Whole Foods Markets (WFM)

[DewDiligence]

Re: Effect of corporate-tax reform on WFM’s EPS

WFM’s GAAP tax rate in FY2016 was $320M/$507M = 38.7%. During FY4Q16, there were 319M diluted shares outstanding (on a weighted-average basis).

On 11/2/16, WFM issued FY2017 EPS guidance of at least $1.42 (excluding any share buybacks), which equates to net income of at least $453M based on FY4Q16 figure of 319M diluted shares.

Assuming WFM’s EPS guidance for FY2017 was based on the 38.7% GAAP tax rate in FY2016, the FY2017 guidance for (at least) $453M in net income corresponds to (at least) $453M/(0.613) = $739M of pre-tax income.

Now, let’s examine what happens in FY2017 if the US federal corporate income-tax rate is reduced to 15%. Adding in state income taxes, WFM’s overall tax rate drops from 38.7% to 18.7%. $739M of pre-tax income taxed at 18.7% yields $138M of taxes, which leaves $601M of FY2017 net income and FY2017 EPS of (at least) $601/319M = $1.88.

In short, the reduction in the US corporate tax rate increases the guidance for WFM’s FY2017 EPS from (at least) $1.42 to (at least) $1.88, a change of +33%.

At the current share price of ~$30.50, the P/E ratio based on FY2017 EPS of $1.88 is 16.2x, which is much lower than the P/E ratio of 21.5 based on WFM’s actual FY2017 guidance.

Bottom line: Corporate-tax reform could make WFM a much cheaper stock than many investors probably think.

Qualification: For simplicity, I have not modeled other possible changes to the US corporate tax code, such as the loss of deductibility on interest expense.