Wall Street Sours on Whole Foods

The shares plunged Friday after the food retailer warned of slower sales growth ahead

Whole Foods Market's (WFMI) stock price plummeted more than 20.7% on Nov.3, after the natural and organic food retailer warned of slowing growth in spite of its recent profits and store openings.

The Austin (Tex.)-based retailer, which has been battling tough competitors like Trader Joe's, said late Nov. 2 that it expects sales growth between 6% and 8% for fiscal year 2007 (which ends in September) at stores open more than a year. The company had rocketed ahead so far with three consecutive years of double-digit comparable stores sales growth.

"After producing such strong growth over the last three years, we believe fiscal 2007 will be a transition year for us," said John Mackey, chairman, chief executive officer, and co-founder of Whole Foods, in a press release.

Investors dumped the stock, which shed 20.7% to $47.66 per share on the Nasdaq after the news, as analysts slashed their forecasts. Standard & Poor's Equity Research downgraded the stock to hold from buy, for example. After reducing its 2007 earnings estimate, S&P's twelve month target price fell $17 to $48 per share. UBS Financial slashed fiscal year 2007 and 2008 estimates, putting its $67 target price under review and maintaining a neutral opinion on the stock.

But Whole Foods' earnings are stronger so far. The company had net income of $39.8 million, or 28 cents earnings per share, during the 12 weeks ended Sept. 24, 2006. During the comparable period of 2005, the company had $9.1 million, or 6 cents per share, after taking a one-time charge.

Mackey is still keeping his long-term goal of $12 billion in sales in fiscal 2010. He says his company will benefit from store openings that will drive strong sales in the "not-so-distant future."

Whole Foods has opened two stores so far in the first quarter of fiscal year 2007, including in West Orange, N.J., and Tigard, Ore. It also plans to open a store in Seattle next week and to relocate a store in Dallas in early December. Mackey expects to open a total 18 to 20 new stores this fiscal year, including five relocations. During fiscal year 2006 Whole Foods had opened 13 stores in areas such as Los Altos, Calif.; Redmond, Wash.; and Milwaukee, only two of which were relocations.

The costs for all this will range between $68 million to $74 million during fiscal year 2007, compared to $37 million in 2006. Mackey says the increase is happening because of an "anticipated acceleration" in ended leases.

Whole Foods' board also declared a dividend of 18 cents per share payable on Jan. 22, 2007, up from the previous 15-cent quarterly dividend. This is the fourth increase since the company declared its first cash dividend in November, 2003.

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