Highlights From Whole Food's (WFMI) Q3 Conference Call: 2% Increase In Sales - Raises FY Guidance

August 5, 2009 12:36 PM EDT
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Whole Foods Market (Nasdaq: WFMI) reported Q3 EPS of $0.25, 5 cents better than the analyst estimate of $0.20. Revenue for the quarter was $1.9 billion, versus the consensus of $1.86 billion. Shares are flying high today...up 16% on investor confidence.

Highlights From WFMI's Q3 Conference Call:

  • Raises its FY09 EPS guidance from $0.65-$0.70, including items, to $0.80-$0.82, versus the consensus of $0.75.
  • (CEO) On a 2% increase in sales, we produced a 23% increase in income from operations, a 22% increase in adjusted EBITDA, strong cash flow from operations of a $160 million, $93 million of positive free cash flow for the quarter, $223 million year-to-date, and an increase in our total cash to $448 million.
  • Average weekly sales per store for all stores were $555,000, translating to sales per square foot of $782. Our 23 new and relocated stores produced average weekly sales per store of $577,000, and averaged 54,000 square feet in size, translating to sales per square foot of $564.
  • Food inflation as measured by the CPI slowed significantly from 4.3% in Q2 to 2.7% in Q3, which while difficult to accurately measure is likely having some negative impact on our sales.
  • Excluding the negative impact of foreign currency translation, comparable store sales decreased 2.0% and identical store sales decreased 3.3%.
  • In Q2, we saw transaction counts stabilize and then start to recover with a marked downward swing in average unit price and basket size.
  • In Q3, the recovery in transaction count continued with average unit price and basket size stabilizing and then improving toward the end of the quarter.
  • For the first four weeks of Q4 ended August 2, 2009, our comps excluding the impact of foreign currency declined 0.7% and idents declined 2.4%, an improvement from the declines we saw in Q3.
  • We are seeing lower cost of goods sold driven by better purchasing disciplines, as well as improved store level execution particularly in terms of shrink control and inventory management.
  • We are particularly proud of the improvements at the former Wild Oats stores.
  • We are seeing many competitors emphasizing value and de-emphasizing organic. We are taking advantage of the increased supply and lower prices available in organic produce to offer great promotions particularly in organic berries, cherries, and grapes.
  • While we've seen a drop in average price per item in produce, we have seen a corresponding pick-up in overall tonnage, which is driving higher gross profit dollars overall.
  • Customer demand for our Whole Deal in-store value guide has grown over the last year from an initial 800,000 copies for a quarterly guide to 1.3 million for a new bi-monthly guide.
  • The average basket containing a Whole Deal coupon totaled $65 and contained 23 items versus an average basket overall of $33 containing 9 items.
  • In addition, we have nearly 500,000 Whole Deal e-newsletter subscribers.
  • Our sales growth in organic products is outpacing growth in natural products 2 to 1.
  • If our comparable and identical store sales in Q4 are in line with our quarter-to-date results, our total sales growth would be approximately 2.9% for the quarter, and approximately 1% for the year. Year-to-date, sales have averaged approximately $154 million per week.
  • However, we have historically experienced lower average weekly sales in Q4, which typically results in lower gross profit, higher direct store expenses, and lower store contribution as a percentage of sales.
  • Based on our better than expected year-to-date results, we are raising our guidance for EBITDA, EBITANCE, and diluted EPS. We expect diluted EPS in the range of 16 to $0.18 in Q4, and 80 to $0.82 for the year, including $0.09 per share in asset impairment charges, $0.06 in FTC-related legal costs and a negative $0.17 impact from the preferred stock.
  • (Q&A) Can you just talk a little more color on the balance between the gross margin and sales. I think this quarter in particular, the gross margin was much better than I expected; it's very good in general. I don't know if you can put into buckets to quantify, where it's coming from, the sourcing side, better shrink. I know you've made some systems enhancements, whether it's mix, it just doesn't seem
    characteristic or representative of what you are seeing in the channel with the gross profit dollars at least, not accounting for the not being the same year-over-year due to some of the deflation? (A)Well, it was all of those things. We do see a very good store level execution in shrink control and in inventory management. We are doing a great job on the buy side. There are- just seem to be executing at a high level. (A)This is Walter, just chip in a little bit. Essentially, we are just looking at 11 basis points sequentially from Q2, so we are sort of staying in the same frame that we were in this last quarter. And really it's just what Glenda said, we've got a slight bump in sales. We've tightened up our inventories, we reduced inventories a little bit, so that helps the gross margins. And the operators across the board have been doing an excellent job tightening down their purchase to sales and watching the shrink. And all of those things add up to a consistency in gross margin, which is really the story here. It's not from pricing, it's all from discipline because we are continuing our select level price investments.
  • And if you look at the baskets, I mean, are some of the baskets tilted towards what's on promotion or not necessarily, is that changing at all, as the stabilization or slight improvement starts to unfold? (A)Well, we're looking at the overall basket and seeing, as the script said, we're seeing a sequential improvement in the basket, recovery in the basket and we are also seeing evidence of less trading
    down and it tipping back towards sales of branded products over private label products. But in terms of the promotional dollars in the basket, I'm not sure I could good numbers on that right here, right now, but except for The Whole Deal - (A)The year-over-year basket size is still negative.
  • I think last quarter you guys had talked about the split between perishable and non-perishable comps and non-perishable was running a bit stronger. Is that still the case, and how much of the sequential improvement was more perishable driven? (A)Your question is in terms of the sequential improvement and how does it break out between perishable and non-perishable? (Q)Yeah. (A)I don't know if I have a great answer here. I don't think there is anything that stands out about that. We had a lot of movement in produce because of the deflation in produce pricing, which allowed us to get very aggressive with pricing. We see great response there, but it didn't really drive the costs, because the sales were- it was more the prices were down. So, we'd have to get back to you on that question I think.
  • What do you think is the, if you look at prepared food maybe, is there within your store is there sort of a canary in the coal mine from a consumer standpoint i.e. maybe prepared foods gets a little bit better as confidence increases and that's the sign of a turn and have you seen that? It's interesting theory, the canary in the coal mine, but I think again the trade offs in this quarter have been around the restaurant business, which we were getting some of that business and at the same time, we're seeing a - they're participating in the sequential improvement, but nothing extraordinary.

Whole Foods Market, Inc., together with its subsidiaries, engages in the ownership and operation of natural and organic foods supermarkets primarily in the United States.

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