Whole Foods Market, Inc. (WFMI)
Q1 2010 Earnings Call Transcript
February 16, 2010, 5:00 p.m. ET

Executives

John P. Mackey – Chief Executive Officer
A.C. Gallo – Co-President and Chief Operating officer
Walter Robb – Co-President and Chief Operating Officer
Glenda J. Chamberlain – Executive Vice President and Chief Financial Officer
Jim P. Sud – Executive Vice President of Growth and Development
Cindy McCann – Vice President of Investor Relations

Analysts

Charles Grom – J.P. Morgan
Scott Mushkin - Jefferies & Co.
Edward Kelly – Credit Suisse
Karen Short – BMO Capital Markets
Mark Wiltamuth – Morgan Stanley
Meredith Adler – Barclays Capital
Neil Currie – UBS
Edward Aaron – RBC Capital Markets

Presentation

Operator

Good day. Welcome to today’s program. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. It is now my pleasure to turn the conference over to Mr. John Mackey. Please go ahead.

John P. Mackey

Good afternoon. Joining me today are Walter Robb and AC Gallo, Co-Presidents and Chief Operating Officers, Glenda Chamberlain, Executive Vice President and Chief Financial Officer, Jim Sud, Executive Vice President of Growth and Development and Cindy McCann, Vice President of Investor Relations.

First, the legalities. The discussion we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and these statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. These risks and uncertainties include those outlined in today’s call as well as any other risks identified from time to time in the company’s public statements and reports filed with the SEC.

I hope you’ve had a chance to read our press release which is available on our website along with the scripted portion of this call. We are very pleased with our first quarter results. On a 7% increase in sales we produced, a 116 basis point improvement in operating margin to 3.9% of sales, a 26% increase in EBITDA to $186 million, a 62% increase in diluted earnings per share to $0.32, a 14% increase in cash flow from operations to $161 million and free cash flow of $79 million.

Average weekly sales per store for all stores increased approximately 4% to $572,000 translating to sales per square foot of approximately $800. We are seeing much better results in our new stores, due in part to the overall rebound in our sales, but also reflecting a positive impact of smaller less expensive stores. Compared to the class of 21 new stores in the first quarter of last year, our class of 17 new stores this year was approximately 9% smaller in size averaging 47,000 square feet.

The smaller new stores produced 27% higher average weekly sales per store of $650,000 or a 37% increase in sales per square foot to approximately $707 and produced a 418 basis point higher store contribution as a percentage of sales, due primarily to lower occupancy costs and direct store expenses as a percentage of sales.

We are also seeing significant reductions in certain areas of our development costs, which are driving healthy improvements in EBITDA as well. The percent of sales from new stores declined year-over-year and sequentially to 6% of total sales in the quarter. This combined with our overall performance resulted in less of a drag on overall results.

As we hold our square footage growth relatively steady over the next few years, we expect the average age of our store base to increase, which should help drive improved store contribution as a percentage of sales. If and when we accelerate our square footage growth, the growth paradox will likely resurface once again.

Our comparable store and identical store sales trends improved for the third quarter in a row and both are now back to positive territory. Comparable store sales increased 3.5%, identical store sales increased 2.5% and for the first time since 2005, our comparable and identical store sales on a two-year stacked basis improved sequentially.

The recovery we have seen is fairly broad based, with every region in almost every department producing positive identical store sales growth and sequential improvements. We are particularly pleased with the double digit comps we are generating at the former Wild Oats stores and at our Kensington store in London. The improvement in comparable and identical store sales continues be driven by increases in transaction count.

Our average basket size was down only slightly year-over-year, a significant improvement from the 2% decrease we saw in Q4. The improvement in basket size trends was driven by an increase in the number of items per transaction with the average price per item down slightly.

In general, we are seeing customers celebrate holidays and special events, such as the recent Super Bowl in a bigger way than they did in 2009. We are also seeing a shift in buying patterns around bad weather. Last year customers didn’t stock up as they had historically, this year not only are customers stocking up, they’re restocking afterward as well.