Whole Foods Market's CEO Discusses F2Q12 Results - Earnings Call Transcript

Whole Foods Market, Inc. (WFM)

F2Q12 Earnings Call

May 2, 2012 5:00 p.m. ET

Executives

Cindy McCann - Vice President of Investor Relations

Walter Robb - Co-Chief Executive Officer

Glenda Flanagan - Executive VP & Chief Financial Officer

A.C. Gallo - President & Chief Operating Officer

John Mackey - Co-Chief Executive Officer

Jim Sud - Executive VP, Growth and Business Development

Ken Meyer - Executive VP, Operations

David Lannon - Executive VP, Operations

Analysts

Charles Grom - Deutsche Bank

Ed Aaron - RBC Capital Markets

Meredith Adler - Barclays Capital

Jason DeRise - UBS

John Heinbockel - Guggenheim

Scott Mushkin - Jefferies & Co.

Sean Naughton - Piper Jaffray

Mark Miller - William Blair

Mark Wiltamuth - Morgan Stanley

Presentation

Operator

Good day, ladies and gentlemen. All sites are now online in a listen-only mode. Please note there will be a question-and-answer session later on today’s conference. (Operator Instructions) I’ll now turn the program over to our first speaker for today, Cindy McCann, Vice President of Investor Relations. Please go ahead.

Cindy McCann

Good afternoon and 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 and Development; and David Lannon and Ken Meyer, our recently promoted Executive Vice Presidents of Operations.

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 outlined in the company’s most recently filed Form 10-Q and 10-K. Please note our press release and scripted remarks are available on our website. We assume you have read our press release, so we will use this time to focus on highlights from the quarter.

I will now turn the call over to John Mackey.

John Mackey

Thank you, Cindy. Good afternoon, everyone. We are pleased to report another consistently strong quarter producing the best results in our 32 year history. We delivered record results on many levels including, average weekly sales per store of $697,000 translating to sales per square foot of $971; gross margin of 36.3%; store contribution of 10.8%; operating margin of 7.1%; EBITDA margin of 9.7%; and a return on invested capital of 16.3%.

Our solid execution, capital discipline, and increasing stock price generated over $413 million of cash during the quarter through a combination of $256 million in cash flow from operations and $157 million in proceeds from team member stock option exercises. We invested $102 million in new and existing stores, and returned $25 million in quarterly dividends to our shareholders. Our total cash and investments increased during the quarter by nearly $300 million to $1.3 billion.

Turning to sales, given slightly moderating inflation and rising gas prices through much of the quarter, we were very pleased to produce a three-year stacked ident of over 24%. We are not aware of any public food retailers producing these kinds of results. And while not a record, the first quarter of 2008 was the last time we produced three year idents this high. Our increase in transaction count accelerated to over 7% and our sales momentum continues to be broad-based across regions, departments and store age classes. Even stores over 15 years old comped at 7%, with healthy transaction count increases of 6%.

Our robust sales and outstanding execution along with moderating inflation helped to generate exceptional margin performance for the quarter. The 70 basis point increase in gross margin was driven by almost equal improvements in both occupancy costs and cost of goods sold. We have better tools and access to better data which are resulting in much higher level of sophistication in purchasing, inventory management, particularly shrink control, as well as pricing management and optimization.

While we’re very proud to have produced record margin results this quarter, our longer term strategy has not changed. And while we have confidence that we can continue to deliver excellent results, we do not consider margins over 35% to be sustainable. We know one of the keys to growing our sales is to improve our relative value positioning over time. So, while we might have some quarters that are higher, our goal remains to consistently deliver gross margin on an annual basis within our historical range of 34% to 35%.

Turning to new store growth. During the second quarter, we opened three new stores in Pembroke Pines, Florida; Glen Mills, Pennsylvania; and Lynnwood, Washington. We believe our new store results are reflecting the success of our broader real estate approach and our ability to go into all types of markets. New stores continue to show great year-over-year improvement and operating performance in Q2. Compared to last year’s class of new stores, this year’s class was 14% smaller in size, averaging 38,000 square feet, and produced average weekly sales per store of $576,000 translating to 23% higher sales per square foot of $791. These new stores produced about 340 basis points higher store contribution versus last year’s class.

In other news, we are proud to announce that as of April 22, Earth Day, we were the first national grocer to stop selling all red-rated seafood, including Atlantic halibut, grey sole and skate. A red rating indicates that a species is suffering from overfishing or that current fishing methods harm other marine life or habitats. Our knowledgeable fishmongers will recommend alternatives such as Marine Stewardship Council certified Pacific halibut and yellow-rated Dover sole and Atlantic flounder. We want to thank our suppliers who have worked closely with us to find high quality green and yellow-rated seafood so we could meet this self imposed deadline one year earlier than scheduled.

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