Whole Foods Market (WFM)

Q3 2012 Earnings Call

July 25, 2012 5:00 pm ET

Executives

Cindy McCann - Global Vice President of Investor Relations

Walter Robb - Co-Chief Executive Officer and Director

Glenda Jane Flanagan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

John P. Mackey - Co-Founder, Co-Chief Executive Officer and Director

David Lannon - Executive Vice-President of Operations

Kenneth J. Meyer - Executive Vice-President of Operations

James P. Sud - Executive Vice President of Growth and Business Development

A. C. Gallo - President and Chief Operating officer

Analysts

Charles X. Grom - Deutsche Bank AG, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Karen F. Short - BMO Capital Markets U.S.

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Mark R. Miller - William Blair & Company L.L.C., Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Jason DeRise - UBS Investment Bank, Research Division

Presentation

Operator

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Good day, everyone, and welcome to today's Whole Foods Market Third Quarter Earnings Program. [Operator Instructions] And it is now my pleasure to turn the conference over to Cindy McCann, VP of Investor Relations. Please go ahead.

Cindy McCann

Good afternoon. Thank you for joining us. On today's call are John Mackey and Walter Robb, Co-Chief Executive Officers; A.C. Gallo, President; Glenda Flanagan, Executive Vice President and Chief Financial Officer; Jim Sud, Executive Vice President of Growth & Development; and David Lannon and Ken Meyer, Executive Vice Presidents of Operations.

As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in our 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've read our press release so we will use this time to focus on highlights from the quarter and our future outlook.

I will now turn the call over to Walter Robb.

Walter Robb

Thank you, Cindy, and good afternoon, everybody. Our Q3 results reflect another quarter of strong sales momentum and outstanding execution. We produced 27% EPS growth on 14% sales growth, delivering significant year-over-year improvement, including a 62-basis-point increase in gross margin to 36%, a 57-basis-point decrease in direct store expenses to 25.3% of sales, a 119-basis-point improvement in store contribution to 10.7% of sales, a 104-basis-point increase in operating margin to 6.9%, 94-basis-point improvement in EBITDA margin to 9.6% and 192-basis-point improvement in return on invested capital to 15.2%.

Our solid performance, capital discipline and increasing stock price generated close to $300 million of cash during the quarter through a combination of $211 million in cash flow from operations and $88 million in proceeds from team member stock option exercises.

We invested $13 million in new and existing stores, repurchased $25 million of common stock and returned $25 million in quarterly dividends to our shareholders. During the quarter, our total cash and investments increased $154 million to $1.5 billion.

Turning back to sales, given the continued moderation in inflation along with some sluggish economic data points, we were very pleased to produce our second consecutive quarter of 24.5% 3-year stacked idents or 3 years of 8%-plus increases. Excluding the Easter shift, our comps increased 8.9%, and our idents increased 8.6%. Transaction count increased 7%, with broad-based sales momentum across regions, departments and store age classes.

On a year-over-year basis, our customers have continued to shift their purchases toward organic products and several discretionary categories. We also continue to see meaningful increases in $50-plus sized baskets.

Our robust sales and focused operating disciplines, along with moderating inflation, helped to generate another quarter of exceptional margin performance. A 51-basis-point increase in gross margin x LIFO was driven primarily by equal improvements in occupancy costs and cost of goods sold.

Sequentially from Q2, we saw an approximate 30 basis point decrease in gross margin, which we attribute in part to seasonality, as well as some impact from our strategy of improving our relative value positioning by increasing our level of price investments. The success of this ongoing strategy is reflected in our continued sales momentum, as well as our most recent competitive survey, which indicates that we are improving our pricing position versus our competitors during the quarter.

Turning now to new store growth. We are very excited to have opened a record 9 new stores in Q3 in Greensboro and Wilmington, North Carolina; Kailua, Hawaii, Edina, Minnesota; Wexford, Pennsylvania; Laguna Niguel, California; 2 stores here in Austin and a relocation of our Soho store in London. Greensboro and Wilmington are both new markets for us. Kailua is our second store on Oahu and our third store in Hawaii. We closed our small store in Soho and opened a new 18,000-square-foot store in Piccadilly that is a great location and triple the size. And more than 7 years after opening our flagship store in Austin, we now have 2 new stores in our hometown.

This quarter's openings speak to the breadth and the variety of market opportunities available to us in new and existing markets, as well as both urban and suburban locations.

We continue to be very pleased with the performance of our new stores. For the last 5 quarters on average, our new store class has consisted of 21 stores opened for approximately 6 months. At 38,000 square feet in size, they have produced average weekly sales of $575,000, translating to sales per square foot of $786 and have generated a contribution margin of just under 6%. We expect these outstanding results, combined with our lower average capital investment per store, will drive strong returns over time. Please check out the Beyond the Numbers section of our Investor Relations webpage for more information about the new stores that we opened during the quarter.

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