$WFM Fiscal Q4 Earnings Preview

by Enis November 4, 2014 12:15 pm • Commentary

Event:  WFM reports its fiscal Q4 earnings tomorrow, Nov 5th, after the close.  The options market is implying a 6% move for the event, which is below both the 4 quarter average of about 9.75% and the 8 quarter average of about 8%.

Sentiment:  Wall Street analysts are mixed on Whole Foods, with 14 buys, 19 holds, and 3 sells.  The average 12 month price target is $44.  The stock is down 31% year-to-date, and has been below its 200 day moving average since February.  Short interest is at 10% of the float, near a 3 year high:

WFM short interest, courtesy of Bloomberg
WFM short interest, courtesy of Bloomberg

Options Open Interest:  Open interest favors calls over puts by a ratio of about 1.4 to 1.  The past month’s average options volume has seen more calls trade as well, by a ratio of 1.45 to 1.  There are several strikes with over 10k of total open interest – the Nov22nd 40 calls, the Jan15 42.75 calls, the Jan15 44 calls, the Jan15 54 calls, and the Jan16 40 calls.  

Price Action/Technicals:  The $40 level is an important long-term inflection point for WFM, as seen on the weekly chart:

[caption id="attachment_47656" align="alignnone" width="600"]WFM weekly chart, courtesy of Bloomberg WFM weekly chart, courtesy of Bloomberg[/caption]

The stock topped out right around $40 nearly 9 years ago, , and then held that level as support after breaking above it in 2012.  The stock has struggled to remain above $40 in the past 6 months:

[caption id="attachment_47657" align="alignnone" width="600"]WFM daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg WFM daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg[/caption]

$43 is obvious resistance on the upside, which coincides with the falling 200 day moving average.  On the downside, the low from July and mid-October is around $36.

Volatility:  Implied volatility in WFM is more subdued ahead of this week’s earnings report compared to the last two reports:

[caption id="attachment_47659" align="alignnone" width="600"]30 day implied volatility in WFM, courtesy of Bloomberg 30 day implied volatility in WFM, courtesy of Bloomberg[/caption]

A big reason is that realized volatility has been quite low in the 3 months in the stock, even when broader market volatility picked up in early October.  In other words, options traders do not expect a break of the recent range in WFM shares.

Our View:  WFM’s P/E multiple, which we had viewed as very elevated near 40 over the past few years, has finally come down to 25, a level more in line with other retailing peers:

[caption id="attachment_47660" align="alignnone" width="600"]WFM 12 month trailing P/E, courtesy of Bloomberg WFM 12 month trailing P/E, courtesy of Bloomberg[/caption]

However, at 25x, with EPS growth estimated at 10% per year over the next 2 years, WFM is hardly cheap.  The real question for the stock, though, is whether it can get back on the growth track and convince investors that its best days are still ahead of it.

For this quarter, the bar is relatively low, with 0.32 EPS expected, flat year-over-year, and $3.26 billion in sales, up 9% year-over-year.  Given the low bar, it’d be quite a surprise to see a big miss, but guidance for next quarter will be critical, as it’s the most important of the year from a seasonal perspective.