Whole Foods Market, Inc. (



F2Q11 Earnings Call

July 27, 2011, 17:00 p.m. ET


Cindy McCann - Global V.P., Investor Relations

John Mackey - Co-Chief Executive Officer

Walter Robb - Co-Chief Executive Officer

Glenda Flanagan - EVP and CFO

Jim Sud - EVP, Growth and Business Development


John Heinbockel - Guggenheim Securities

Karen Short - BMO Capital Markets

Mark Miller - William Blair

Scott Mushkin - Jefferies

Ed Aaron - RBC Capital Markets

Stephen Grambling - Goldman Sachs

Bob Summers - Susquehanna



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Good day ladies and gentlemen, all sites are now online in a listen-only mode. (Operator Instructions). I’ll now turn the program over to our moderator for today, Cindy McCann, Vice President of Investor Relations. Please go ahead.

Cindy McCann

Good afternoon. Thank you for joining us for the Whole Foods Market Third Quarter Earnings Conference Call. On the call today are John Mackey; and Walter Robb, Co-Chief Executive Officers; Glenda Flanagan, Vice President and Chief Financial Officer; Jim Sud, Executive Vice President of Growth & Development.

As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause the company’s actual results to differ materially from the expectations and assumptions discussed today, this may be due to a variety of factors that affect the company, including the risks specified in the company’s most recently filed Forms 10-Q and 10-K. Please note our press release and scripted remarks are available on our website. We assume you read our press release that will use this time to focus on highlights from the quarter and our initial outlook for next year.

I will now turn the call over to Walter Robb.

Walter Robb

Thank you, Cindy. Good afternoon everybody. We are very proud of the consistency of our third quarter results which were once again near peak levels. We produced 8.4% comparable store sales growth, average weekly sales per store of $653,000 translated into $896 of sales per square foot. 9.5% store contribution, 5.9% operating margin which we are proud to say is our ninth consequent quarter of the year-over-year operating margin improvement. 8.6% EBITDA margin and 30% increase in diluted earnings per share of $0.50 and 38% NOPAT ROIC for all stores.

Our solid execution combined with our capital discipline is generating strong consistent cash flow. Over the last four quarters we have produced 720 million in cash flow from operations and received 214 million in proceeds from stock option exercises. We have used our cash to invest 329 million in new and existing stores. Payoff the remaining 490 million of our term loan and to-date return $53 million in quarterly dividends to our shareholders.

We are pleased to be in a position where we can maintain a healthy cash balance and still have the capacity to internally fund our accelerated growth plans, increase our dividend and repurchase stock. We expect we will be using all three of these strategies overtime.

Turning to sales, we are very pleased to be reporting 8.4% comps or 7.8% excluding the positive impact of the Easter shift. This was our sixth consecutive quarter of comp growth of 7.8% or higher, we believe our efforts around value continue to be a significant contributor to our momentum helping drive a 5% increase in our transaction counts. We worked very hard over the last couple of years to successfully improve our price image, particularly in perishables and we remain focused on maintaining our relative price positioning in the marketplace.

With the return of inflation we are seeing our comp breakout move towards our historical pattern of 60% transaction count and 40% basket size. In Q3, our basket size increased 3% slightly higher than the 2% increase in Q2. This is driven entirely by higher average price per item as we selectively pass through some product cost increases and customers continue trading up.

Year-over-year sales continue to shift toward branded and organic products, higher priced tiers and to several discretionary categories. We also saw strong increases in the $50 plus size baskets. We are hopeful we can continue to strike the right balance between rising product costs in our retails based on our distribution network and our tools to manage value. We anticipate incremental increases in inflation in Q4, but our pricing study show that our competitors have been passing through product cost increases and we don’t have any reason to believe that’s going to change.

Our comparable store sales increased 8.5% year-to-date through Q3 and 9.5% for the first three weeks of Q4. We are proud that we are continuing to gain market share at a faster rate than most public retailers and attribute much of our success to our visible value efforts which could positively impacted our price image and then continuing to raise the bar in areas that matter to our customers particularly quality standards and health and wellness.

For example, we recently announced our new Whole Kids Foundation, a charitable organization that will provide children with access to healthy food choices through partnerships with schools, educators and organizations. We believe our new foundation is a natural extension of our role as America’s healthiest grocery store and hope that through collaborating with schools and parents, we can increase food and vegetable consumption both at schools and at home and make a significant contribution in the fight against childhood obesity. The foundation is first major initiative is the Whole Kids Garden Grant Project, a program designed for schools to help build healthy relationships between children and food for the power of gardening.

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