The Whole Truth About Whole Foods

Today, Whole Foods (WFM) rallied over 5% after the upscale grocer announced record sales and earnings for most recent quarter. After struggling through much of 2014, has “Whole Paycheck,” made a comeback? Is it time to buy WFM? Let’s find out.

This earnings report represented a major change in tone from previous announcements. During 2014, it appeared that Whole Foods was racing to the bottom as management repeatedly slashed its full-year earnings outlook. As you can see from the chart here, WFM plunged after its Q2 2014 report last May and continued to flounder through the end of October. It was only after its Q4 2014 report in early November that WFM started to recover, and today’s announcement helped push the stock back above its 52-week high.

Now, let’s look at the numbers. For the most recent quarter, Whole Foods posted 10.1% annual sales growth, 4.5% same-store sales growth and 10% earnings growth. Whole Foods also posted adjusted earnings of $0.46 per share, which beat the consensus estimate by a penny (2.2%). Those are solid enough numbers, but when it comes to upscale grocery chains, investors can do better:

When comparing Whole Foods with three of its top competitors—Kroger Co. (KR), Sprouts Farmers Market Inc. (SFM) and Fresh Market Inc. (TFM)—one company comes out on top. SFM, TFM and WFM are all C-rated holds.

Kroger is in a league of its own. With 2,631 supermarkets across 34 states, Kroger is known for being one of the nation’s largest retail grocery chains. But what many don’t know is that the Kroger umbrella also covers nearly 1,200 gas stations, 800 convenience stores, over 320 jewelry stores (yes, jewelry!) and 37 food processing facilities.

And of course I wouldn’t be recommending Kroger unless it had an excellent earnings potential. Last quarter, net earnings jumped 21% to $362 million, or $0.73 per share. Excluding special items, adjusted earnings were $0.69 per share, topping the $0.61 consensus EPS estimate by 13.1%. Over the same period, total sales advanced 11% to $24.99 billion, also beating the $24.83 billion consensus revenue estimate. Identical supermarket sales, which gauges performance at locations open at least five quarters, grew 4.7%. Excluding fuel centers, identical supermarket sales improved 5.6%.

And Kroger Co. is in great shape for its next earnings announcement, which is scheduled for March 5. The consensus estimate is for $0.89 EPS on $25.18 billion in revenue. This translates to 14.1% earnings growth and 8.4% sales growth. And given Kroger’s track record of surpassing analysts’ expectations, this is a conservative estimate.

As icing on the cake, Kroger Co. also pays a modest 1.0% dividend and is in the middle of a $500 million share repurchase program. KR is an A-rated Strong Buy.

Sincerely,

Louis Navellier

Louis Navellier

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