Whole Foods Market, Inc. (WFMI)
Q2 2009 Earnings Call Transcript
May 13, 2009 5:00 p.m. ET

Executives

John P. Mackey – Chairman & Chief Executive Officer
A. C. Gallo – Co-President & Chief Operating Officer
Walter Robb – Co-President and Chief Operating Officer
Glenda J. Chamberlain - Executive Vice President & Chief Financial Officer

Analysts

Grant John – RBC Capital Markets
Robert Summers - Pali Capital, Inc.
Simeon Gutman - Canaccord Adams
John Heinbockel – Goldman Sachs
Charles Grom - JPMorgan
Scott Mushkin - Jefferies & Co.
Karen Short - FBR Capital Markets
Andrew Wolf – BB&T Capital Markets
Neil Currie – UBS
Meredith Adler – Barclays Capital
Alvin – Citigroup

Presentation

Operator

Good day. All sites are now online in a listen-only mode. Later during the conference you will have an opportunity to ask questions during our Q&A segment. If you would like to queue up for a question at any time, please press the “*” and “1” on your touchtone keypad. Please note this call is being recorded. At this time, I would like to turn the call over to our moderator, Mr. John Mackey. Go ahead, sir.

John P. Mackey

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

First for the legalities. The following constitutes a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this press release are forward-looking statements that involve risks and uncertainties, which could cause our actual results to differ materially from those described in the forward-looking statements. These risks include, but are not limited to, general business conditions, the successful integration of acquired businesses into our operations, changes in overall economic conditions that impact consumer spending, including fuel prices and housing market trends, the impact of competition, changes in the availability of capital, the successful resolution of ongoing FTC matters, and other risks detailed from time to time in the SEC reports of Whole Foods Market, including Whole Foods Market''s report on Form 10-K for the fiscal year ended September 28, 2008. The company does not undertake any obligation to update forward-looking statements.

I hope you have had a chance to read our press release, which is available on our website along with the scripted portion of this call.

We are pleased with our second quarter results. We believe we struck the right balance between sales and gross margin while exhibiting strong cost and expense controls, particularly in terms of wages and G&A. Despite flat sales we produced a 10% increase in income from operations and a 9% increase in EBITDA, including non-cash asset impairment charges; strong cash flow from operations of $173 million; $98 million of positive free cash flow in Q2 and $130 million year to date; and an increase in cash to $363 million.

In addition, the former Wild Oats stores continued to comp positively and showed strong sequential improvement in store contribution.

For the quarter, our sales were flat at $1.9 billion year-over-year. Our average weekly sales were $155 million, in line with the first quarter. Average weekly sales per store for all stores were $552,000, translating to sales per square foot of $786.

Year over year, our ending square footage increased 9% to 10.3 million square feet. Our 21 new and relocated stores produced average weekly sales per store of $530,000 and averaged 52,000 square feet in size, translating to sales per square foot of $531.

Excluding the negative impact of foreign currency translation, comparable store sales decreased 4.1%, and identical store sales decreased 5.1%. We are seeing some positive trends with regard to comps. The sequential decline in our comps narrowed from 440 basis points in Q1 to 80 basis points in Q2, driven by stabilizing sales in some regions and some teams.

In addition, in contrast to Q4 and Q1 when our comp declines were driven almost entirely by decreases in transaction count, in Q2 our comp breakout was roughly 50/50 split between transaction count and basket size, with some recovery in our transaction count.

Whereas, historically, increases in average price per item drove increases in average basket size, we are now seeing a decline in basket size with little to no change in average price per item year-over-year.

Consistent with market reports that indicate consumers continue to be value driven in this economy, our customers are taking increasing advantage of our value offerings. We started pushing hard on our value programs last May and while it hasn’t been an overnight shift, we believe we are starting to change the dialog about our prices and hopefully the perception as well. While this has a negative short-term impact on our comps, we believe we will be well positioned to drive further comp increases through increased basket size when the economy rebounds.