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Whole Foods Market (WFMI)

F1Q11 Earnings Call

February 09, 2011 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

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

Walter Robb - Co-Chief Executive Officer and Director

Analysts

John Heinbockel - Guggenheim Securities, LLC

Scott Mushkin - Jefferies & Company, Inc.

Karen Short - BMO Capital Markets U.S.

Joseph Parkhill - Morgan Stanley

Robert Ohmes - BofA Merrill Lynch

Edward Aaron - RBC Capital Markets, LLC

Charles Grom - JP Morgan Chase & Co

Presentation

Operator

Good day, everyone, and welcome to the Whole Foods First Quarter Earnings Call. [Operator Instructions] And it is now my pleasure to hand the call over to Cindy McCann, Vice President of Investor Relations. Please go ahead.

Cindy McCann

Good afternoon. Thank you for joining us for the Whole Foods Market First 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 & Development.

I'd like to remind you that the discussion we're 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 Walter Robb.

Walter Robb

Thank you, Cindy. Good afternoon, everyone. We assume you have read our press release, and we'll use this time to focus on highlights from the quarter. We're very proud of our results, which once again showed strong top and bottom line increases. On a 14% increase in sales, we produced: a 15% increase in gross profit; a 26% increase in EBITDA to $234 million; a 59% increase in earnings per share to $0.51; cash flow from operations of $253 million; and free cash flow of $162 million. Our solid execution is generating consistent free cash flow which we are using to pay off debt, invest in new and existing stores and return cash to shareholders. During the quarter, we repaid $100 million of our term loan and invested $91 million in capital expenditures. Subsequent to the end of the quarter, we repaid another $200 million and paid $17 million to our shareholders after reinstating our dividend last December.

The biggest news of the quarter is, despite increasingly tougher comparisons, we maintained our sales momentum and are reporting our fifth consecutive quarter of accelerating ident [identical] store sales growth on both a one- and a two-year basis. Identical store sales increased 9.1%, our highest result in four years, and an acceleration of 518 basis points to 11.6% on a two-year stacked basis. Average weekly sales per store for all stores increased 9% to $621,000, translating to sales per square foot of approximately $856.

We believe our value efforts and differentiation are continuing to gain traction as evidenced by our strong 7% increase in transaction count in identical stores. A 2% increase in basket size was driven primarily by customers putting more items in their baskets, and while there was a lot of discussion about inflationary pressures on product costs, our average price per item showed only a slight increase year-over-year. This is a reversal from slight decreases we have been seeing. We attribute this net overall result to our strategic price investments offsetting the selected pass-through of some higher product costs.

Our results underscored signs that consumer confidence continues to improve. Year-over-year, branded product sales growth outpaced our exclusive brand growth, and customers continued to shift towards organic products. We also saw an increase on the percentage of sales and transactions for baskets over $50.

Our identical store sales growth averaged 8.5% over the last four quarters and 8.6% for the first three weeks of Q2. With over a third of the year behind us, our idents have averaged 9% year-to-date. We are proud that we are continuing to gain market share at a much faster rate than most public food retailers and attribute a lot of our success to the progress we have made in our relative price positioning and to continuing to raise the bar in areas that matter to our customers.

Just last week, we announced our deeper commitment to improve the lives of farm animals with the adoption of the 5-Step Animal Welfare Rating System. This is big news for our producers, for our shoppers and most importantly, for the farm animals. The rating system is the signature program of the new non-profit Global Animal Partnership and recognizes producers for their efforts improving the welfare of the animals.

For our shoppers, the rating system offers a new level of transparency about the beef, pork and chicken that we sell. Some step-rated options are now available at all of our stores in the United States, and by May 9, all the beef, pork and chicken we carry in the fresh and pre-packaged cases will be rated.

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