Diluted EPS Increase 62% to $0.32 Driven by 3.5% Comparable Store Sales Growth and Strong Gross Margin Improvement; Company Raises Outlook for Fiscal Year 2010
AUSTIN, Texas, Feb. 16 -- 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.
QTD YTD
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 2010
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Sales growth 0.4% -0.5% 2.0% 2.3% 7.0% 11.1% 7.8%
Comparable
store sales
growth -4.0% -4.8% -2.5% -0.9% 3.5% 7.0% 4.2%
Excluding
foreign
currency -3.4% -4.1% -2.0% -0.7% 3.2% 6.6% 3.9%
Two-year
comps (sum
of two
years) 5.3% 1.9% 0.1% -0.6% -0.5% 2.5% 0.1%
Excluding
foreign
currency 5.6% 2.5% 0.5% -0.2% -0.2% 2.8% 0.4%
Identical
store sales
growth -4.9% -5.8% -3.8% -2.3% 2.5% 6.0% 3.2%
Excluding
foreign
currency -4.2% -5.1% -3.3% -2.0% 2.2% 5.6% 2.9%
Two-year
idents (sum
of two
years) 2.2% -0.7% -1.9% -2.8% -2.4% 0.6% -1.8%
Sequential
basis point
change (336) (293) (115) (90) 34 -- --
Excluding
foreign
currency 2.6% -0.1% -1.5% -2.4% -2.0% 0.9% -1.5%
"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.
Certain results for the Company's last five quarters are shown in the following table.
1Q09 2Q09 3Q09 4Q09 1Q10
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Gross profit 33.4% 34.7% 35.2% 34.2% 34.3%
Gross profit
excluding
LIFO 33.5% 34.7% 34.8% 34.0% 34.3%
YOY basis
point
change (24) (30) 33 46 84
Direct store
expenses 26.5% 26.2%(1,2) 26.6% 26.9% 26.6%
Store
contribution 6.8% 8.5%(1,2) 8.5% 7.3% 7.7%
Store
contribution
excluding
LIFO 7.0% 8.5% 8.2% 7.2% 7.7%
G&A expenses
excluding
FTC legal
costs 2.9% 2.9% 2.8% 2.8% 2.8%
(1) Unusually low number of workers' compensation claims and average cost
per claim in the quarter
(2) Excludes asset impairment charges
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.
Additional information on the quarter for comparable stores and all stores is provided in the following table.
Total
Comparable NOPAT # of Average Square
Stores Comps ROIC(1) Stores Size Feet
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Over 11 years
old (15.6
years old,
s.f.
weighted) 1.6% 72% 102 27,100 2,766,700
Between eight
and 11 years
old 1.2% 48% 53 32,100 1,702,800
Between five
and eight
years old 1.2% 45% 45 37,400 1,682,900
Between two
and five
years old 4.4% 9% 55 52,500 2,886,500
Less than two
years old
(including
five
relocations) 20.7% 3% 23 52,900 1,216,100
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All comparable
stores (8.0
years old,
s.f.
weighted) 3.5% 27% 278 36,900 10,255,000
All stores
(7.6 years
old, s.f.
weighted) 25% 289 37,200 10,743,600
(1) Reflects store-level capital and net operating profit after taxes
("NOPAT"), including pre-opening expense
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.
Stores Stores Current Current
New Store Opened Opened Leases Leases
Information FY09 FY10 Tendered Signed(1)
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Number of stores
(including
relocations) 15 6 17 51
Number of
relocations 6 0 1 9
Number of lease
acquisitions,
ground leases and
owned properties 4 0 4 4
New markets 1 2 3 6
Average store
size (gross
square feet) 53,500 35,300 43,900 44,500
Total square
footage 801,800 211,500 746,700 2,303,700
Average tender
period in months 12.6 8.5
Average pre-
opening expense
per store (incl.
rent) $3.0 mil $2.6 mil
Average pre-
opening rent per
store $1.3 mil $0.8 mil
(1) Includes leases tendered
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.
Average Ending
Square Ending Square
Total Feet per Square Footage
Openings Relocations Store Footage(1) Growth
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FY10 remaining
stores in
development 10 0 46,300 11,207,000 6.1%
FY11 stores in
development 17 4 39,200 11,803,200 5.3%
FY12 stores in
development 17 3 46,600 12,421,300 5.2%
FY13 stores in
development 7 2 49,800 12,705,900 2.3%
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Total 51 9 44,500
(1) Reflects year-to-date openings/closures in fiscal year 2010 and one
expansion in development in fiscal year 2011
About Whole Foods Market
Founded in 1980 in Austin, Texas, Whole Foods Market (www.wholefoodsmarket.com) is the leading natural and organic foods supermarket, and America's first national certified organic grocer. In fiscal year 2009, the Company had sales of approximately $8 billion and currently has 289 stores in the United States, Canada, and the United Kingdom. Whole Foods Market employs more than 53,000 Team Members and has been ranked for 13 consecutive years as one of the "100 Best Companies to Work For" in America by Fortune magazine.
