Lowering Our Outlook for Whole Foods

We are placing our $40 fair value estimate for narrow-moat

However, management now expects sales to increase only 3%-5% next year, with flat comps. We do believe the grocery market will reach a new equilibrium, and we foresee Whole Foods increasing same-store sales around 3% annually over the long term once its share losses moderate; however, 3% comp growth isn't enough to drive much margin expansion, and we are less convinced that Whole Foods can drive a reacceleration in same-store sales growth.

In our research, we have noted that sustained traffic/volume declines despite lower prices could be an indicator of a negative moat trend; for the first time, Whole Foods' same-store transactions declined 0.8% in the fourth quarter, despite price cuts. One quarter doesn't make a trend, though, so we intend to keep a very close eye on traffic trends over the next year rather than brashly assuming that the market hasn't already moved to a new equilibrium, after which Whole Foods' sales should grow in line with the industry.

Morningstar Premium Members gain exclusive access to our full Whole Foods report, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.