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Whole Foods Beats Estimates; Analyst Sees ‘Significant Advantage’

Whole Foods Market beat earnings and revenue expectationson Wednesday due in part to better buying, but investors should not expect similar margin increases in subsequent quarters, one analyst told CNBC.

A Whole Foods Market in Dallas.
Donna Mcwilliam
A Whole Foods Market in Dallas.

“The key reason why the stock’s up today, beside the beat and the guidance raise, is their gross profit margins are up 70 basis points, and half of that was from better buying,” said Charles Grom, a senior analyst at Deutsche Bank.

The company attributed its gross profit increase to improvements in occupancy costs and cost of goods sold as a percent of sales.

Grom has a $100 price target on the stock, which hit a 52-week high on Thursday before closing at $90.69.

He added that the company is not necessarily squeezing its suppliers more to generate its higher margins.

“Given that they’re the largest organic procurer in the country, that they’re at a significant advantage,” Grom said. “The fact that costs are beginning to decline — that allows them to keep their retails flat and essentially benefit from the drop in sourcing costs.”

Comparable store sales at locations open for more than 15 years rose 7.1 percent, while sales at stores open for less than two years jumped more than 21 percent.

“To me, that’s the real key story here. This company is opening up stores more disciplined than they ever have in the past, and I think that’s a sign that Walter Robb (the company’s co-chief executive officer) really knows how he’s running the company at this point in time, relative to five or six years ago,” he added.

Despite sometimes being referred to as “Whole Paycheck,” the company remains committed to keeping prices low — a strategy that will allow its same-store sales to continue to improve over time, Grom said.

“They continue to try to keep prices in line, and they continue to try to keep prices low and one of the things they spoke about last night on their call was how even though the margins were up very good in the quarter — up over 36 percent — they made a point several times in the call to let investors know that that’s not going to be the norm," he added.

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Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

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Follow Katie Little on Twitter @katie_little.