Lowering Our Outlook for Whole Foods
We are decreasing our fair value estimate for Whole Foods as we now expect the grocery-store chain will no longer be able to expand its profit margin over time, writes Morningstar’s Ken Perkins.
We are placing our $40 fair value estimate for narrow-moat
However, management now expects sales to increase only 3%-5% next year, with flat comps. We do believe the grocery market will reach a new equilibrium, and we foresee Whole Foods increasing same-store sales around 3% annually over the long term once its share losses moderate; however, 3% comp growth isn't enough to drive much margin expansion, and we are less convinced that Whole Foods can drive a reacceleration in same-store sales growth.
In our research, we have noted that sustained traffic/volume declines despite lower prices could be an indicator of a negative moat trend; for the first time, Whole Foods' same-store transactions declined 0.8% in the fourth quarter, despite price cuts. One quarter doesn't make a trend, though, so we intend to keep a very close eye on traffic trends over the next year rather than brashly assuming that the market hasn't already moved to a new equilibrium, after which Whole Foods' sales should grow in line with the industry.
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