This summary is based on the second quarter fiscal 2008 earnings call conducted by Whole Foods Markets, Inc. (WFMI) on May 13, 2008.
Management:
Chairman & CEO: John Mackey
Co-President & COO: Walter Robb
Co-President & COO: A.C. Gallo
Executive VP & CFO: Glenda Chamberlain
Executive VP Growth & Business Development: Jim Sud
Executive VP Global Support: Lee Valkenaar
VP Investor Relations: Cindy McCainn
Key Investors Issues
- EPS were 29 cents a share compared to 32 cents a share last year.
- Net income was $40 million versus $46 million a year earlier.
- Revenue rose 28% to $1.87 billion from $1.46 billion a year ago.
Second Quarter Highlights
Total sales increased 28% to $1.9 billion.
- Sales excluding Wild Oats increased 16% to $1.7 billion driven by 15% ending square footage growth and 6.7% comparable stores sales growth.
- Identical store sales which exclude four relocated stores and two major expansions increased 5.1%. The company continues to see healthy increases in both transaction count and basket size. Comparable breakout was split 50-50 with an average basket of $35 and average transactions per week of 3.7 million. Average weekly sales per store, excluding Wild Oats increased 5.7% to $671,000 translating to sales per square foot of $922.
The company is continuing to gain market share at a much faster rate than competition as evidenced by comparable store sales and sales per square foot which continue to run well above that of average US food retailers.
- The company reported a 6.7% comparable store sales after reporting an 8.9% comp for the first four weeks of the quarter.
- Weekly comparable store sales varied dramatically from week to week and it faced tougher comparisons throughout the quarter. Some regions comped below the chain average and some comped as high as low double-digits. Results varied based on many factors including differing degrees of cannibalization from new stores, competition, and changes in the economy, making it hard to attribute performance to one factor over another.
The company is continuing to make selective price investments.
- The company continues to expand private label offerings with SKU count increasing 15% year-over-year to just over 2,200. Private label sales continue to increase, currently representing 22& of total grocery and whole body sales up from 15% three years ago.
- For all stores excluding Wild Oats, gross profit increased 36 basis points to 35.5% of sales, above five-year range for the second quarter of 35.3%.
The company continues to have a market-based pricing strategy.
The company is generally priced in line on like items to many supermarket peers and at a premium when the quality or uniqueness of an item allow for that. Food inflation is running upwards of four percent in the United States and the company is impacted by arising food costs as all food retailers are. The company tends to follow the market in terms of passing on or absorbing these higher costs but retail price increases in the second quarter were below the US average. The impact of the acceleration in new store openings as well as continuing increases in health care costs as a percentage of sales in existing stores is continuing to show up in direct stores expenses, which increased 49 basis points to 26.4% of sales.
The 22 new and relocated stores averaged 57,000 square feet in size and were 7.4 months old.
- They produced average weekly sales of $661,000 translating to sales per square foot of $604. As a class new stores produced a higher store contribution as a percentage of sales than class of new stores last year, but they accounted for 10% of sales, up from seven percent last year. On the whole new and relocated stores continue to run ahead of sales projections for the first year and are on track to reach real estate investment hurdle rate of cumulatively positive EVA within seven years or less.
- For stores in the identical base which averaged 7.7 years of age and 36,000 square feet in size, gross margin improved 65 basis points and direct store expenses improved 10 basis points, resulting in a 75 basis point increase in store contribution.
- G&A expenses increased to 3.7% of sales. This was largely due to the costs of integrating and supporting the Wild Oats stores as well as front-loaded G&A expenditures to support 2008 and 2009 growth.
- Income before pre-opening and interest was down from last year as a percentage of sales due primarily to the increase in G&A offsetting strong results in identical stores. The company had a solid 87 basis point sequential improvement to 5.4% of sales in the second quarter from 4.6% in the first quarter.
The company closed four stores subsequent to the end of the quarter.
- Sales for the 58 continuing Wild Oats stores were $169 million and identical store sales growth was 5.9%.
- The continuing stores averaging 24,000 square feet in size and 9.3 years of age had average weekly sales per store of $243,000 sales per square foot of $523 and store contribution of $3.8 million, or 2.3% of sales. This was down from 3.5% in the first quarter due primarily to a 179 basis point increase in salaries and benefits as a percentage of sales which was partially offset by a 72 basis point improvement in gross margin.
- Regarding margins the company completed the conversion of all Wild Oats stores to purchasing and information systems during the second quarter but at the start of the quarter, less than 40% of the stores had been converted. These conversions were critical to managing store-level inventory, pricing and merchandising programs and should be a driver of stronger margin gains in the future. Regarding the increase in salaries and benefits, the Wild Oats team members transitioned to payroll and benefits plan on January 1, so the stores had a full-quarter impact of higher payroll and benefits load in the second quarter versus only a three-week impact in the first quarter.
