BUSINESS NEWS: Whole Foods Reports First Quarter Results

Whole Foods is reporting that for the first quarter ended January 17, 2010, sales increased 7.0% to $2.6 billion. "Our first quarter results exceeded our own expectations on both the top and bottom line. Given the strong sales momentum we are seeing, there are many reasons to be bullish about our future results. It is relatively early in our recovery, however, and there is still a lot of uncertainty regarding where the economy, the consumer, and competition go from here," said John Mackey, chief executive officer and co-founder of Whole Foods Market.

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Whole Foods Market Reports First Quarter Results

AUSTIN, Texas, Feb 16, 2010 /PRNewswire via COMTEX/ -- Whole Foods Market, Inc. today reported results for the 16-week first quarter ended January 17, 2010. Sales increased 7.0% to $2.6 billion. Comparable store sales increased 3.5%, or -0.5% on a two-year stacked basis. Identical store sales, excluding five relocations and two major expansions, increased 2.5%, or -2.4% on a two-year stacked basis. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 26% to $186.0 million. Income available to common shareholders increased 79% to $49.7 million, and diluted earnings per share increased 62% to $0.32 per diluted share.

The Company's comparable and identical store sales results for the last five quarters, first four weeks of the second quarter and year to date through February 14, 2010 are shown in the following table.

"Our first quarter results exceeded our own expectations on both the top and bottom line. Given the strong sales momentum we are seeing, there are many reasons to be bullish about our future results. It is relatively early in our recovery, however, and there is still a lot of uncertainty regarding where the economy, the consumer, and competition go from here," said John Mackey, chief executive officer and co-founder of Whole Foods Market. "Our raised outlook for the fiscal year reflects our cautiousness on the low end and our optimism on the high end. As the world moves out of this recession, we believe we are well positioned to produce strong returns for our shareholders."

During the quarter, the Company produced $161.5 million in cash flow from operations and invested $82.5 million in capital expenditures, of which $59.3 million related to new stores. This resulted in free cash flow of $78.9 million. Total cash and cash equivalents, including restricted cash, and short-term investments were $569.6 million, and total debt was $734.1 million. In addition, the Company currently has $337.7 million available on its credit line, net of $12.3 million in outstanding letters of credit.

For the quarter, gross profit, excluding LIFO, increased 84 basis points to 34.3% of sales due to an improvement in cost of goods sold which was partially offset by a slight increase in occupancy costs as a percentage of sales. The LIFO charge was $0.2 million versus $3.6 million last year, a positive impact of 14 basis points. Direct store expenses increased 12 basis points to 26.6% of sales driven by an increase in health care costs which was partially offset by an improvement in workers' compensation expense as a percentage of sales. As a result, store contribution, excluding LIFO, improved 73 basis points to 7.7% of sales.

"Early last year, we made the shift from being fairly reactionary on pricing to being much more strategic. We have seen this strategy successfully play out over the last several quarters, as we have produced strong year-over-year improvement in gross margin and comparable store sales growth," said Mr. Mackey. "While many of our competitors have gone back and forth on their pricing strategies, we remain focused on continuing to strike the right balance between driving sales over the long term by improving our value offerings while maintaining margin."

For stores in the identical store base, gross profit, excluding LIFO, improved 104 basis points to 34.5% of sales, direct store expenses improved seven basis points to 26.4% of sales, and store contribution improved 111 basis points to 8.1% of sales.

G&A expenses, excluding FTC-related legal costs, improved five basis points to 2.8% of sales. FTC-related legal costs totaled $0.7 million in the quarter versus $11.0 million in the prior year.

Pre-opening expenses were $12.8 million versus $14.1 million in the prior year.

Relocation, store closure and lease termination costs were $12.4 million, of which $10.1 million related to store closure reserve adjustments. The Company continues to make ongoing store closure reserve adjustments primarily related to changes in certain sub-tenant income estimates driven by the outlook for the commercial real estate market.

Growth and Development

The Company opened six stores and closed one former Wild Oats store in the first quarter. The Company currently has 289 stores totaling 10.7 million square feet. Three stores are expected to open in the second quarter.

Since the Company's fourth quarter earnings release, the Company has reduced the size of one store in development by 8,000 square feet and terminated two leases totaling approximately 103,000 square feet for stores previously scheduled to open in fiscal years 2012 and 2013. The Company also recently signed three new leases averaging 40,000 square feet in size - two in Ontario, Canada (Mississauga and Toronto) and Pembroke Pines, FL - all currently scheduled to open after fiscal year 2010.

