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Whole Foods Market, Inc. (WFM), The Fresh Market Inc (TFM): Some Key Things To Note

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Whole Foods Market, Inc. (NASDAQ:WFM) reported vigorous earnings last week, and the results, coupled with the announcement of a 2-for-1 stock split, lifted shares more than 10% in a single trading session. The market tends to react in knee-jerk fashion to Whole Foods Market, Inc. (NASDAQ:WFM)’s earnings reports, and last week’s stock price movement was a mirror image of February’s earnings announcement, at which point the stock fell 10% in a single day.

Whole Foods Market, Inc. (NASDAQ:WFM)Aside from supporting Newton’s Third Law of Motion (for every action there is an equal and opposite reaction), the varying stock movement between the two most recent quarters shows how difficult it is for investors to decide if Whole Foods Market, Inc. (NASDAQ:WFM)’s impressive results can be sustained. Let’s look at three key takeaways from the company’s earnings that point to continued enviable performance.

Record operating margin: no big deal
One catalyst for WFM’s stock price pop last week was its operating margin, which came in at 7.5%, a company record. If we peer back one year to the comparable quarter in 2012, however, we see that the company posted operating margin of 7.12%, also a record at the time.

In some ways, the operating margin of Q2 2013 is ho-hum; it’s an improvement of roughly four-tenths of 1% over the same period last year. But a larger point will likely rise to the surface for the long-term investor: Whole Foods Market, Inc. (NASDAQ:WFM)understands that steady, incremental progress builds long-term value, and it strives to continually expand its margins. Rather than focusing on an incremental “record operating profit” then, it might be interesting to see which levers WFM is pushing to get there. Below is a table I’ve compiled from data furnished in the company’s earnings release:

12 Weeks Ended April 14, 2013 Margin 12 Weeks Ended April 8, 2012 Margin
Sales $3,027 $2,670
Cost of goods sold and occupancy costs $1,926 $1,700
Gross profit $1,101 36.37% $970 36.33%
Direct store expenses $769 $682
Store contribution profit $332 10.97% $288 10.79%
General and administrative expenses $91 3.01% $86 3.22%
Operating income before pre-opening and store closure $241 $202
Pre-opening expenses $10 $11
Relocation, store closure and lease termination costs $3 $1
Operating income $228 7.53% $190 7.12%
Investment and other income, net of interest expense $3 $2
Income before income taxes $231 $192
Provision for income taxes $89 $74
Net income $142 4.69% $118 4.42%

Source: Whole Foods quarterly earnings press release. All dollar figures are in millions.

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