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Whole Foods Market (WFMI)

Q4 2010 Earnings Call

November 03, 2010 5:00 pm ET

Executives

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

A. Gallo - President and Chief Operating Officer

Cindy McCann - Vice President of Investor Relations and Vice President of Construction and Store Development

James Sud - Executive Vice President of Growth and Business Development

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

Walter Robb - Co-Chief Executive Officer and Director

Analysts

Colin Guheen - Cowen and Company, LLC

Meredith Adler - Barclays Capital

Scott Mushkin - Jefferies & Company, Inc.

Robert Summers - Susquehanna Financial Group, LLLP

Karen Short - BMO Capital Markets U.S.

Joseph Parkhill - Morgan Stanley

Neil Currie - UBS Investment Bank

Edward Aaron - RBC Capital Markets Corporation

Charles Grom - JP Morgan Chase & Co

Presentation

Operator

Good day, everyone, and welcome to today's program: Whole Foods Market Fourth Quarter Earnings Conference. [Operator Instructions] It is now my pleasure to turn the conference over to Cindy McCann, Global Vice President of Investor Relations.

Cindy McCann

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

I'd like to remind you that the discussions we are having today will include forward-looking statements within the context of federal securities laws. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. We undertake no obligation to update forward-looking statements. These risks and uncertainties include those outlined in today's call, as well as any other risks identified from time to time in the company's public statements and reports filed with the SEC. Please note our press release and scripted remarks are available on our website.

I will now turn the call over to John Mackey.

John Mackey

Thank you, Cindy. Good afternoon, everyone. We're very pleased to report our fourth quarter results, which once again showed strong top and bottom line increases. On a 15% increase in sales, we produced: a 17% increase in gross profit, including LIFO; a 26% increase in EBITDA to $165 million; a 63% increase in earnings to $0.33 per diluted share; cash flow from operations of $124 million; and free cash flow of $67 million. Our solid financial performance and capital expense discipline have resulted in a consistent generation of free cash flow and a healthy balance sheet.

For the fiscal year, we produced $585 in cash flow from operations and invested $257 million in capital expenditures, resulting in free cash flow of $328 million. We ended the year with approximately $645 million in total cash, including cash equivalents, restricted cash and investments with an additional $343 million available on our credit line.

With our excess cash, we paid off $210 million of our term loan in the third quarter and an additional $100 million subsequent to the end of the fourth quarter, bringing our remaining balance to $390 million.

Going forward, our priority is to pay off the remainder of our term loan prior to its maturity in August 2012. We also plan to step up the investment in our business. We expect capital expenditures to increase by approximately $90 million to $140 million this fiscal year and to increase again in 2012 as new store openings begin to accelerate.

All in all, we're very pleased to be consistently producing free cash flow and in such a favorable cash position, where we can consider various options, including the possibility of reinstating our dividend.

Turning back to our Q4 results. Average weekly sales per store for all stores increased approximately 9% to $583,000, translating to sales per square foot of approximately $810. Identical store sales increased 8.7%, accelerating to 6.4% on a two-year stacked basis. Our ability to continue to perform against increasingly tougher comparisons has surpassed our expectations, translating to results that were significantly higher than our guidance range of 6.5% to 7.5%.

Our sales momentum increased throughout much of the quarter and was broad-based across most regions and departments. The drivers behind our identical store sales growth in Q4 was similar to Q3. Year-over-year, transaction count increased approximately 7% and basket size increased approximately 2%, with the increase in basket size driven entirely by customers putting more items in their baskets.

Average price per item decreased slightly as our strategic price investments more than offset the pass through of some higher product costs. Customer behavior was also fairly consistent with what we saw in Q3. Customers were still seeking value as demonstrated by strong sales growth year-over-year in promotional and exclusive-branded items. At the same time, signs of customer confidence also continued as year-over-year branded product sales growth continued to outpace exclusive brand growth, and customers selectively traded up to higher-priced items in certain discretionary areas such as seafood, cheese and housewares.

Customers have also continued to shift toward organic products for sales growth and organic products outpacing sales growth in natural products year-over-year. Our identical store sales growth has averaged 8.3% for the last three quarters and was 8.9% for the first five weeks of Q1. We are proud that we are continuing to gain market share in a much faster rate than most public food retailers and attribute a lot of our success with the progress we have made in our relative pricing position and to continue to raise the bar in areas that matter to our customers.

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