get out of last month:

For a while, Whole Foods was en fuego -- it wasn't competing on price, but on quality. It's name became synonomous with the health craze boom....but supermarketing is a low margin business...even with Whole Food's largest competitior Wild Oats (OATS) losing money hand over fist, we think investors would be better off passing on WFMI.

Whole Foods went from 0 to 60 mph and now it's about to hit a lightpole; WFMI's lofty valuation cannot and will not hold up. To add to our valuation concerns, both Safeway (SWY) and Kroger (KR) recently announced that they're going organic. Lastly, let's not forget Walmart (WMT), whose nauseating ubiquity and cost advantage will most certainly throw some competitive speedbumps in Whole Foods' path.

We're sticking with our underweight rating on Whole Foods.

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