'CRYPTIC' GROWTH FORECAST SINKS WHOLE FOODS' STOCK

ELLIOT ZWIEBACH and MARK HAMSTRA

AUSTIN, Texas - Whole Foods Market here reported yet another quarter of double-digit sales and earnings growth last week, but investors were not impressed.

Shares in the fast-growing natural food chain plunged 12% to a new 52-week low after what analysts said was confusing guidance about its sales growth and what could be a slowdown in new-store expansion.

"They were a little cryptic with their guidance, and that created uncertainty, and uncertainty in this current market environment is dealt with swiftly," said Scott Van Winkle, an analyst with Canaccord Adams, Boston. "The guidance for revenue growth for next year of 15%-20% was below expectations. Just a quarter ago, the company had said it expected to see square footage growth at the high end of the 15%-20% range. So if you are growing square footage at 15%-20%, and you are growing revenues at 15%-20%, where's your comp?"

The chain regularly had been reporting double-digit gains in quarterly comparable-store sales, and analysts said investors may have taken the company's guidance to indicate that it expected a slowdown in that pace of growth. Van Winkle said he believes the chain might be facing some "reduced visibility" into the number of new stores it will open, and so has become more conservative in its outlook.

"Rather than going out and saying, 'We're going to open 20 stores,' and not being able to deliver 20, they are going to say, 'Look, we have 10 ready; we'll announce the rest as they come,'" he said.

Steve Chick, an analyst with J.P. Morgan Securities, New York, also said new-store openings "are taking longer than we anticipated."

"The stock is simply too expensive in our estimates, particularly given subtle changes to current expectations in comps and square footage," he said in a report.

For the 12-week quarter that ended July 2, Whole Foods reported that net income rose 33.5% to $53.9 million, with sales climbing 18.1% to $1.3 billion and comparable-store sales up 9.9% - off a 15.2% increase in the year-ago quarter. For the 40-week period, net income jumped 28.9% to $164 million, with sales up 20.4% to $4.3 billion and comps up 11.7%.

Analysts said the numbers were strong, but the market has been cautious about Whole Foods' stock, which trades based its projected growth.

"It looks like a well-executed quarter with very reasonable comparable-store and total sales increases, but high-multiple names like Whole Foods are notoriously spicy meatballs for investors," Robert Campagnino, an analyst with Prudential Equity Group, New York, wrote in a report.

In a conference call with analysts, Whole Foods said it intends to accelerate its efforts over the next 12-24 months to differentiate its stores and the customer experience from the competition.

"The competition will be chasing our shadow pretty soon," said John Mackey, president and chief executive officer.

He did not outline any specific initiatives the company is contemplating, though he mentioned some will relate to devoting more resources to private label and bolstering the buying team.

The company may also do more price advertising, Walter Robb, co-president and chief operating officer, added. "We've done it in three or four selected markets this year, and we've seen good results," he said.

Whole Foods also said it planned to submit bids last week to Albertsons LLC for some of the shuttered Albertsons stores on the block.

Mackey said he does not believe competitors who add natural and organic foods are hurting Whole Foods, "because it has created a gateway experience, and [those efforts] broaden our appeal beyond the core natural and organic food customer. We are a leader, not a follower, and we walk our talk when it comes to quality standards and our commitment to the environment."

He also said Whole Foods intends to strengthen its local sourcing efforts by experimenting with local farmers markets at some of its standalone stores across the U.S., Canada and the United Kingdom.

3RD-QUARTER RESULTS

Qtr Ended: 7/2/06; 7/3/05

Sales: $1.3 billion; $1.1 billion

Change; 18.1%

Comp-store; 9.9%

Net Income: $53.9 million; $40.4 million

Change; 33.5%

Inc/Share; 37 cents; 29 cents

40 Weeks: 2006; 2005

Sales: $4.3 billion; $3.6 billion

Change; 20.4%

Comp-store; 11.7%

Net Income: $164.0 million; $127.3 million

Change; 28.9%

Inc/Share: $1.13; 93 cents