This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Whole Foods Market Inc. (WFMI) on November 20, 2007.
CEO: John Mackey
Co-President and COO: Walter Robb
Co-President and COO: A.C. Gallo
EVP and CFO: Glenda Chamberlain
EVP of Growth & Development: Jim Sud
EVP of Global Support: Lee Valkenaar
VP, IR: Cindy McCann
Key Investors Issues
- The earnings per share dropped to 24 cents from 28 cents in the prior year.
- Including Wild Oats, revenue grew 35% over previous year to $1.74 billion.
- During Q4, average transactions per week increased roughly 5.5% to 3.5 million.
- For fiscal 2008, the company projects higher-than-average sales growth of 25% to 30%.
Fourth Quarter Fiscal 2007 Financial Highlights
The sales increased 16% over the prior year to $1.6 billion.
This was driven by 18% ending square footage growth and 8.2% comparable store sales growth, which was on top of an 8.6% increase in the prior year. Identical store sales, which exclude six relocated stores and two major expansions, increased 6%.
The spread between same store sales and identical store sales increased 95 basis points in Q4 compared to Q3, primarily reflecting the inclusion of the Kensington relocation in London for the entire fourth quarter versus only three weeks in the third quarter and the two additional relocations that opened in Q4. Year-over-year, average transactions per week increased approximately 5.5% to 3.5 million, and average basket size increased approximately 2.5% to $33. Wild Oats stores will not be included in the comp base until the 53rd week following the acquisition. Average weekly sales were $628,000 per store, excluding the Wild Oats stores, in the quarter, a 7.5% increase year-over-year, translating to sales per square foot of $892.
The firm opened a record eight new stores during the quarter and a record 21 new stores during the fiscal year, a significant increase from the 13 new stores opened in fiscal year 2006.
The company relocated five stores, entered three new markets and completely revitalized its brand image in the Chicago area with the addition of four new stores. The new stores include a number of innovations that not only help the firm continue to redefine the marketplace but also create an incredible amount of excitement and positive momentum within the company.
For the quarter, the new stores averaged 57,000 square feet in size and were over six months old. They produced average weekly sales of $630,000, translating to sales per square foot of $573.
The firm’s new stores open at least one year continue to run ahead of the sales projections for the first year and are on track to reach the real estate investment hurdle rate of cumulatively positive EVA within seven years or less.
The firm is actively continuing to further differentiate its product offerings in ways that speak to its authenticity and leadership role within natural and organic products.
These initiatives include the continued expansion of private label products, which saw a 13% increase in SKU count year-over-year and currently represent 19% of the firm’s total grocery. Whole Body sales, the expanded ""Buying Local"" efforts and local product selection, Whole Trade Program, and the new Five-Step Animal Welfare Rating Program allows shoppers to easily understand how the animals from which the meat and poultry products they are buying were raised and treated.
The company has now administered over $1 million in low-interest loans under its new Local Producer Loan Program. Loan recipients include small-scale food producers and growers from 12 states. Among their products are fresh produce, body care products, and artisan foods including nut butters, ice cream, granolas and cheeses.
Excluding the Wild Oats stores, gross profit improved eight basis points.
However, this improvement was offset by a 65 basis point increase in direct store expenses, resulting in a 57 basis point decline in store contribution. For stores in the comparable store base, gross margin improved 27 basis points, and direct store expenses increased 23 basis points as a percentage of sales, resulting in a four basis point improvement in store contribution as a percentage of sales. The $2.6 million LIFO charge in Q4 compared to the $0.6 million credit in Q4 last year negatively impacted gross margin by approximately 20 basis points.
In Q4, the firm had 25 new stores that averaged six months of age compared to the prior year, when it had only 15 new stores that averaged eight months of age. For stores in the comp base, the 23 basis point increase in direct store expenses in Q4 was in line with the year-over-year increase witnessed in Q3 and was once again driven primarily by an increase in health care costs as a percentage of sales. Rising health care costs continue to be an issue for most businesses, and while the firm’s annual increases and health care cost per team member are still well below industry norms, it is seeing health care costs continuing to grow.
Including Wild Oats, G&A expenses increased to 3.9% of sales.
This is primarily due to approximately $13 million, or 6 cents per diluted share, in costs related to legal matters, integration efforts and the addition of Wild Oats'' G&A expenses. The firm continues to expect significant synergies through G&A cost reductions over time, but there will be some temporary costs associated with integrating the Wild Oats acquisition, along with the cost of fully staffing the firm’s three smallest regions, which gained the greatest number of stores relative to their existing base in the merger.