Forward-looking statements
The following constitutes a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this press release are forward-looking statements that involve risks and uncertainties, which could cause our actual results to differ materially from those described in the forward-looking statements. These risks include general business conditions, changes in overall economic conditions that impact consumer spending, including fuel prices and housing market trends, the impact of competition, changes in the Company's access to available capital, and other risks detailed from time to time in the SEC reports of Whole Foods Market, including Whole Foods Market's report on Form 10-K for the fiscal year ended September 27, 2009. Whole Foods Market undertakes no obligation to update forward-looking statements.
The Company will host a conference call today to discuss this earnings announcement at 4:00 p.m. CT. The dial-in number is 1-800-862-9098, and the conference ID is "Whole Foods." A simultaneous audio webcast will be available at www.wholefoodsmarket.com.
Whole Foods Market, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per share amounts)
Sixteen weeks ended
January 17, 2010 January 18, 2009
=========================================================================
Sales $2,639,158 $2,466,503
Cost of goods sold and occupancy costs 1,732,942 1,643,785
-------------------------------------------------------------------------
Gross profit 906,216 822,718
Direct store expenses 702,806 653,974
-------------------------------------------------------------------------
Store contribution 203,410 168,744
General and administrative expenses 75,936 82,600
-------------------------------------------------------------------------
Operating income before pre-opening and
store closure 127,474 86,144
Pre-opening expenses 12,809 14,064
Relocation, store closure and lease
termination costs 12,412 5,077
-------------------------------------------------------------------------
Operating income 102,253 67,003
Interest expense (10,553) (13,580)
Investment and other income 1,783 1,841
-------------------------------------------------------------------------
Income before income taxes 93,483 55,264
Provision for income taxes 38,328 22,935
-------------------------------------------------------------------------
Net income 55,155 32,329
-------------------------------------------------------------------------
Preferred stock dividends 5,478 4,533
-------------------------------------------------------------------------
Income available to common shareholders $49,677 $27,796
=========================================================================
Basic earnings per share $0.32 $0.20
=========================================================================
Weighted average shares outstanding 154,413 140,330
=========================================================================
Diluted earnings per share $0.32 $0.20
=========================================================================
Weighted average shares outstanding,
diluted basis 154,858 140,330
=========================================================================
Whole Foods Market, Inc.
Consolidated Balance Sheets (unaudited)
January 17, 2010 and September 27, 2009
(In thousands)
Assets
2010 2009
=========================================================================
Current assets:
Cash and cash equivalents $241,412 $430,130
Short-term investments - available-for-sale
securities 240,953 -
Restricted cash 87,214 71,023
Accounts receivable 113,731 104,731
Merchandise inventories 323,400 310,602
Prepaid expenses and other current assets 43,374 51,137
Deferred income taxes 95,461 87,757
-------------------------------------------------------------------------
Total current assets 1,145,545 1,055,380
Property and equipment, net of accumulated
depreciation and amortization 1,897,097 1,897,853
Long-term investments - available-for-sale
securities 6,744 -
Goodwill 657,956 658,254
Intangible assets, net of accumulated amortization 71,664 73,035
Deferred income taxes 83,431 91,000
Other assets 9,186 7,866
-------------------------------------------------------------------------
Total assets $3,871,623 $3,783,388
=========================================================================
Liabilities And Shareholders' Equity
2010 2009
=========================================================================
Current liabilities:
Current installments of long-term debt
and capital lease obligations $398 $389
Accounts payable 187,290 189,597
Accrued payroll, bonus and other benefits due
team members 228,532 207,983
Dividends payable - 8,217
Other current liabilities 270,550 277,838
-------------------------------------------------------------------------
Total current liabilities 686,770 684,024
Long-term debt and capital lease obligations,
less current installments 733,667 738,848
Deferred lease liabilities 262,646 250,326
Other long-term liabilities 76,786 69,262
-------------------------------------------------------------------------
Total liabilities 1,759,869 1,742,460
-------------------------------------------------------------------------
Series A redeemable preferred stock, $0.01 par
value, no and 425 shares authorized, issued
and outstanding in 2010 and 2009, respectively - 413,052
Shareholders' equity:
Common stock, no par value, 300,000 shares
authorized; 170,357 and 140,542 shares issued
and outstanding in 2010 and 2009, respectively 1,710,594 1,283,028
Accumulated other comprehensive income (loss) (6,732) (13,367)
Retained earnings 407,892 358,215
-------------------------------------------------------------------------
Total shareholders' equity 2,111,754 1,627,876
-------------------------------------------------------------------------
Commitments and contingencies
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,871,623 $3,783,388
=========================================================================
Whole Foods Market, Inc.
