This summary is based on the second quarter fiscal 2007 earnings call conducted by Whole Foods Market, Inc. (WFMI: chart) on May 9, 2007.
Co-President and Chief Operating Officer: A.C. Gallo
Executive Vice President and Chief Financial Officer: Glenda Chamberlain
Executive Vice President of Growth and Business Development: Jim Sud
Executive Vice President of Global Support: Lee Valkenaar
Vice President of Investor Relations: Cindy McCann
Key Investors Issues
- Net income fell to $46 million or 32 cents a share from $51.8 million or 36 cents a year ago.
- Revenue rose to $1.46 billion from $1.31 billion.
- Opening and relocation costs totaled $15.6 million, or 7 cents a share, compared with $7.3 million or 3 cents, a year ago.
Second Quarter Highlights
- For the quarter gross profit decreased 18 basis points to 35.2% of sales. Year-to-date gross profit of 34.7% of sales was in line with the company’s five-year fiscal year average.
- Excluding Hurricane Katrina credits in the prior year direct store expenses for the second quarter increased 49 basis points to 25.9% of sales, higher than the five-year average and range.
- For same stores direct store expenses increased 8 basis points to 25.5% of sales due primarily to higher healthcare and workers compensation cost as a percentage of sales which were partially offset by leverage in wages.
Materially pre-opening and relocation cost resulting primarily from acceleration and leases tendered and square footage opening this year and next year is having a significant negative impact on diluted earnings per share growth.
For the quarter the pre-opening and relocation costs were $15.6 million or 7 cents per share, more than double the cost in the prior year of $7.3 million or 3 cents per share.
- For the quarter operating cash flow was 47 cents per share. The decrease year-over-year was due primarily to timing differences related to taxes paid during the quarter.
- In the second quarter the company opened a record 6 new stores in Fairfax, Virginia; Chicago, Illinois; Birmingham, Alabama; Manhattan, New York; Cleveland, Ohio; and Portland, Maine, ending the quarter with 194 stores and approximately 6.9 million square feet in operation.
Bowery and Houston store located on Manhattan’s lower east side is the company’s fourth and largest New York City location of 71,000 square feet and is open with sales above projections.
The two stores include three eateries, one of the nation’s only genuine fromageries featuring 80 cheeses, homemade pies baked fresh throughout the day, as well as foods from a variety of top tier local artisans and growers.
Innovations include many French and Japanese inspired bouquets in the Floral department, an expanded selection of homemade sausages and a huge selection of meats and seafood smoked in house. Also located on the second floor is the culinary center, which will offer dozens of hands-on classes and demonstrations with some of the best New York and Whole Foods market chefs, artisans and growers.
So far in the third quarter Whole Foods Market has opened one store in El Segundo, California, closed one Fresh & Wild Store, London, that will be relocated at the 80,000 square foot Whole Foods Market location opening early June and the company expects to open one store in Sonoma, California.
As of today, the company has opened 15 new stores over the last 12 months. On April 24, 2007, the company has announced that its extended the expiration date for its tender offer to purchase outstanding shares of Wild Oats markets through May 22, 2007.
The company is working diligently with the SEC regarding the Hart-Scott-Rodino review. Although the SEC has not yet decided whether to challenge Wild Oats transaction, members of the SEC staff have voiced concerns regarding the perceived anti-competitive effects resulting from the proposed tender offer and merger. Any further updates regarding Wild Oats transaction will be made through public filing.
The guidance for fiscal year 2007 excludes any impact from the proposed merger as it is not yet closed.
The company is maintaining its guidance of 13%, 17% sales growth, 6% to 8% comparable sales growth and 18 to 20 new stores openings resulting in 16% ending square footage growth. The company now expects operating income for pre-opening and relocation costs as a percentage of sales to be in line with the company’s performance year-to-date.
The management believes that Whole Foods Market is executing at a high level, continuing to produce higher sales costs and sales per square foot than the competitors.
Given the strong historical sales growth, record store development of pipeline and acceleration of store openings, the management believes the company is well-positioned to achieve its goal of $12 billion in sales in the year 2010. Over the longer term, however, the sales potential for Whole Foods Market is believed to be much greater than $12 billion as the market continues to grow and as the company continues to improve.
Whole Foods Market is constantly experimenting, innovating and evolving and has a demonstrated track record of competing, executing and delivering strong results. Based on the 19% sales growth last year, the company is was pleased to learn that it moved up 38 spots to number 411 on the Fortune 500 list of the largest public companies in the United States.
