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Whole Foods Market (WFMI)

Q2 2011 Earnings Call

May 04, 2011 5:00 pm ET


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


John Heinbockel - Guggenheim Securities, LLC

Meredith Adler - Barclays Capital

Scott Mushkin - Jefferies & Company, Inc.

Mark Wiltamuth - Morgan Stanley

Karen Short - BMO Capital Markets U.S.

Robert Ohmes - BofA Merrill Lynch

Stephen Grambling - Goldman Sachs Group Inc.

Edward Aaron - RBC Capital Markets, LLC



Good day, and welcome to the Whole Foods Market Second Quarter Earnings Call. [Operator Instructions] It is now my pleasure to hand the call over to Cindy McCann. Please go ahead.

Cindy McCann

Good afternoon. Thank you for joining us for the Whole Foods Market Second 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.

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 due to a variety of factors that affect the company, including the risks specified in the company's most recently filed Forms 10-Q and 10-K. 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 assume you've read our press release, so we'll use this time to focus on highlights from the quarter and our updated guidance for the year. We're very proud of our results, with the strongest we have reported in the past five years. We produced average weekly sales per store of $644,000, translating to $888 in sales per square foot, 9.7% store contribution, 6% operating margin, 8.9% EBITDA margin, 29% increase in diluted earnings per share to $0.51, and a 38% net operating profit after tax return on invested capital for all stores.

Our solid execution and capital discipline is generating consistent cash flow. Over the last four quarters, we have produced $645 million in cash flow from operations, and received a $166 million in proceeds from stock option exercises. We've used our cash to invest $279 million in new and existing stores, pay off $700 million in long-term debt, and return $35 million in two quarterly dividends to our shareholders. With our long-term debt now fully repaid, we are considering other uses for our growing cash balance, including increasing the investment in our new and existing stores, raising our dividend and repurchasing stock.

While we're very proud of our results and healthy balance sheet, the biggest news of the quarter is that we were able to successfully comp the comp. Despite a 520 basis point tougher year-ago comparison in Q2 compared to Q1, we are reporting our sixth consecutive quarter of accelerating two-year identical store sales growth. Identical store sales increased 8.3% in the second quarter or 16% on a two-year stacked basis, excluding a negative 50 basis point impact from the Easter shift.

We believe our efforts around value and differentiation continue to gain traction as evidenced by the strong 6% increase in our transaction count and identical stores. We believe the slight decline from the 7% increase we saw in Q1 was due to the much tougher year-ago comparison. On a two-year basis, the increase in transaction count accelerated to 10.9% in Q2 from 9.7% in Q1. We did see some product cost increases in the quarter, which we were able to selectively pass-through at retail. This resulted in a 2% increase in our Q2 basket size, driven by increases in both the average price per item and to a lesser extent, items per basket. We have worked very hard over the last couple of years to successfully improve our price image, remained focused on maintaining our relative price positioning in the marketplace.

Costs have definitely moved up, so we are appropriately cautious about the back half of the year. We are hopeful that we can again strike the right balance between rising product costs, and our retails based on our contracts, distribution and tools to manage value. We believe that it is increasingly important to offer a range of prices in each category to allow people to make choices, and we are focused on continuing to develop new products that are of better value to our customers, particularly in the commodity areas.

While we can't say how our customers may react going forward, our quarterly results underscore signs that consumer confidence continued to improve, even as gas prices rose. Year-over-year, sales continue to shift toward branded and organic products. We also saw a shift in purchases to higher-priced tiers, including shifts in several discretionary categories such as cheese, body care and gift sets.

With 31 weeks now behind us, our identical store sales growth has averaged 8.6% year-to-date. We're 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 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. For example, similar to the rating systems we have implemented in other categories such as meat and seafood, we recently announced our new Eco-Scale rating system for household cleaning products. This comprehensive color-coded rating system will allow shoppers to easily identify a product's environmental impact and safety based on a red, orange, yellow, green color scale. We have committed to working with our vendors to evaluate and independently audit every product in our cleaning category, and all products will be required to meet the baseline orange standard by Earth Day 2012.

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