Consolidated Statements of Cash Flows (unaudited)
January 17, 2010 and January 18, 2009
(In thousands)
Sixteen weeks ended
January 17, January 18,
2010 2009
=========================================================================
Cash flows from operating activities:
Net income $55,155 $32,329
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 83,701 80,792
Loss on disposition of fixed assets 529 7
Impairment of long-lived assets 1,730 2,292
Share-based payment expense 5,241 3,789
LIFO expense 195 3,600
Deferred income tax benefit (1,584) (1,839)
Excess tax benefit related to exercise of
team member stock options (81) -
Deferred lease liabilities 10,717 13,162
Other (3,100) 5,544
Net change in current assets and liabilities:
Accounts receivable (8,812) 4,378
Merchandise inventories (12,547) (15,888)
Prepaid expenses and other current assets 10,041 29,432
Accounts payable (2,619) (23,242)
Accrued payroll, bonus and other benefits
due team members 20,351 8,592
Other current liabilities (5,030) (389)
Net change in other long-term liabilities 7,590 (461)
-------------------------------------------------------------------------
Net cash provided by operating activities 161,477 142,098
-------------------------------------------------------------------------
Cash flows from investing activities:
Development costs of new locations (59,273) (82,086)
Other property and equipment expenditures (23,257) (28,209)
Purchase of available-for-sale securities (264,782) -
Sale of available-for-sale securities 17,205 -
Increase in restricted cash (16,191) (3)
Other investing activities (475) (126)
-------------------------------------------------------------------------
Net cash used in investing activities (346,773) (110,424)
-------------------------------------------------------------------------
Cash flows from financing activities:
Preferred stock dividends paid (8,500) (2,833)
Issuance of common stock 3,962 1,350
Excess tax benefit related to exercise
of team member stock options 81 -
Proceeds from issuance of redeemable
preferred stock, net - 413,052
Proceeds from long-term borrowings - 123,000
Payments on long-term debt and capital
lease obligations - (320,715)
Other financing activities 3 -
-------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (4,454) 213,854
-------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 1,032 (3,468)
-------------------------------------------------------------------------
Net change in cash and cash equivalents (188,718) 242,060
Cash and cash equivalents at beginning of period 430,130 30,534
-------------------------------------------------------------------------
Cash and cash equivalents at end of period $241,412 $272,594
=========================================================================
=========================================================================
Supplemental disclosure of cash flow information:
Interest paid $19,375 $22,286
Federal and state income taxes paid $41,483 $4,581
Non-cash transaction:
Conversion of redeemable preferred stock
into common stock $418,247 $-
=========================================================================
Whole Foods Market, Inc.
Non-GAAP Financial Measures (unaudited)
(In thousands)
In addition to reporting financial results in accordance with generally
accepted accounting principles, or GAAP, the Company provides information
regarding Earnings before interest, taxes, depreciation and amortization
("EBITDA"), Adjusted EBITDA and Free Cash Flow in the press release as
additional information about its operating results. These measures are
not in accordance with, or an alternative to, GAAP. The Company's
management believes that these presentations provide useful information
to management, analysts and investors regarding certain additional
financial and business trends relating to its results of operations and
financial condition. In addition, management uses these measures for
reviewing the financial results of the Company as well as a component of
incentive compensation. The Company defines Adjusted EBITDA as EBITDA
plus non-cash asset impairment charges. The Company defines Free Cash
Flow as net cash provided by operating activities less capital
expenditures.
The following is a tabular presentation of the non-GAAP financial
measures, EBITDA and Adjusted EBITDA including a reconciliation to GAAP
net income, which the Company believes to be the most directly comparable
GAAP financial measure.
Sixteen weeks ended
January 17, January 18,
EBITDA and Adjusted EBITDA 2010 2009
=========================================================================
Net income $55,155 $32,329
Provision for income taxes 38,328 22,935
Interest expense, net 8,770 11,739
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Operating income 102,253 67,003
Depreciation and amortization 83,701 80,792
-------------------------------------------------------------------------
Earnings before interest, taxes,
depreciation & amortization (EBITDA) 185,954 147,795
Impairment of assets 1,730 2,292
-------------------------------------------------------------------------
Adjusted EBITDA $187,684 $150,087
=========================================================================
The following is a tabular reconciliation of the Free Cash Flow non-GAAP
financial measure.
Sixteen weeks ended
January 17, January 18,
Free Cash Flow 2010 2009
=========================================================================
Net cash provided by operating activities $161,477 $142,098
Development costs of new locations (59,273) (82,086)
Other property and equipment expenditures (23,257) (28,209)
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Free cash flow $78,947 $31,803
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Contact: Cindy McCann
VP of Investor Relations
512.542.0204
Source: Whole Foods Market, Inc.