RBC Upgrades Whole Foods Market Post-Q2 Results

In a report published Thursday, RBC Capital Markets analyst William Kirk upgraded shares of Whole Foods Market, Inc. (NASDAQ: WFM) to Outperform from Sector Perform with a price target lowered to $51 from a previous $54 despite a "disappointing" comparable store sales print in the second quarter.

Whole Foods reported on Wednesday currency-neutral comparable store sales growth of 3.6 percent while currency-neutral comparable sales growth for the five weeks ended May 3 rose 2.8 percent. The disappointing print isn't phasing Kirk who stated that Whole Foods has the initiatives to improve performance at existing stores and comps can now accelerate.

"Yesterday, Whole Foods announced a new store concept that would offer more select and consistent assortment at a better value proposition," Kirk wrote. He added that "we believe this concept will better allow Whole Foods to reach demographics and locations that have natural/organic awareness, but currently lack accessibility."

Kirk pointed out Del Frisco's Restaurant Group Inc (NASDAQ: DFRG) launch of its Grille concept as a comparable event. Grille is cheaper with an average ticket price of $50 versus $100, and offers smaller (6,000 to 8,000 square feet versus 11,000 to 24,000 square feet) locations with limited cannibalization. The analyst speculated that Whole Food's new concept ("cheaper and smaller") can begin addressing population densities of 150 people per square mile versus a current addressable density of approximately 200 people per square mile.

Bottom line, Kirk argued that Whole Foods' new concept announcement better positions the company to gain share in the specialty natural and organic segment.