Thursday, February 18, 2010

Whole Foods We Now Love Austin for 2 Reasons; Upgrade to Overweight

We are upgrading Whole Foods to Overweight from Neutral and
increasing our price target to $39 from $32. As we highlighted in our long
trading call yesterday, “Whole Foods: Recipe for a Squeeze, Buyers
Ahead of 1Q Print,” we expected a combination of positive ID sales
(+2.5%) and store contribution margin expansion (73 bps of expansion, ex.
LIFO) to lead to a clean EPS beat ($0.06 ahead of consensus) but were
concerned about the sustainability of emerging sales trends longer term.
With the strong ID sales and margin results, we are now more confident
that WFMI's emerging sales growth trends have been validated and feel an
OW rating is merited. Moreover, in line with our new Bull’s-Eye
investment strategy that we’ve adopted for 2010 (see note out today,
“Broadlines Retailing: Barbell Out, Bull's-Eye In; 2010 Handbook &
4Q Look”), WFMI is demonstrating early signs of two of the three
attributes we’re looking for, specifically: identifiable sales catalysts (via
trade-up and value focus) and strong top-line momentum (with traffic the
key driver). In addition, the stock already fully embodies the third
attribute, out-of-favor opportunities (with a ~10% short interest ratio).
While WFMI will likely open higher tomorrow, we think management has
left room for additional EPS upside – hence our upgrade.

full report here
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