The following table provides additional information about the Company's store openings in fiscal years 2009 and 2010, leases currently tendered but not opened, and total development pipeline for stores scheduled to open through fiscal year 2013. For accounting purposes, a store is considered tendered on the date the Company takes possession of the space for construction and other purposes, which is typically when the shell of the store is complete or nearing completion. The average tender period, or length of time between tender date and opening date, will vary depending on several factors, one of which is the number of acquired leases, ground leases and owned properties in development, all of which generally have longer tender periods than standard operating leases.

Redemption of Series A Preferred Stock

Leonard Green & Partners converted its preferred stock into common stock on November 26, 2009, increasing the Company's common stock outstanding by approximately 29.7 million shares. The Company made an $8.5 million dividend payment during the first quarter and issued approximately 0.4 million shares of common stock upon conversion for the pro-rated amount due on the second dividend. The conversion of the preferred stock will save the Company approximately $26 million in preferred cash dividends this year, and the net impact on diluted earnings per share will not be material.

Updated Assumptions for Fiscal Year 2010

The Company is raising its sales and earnings outlook for the fiscal year. For the twenty weeks ended February 14, 2010, total sales increased 7.8%. Comparable store sales increased 4.2%, and identical store sales increased 3.2%, or 0.1% and -1.8% on a two-year stacked basis, respectively. The Company is still in the early stages of recovery but believes it is reasonable to expect some sales momentum to continue for the remainder of the year. Accordingly, the Company is raising its sales outlook as follows: sales growth of 8.5% to 10.5%, comparable store sales growth of 3.5% to 5.5% (or 0.4% to 2.4% on a two-year stacked basis), and identical store sales growth of 2.9% to 4.9% (or -1.4% to 0.6% on a two-year stacked basis). The Company points out that the economic outlook remains uncertain, and it faces a significantly higher hurdle starting in the third quarter as identical store sales improved 224 basis points from the first half to the second half of fiscal year 2009. The Company has no relocations or significant expansions this fiscal year, so after the relocated Lincoln Park store anniversaries its opening in May, comparable and identical store sales growth will be the same. The Company still expects to open 16 new stores this year, six of which have already opened, translating to a 6% increase in ending square footage.

The Company now expects operating margin of 4.3% to 4.5% for fiscal year 2010. For the second through fourth quarters, the Company does not expect to generate the 57 basis point year-over-year improvement in gross margin, excluding LIFO, that it produced on average over the last three quarters. That higher level of improvement will be hard to sustain once the Company anniversaries the shift in its pricing strategy that occurred in the first half of last year. In addition, the Company has been taking advantage of buying opportunities to pass through values to its customers, but it is difficult to predict to what extent those opportunities will continue. The Company is committed to maintaining its relative price positioning, which might require a higher level of price investments going forward. The Company expects G&A as a percentage of sales to be in line with fiscal year 2009 results of 2.9% excluding FTC-related legal expenses.

Based on the Company's first quarter results and updated estimates for the year, including the possibility of further store closure reserve adjustments primarily related to changes in certain sub-tenant income estimates driven by the outlook for the commercial real estate market, the Company now expects total pre-opening and relocation costs in the range of $65 million to $70 million.

The Company is raising its estimates for EBITDA to $655 million to $685 million from a previous range of $625 million to $650 million and diluted earnings per share to $1.20 to $1.25 from a previous range of $1.05 to $1.10. After earning $0.32 per diluted share in the first quarter, this implies $0.88 to $0.93 per diluted share for the remaining three quarters of the year. The Company notes the fourth quarter is seasonally its weakest quarter.

Capital expenditures for the fiscal year are expected to be in the range of $350 million to $400 million. Of this amount, approximately 60% to 65% relates to new stores opening in fiscal year 2010 and beyond.

The Company is committed to producing positive free cash flow on an annual basis, including sufficient cash flow to fund the 51 stores in its current development pipeline. The following table provides information about the Company's estimated store openings through 2013 based on this pipeline. These openings reflect estimated tender dates, which are subject to change, and do not incorporate any potential new leases, terminations or square footage reductions.


SOURCE: Whole Foods Press Release