Whole Foods Market, Inc. (WFM)

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Whole Foods Market, Inc. (WFM)

F1Q2012 (Qtr End 01/15/2012) Earnings Call

February 08, 2012 05:00 pm ET


Cindy McCann - VP, IR

Walter Robb - Co-CEO

Glenda Flanagan - EVP &CFO

A.C. Gallo - President & COO

John Mackey - Co-CEO

Jim Sud - EVP, Growth and Business Development


Mark Miller - William Blair

Charles Grom - Deutsche Bank

Stephen Grambling - Goldman Sachs

Ed Aaron - RBC Capital Markets

Sean Naughton - Piper Jaffray

John Heinbockel - Guggenheim

Ed Kelley - Credit Suisse

Karen Short - BMO Capital

Scott Mushkin - Jefferies



Good day everyone and welcome to the Whole Foods first quarter earnings conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions) And it is now my pleasure to hand the call over to Cindy McCann, VP of Investor Relations. Please go ahead.

Cindy McCann

Good afternoon and thank you for joining us for 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 and 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. This may be due to a variety of factors that affect the company, including the risks specified in the company’s most recently filed Form 10-Q and 10-K. Please note our press release and scripted remarks are available on our website. We assume you’ve read our press release, so we’ll use this time to focus on highlights from the quarter.

I will now turn the call over to Walter Robb. Walter?

Walter Robb

Thank you Cindy and good afternoon everyone from Austin Texas. We are very pleased to begin the year delivering another quarter of consistently strong results. For the first quarter we produced 8.7% comparable store sales growth, average weekly sales per store of $667,000 translating to near record sales per square foot of $929. 9.1 % store contribution, 5.6% operating margin and our 11th consecutive quarter of year-over-year operating margin improvement, 8.3% EBITDA margin, a 28% increase in diluted earnings per share to $0.65; and 12.6% NOPAT return on invested capital.

Our solid execution, capital discipline, and increasing stock price generated over $340 million of cash during the quarter through a combination of $261 million in cash flow from operations and $80 million in proceeds from team member stock option exercises. We invested $111 million in new and existing stores, returned $18 million in quarterly dividends to our shareholders and repurchased $4 million of common stock. Our total cash and investments increased during the quarter by $209 million to just over $1 billion, a company milestone.

Turning to sales, given increasingly tougher comparisons and slightly moderating inflation, we are particularly pleased to deliver our 9th consecutive quarter of accelerating two-year comps which were 17.7 % for the quarter. Our sales momentum continues to be broad based across regions, departments and store age classes. Even stores over 15 years old comped at 4%, with strong transaction count increases of over 4%.

We are pleased to see increases in transaction count back over 6%, reflecting our ability both to attract new customers and to retain our loyal core customers. With the moderation in inflation, the breakout between our transaction and basket size increases was back to the 80:20 mix we were reporting prior to the sharp increase in inflation in the back half of last year.

Our core customers spend on average close to three times more than new customers, so as the increase in our average transaction count accelerated and inflation moderated in Q1, we saw the increase in our average basket size moderate as well to 2%. We were able to selectively pass through product cost increases while customers continued to trade up, resulting in higher average price per item which drove an increase in our basket size. This was offset slightly by a decrease in items per transaction. On a year-over-year basis, our customers have shifted their purchases towards organic products, higher price tiers, and several discretionary categories. We are nice growth in our 25 to 50 dollar basket and also continue to see strong increases in the 50 dollar plus-size baskets.

Excluding LIFO, gross profit increased 10 basis points to 34.7% of sales driven by an improvement in occupancy costs as a percentage of sales. Similar to our results in the fourth quarter, we did not see cost of goods leverage as we remained focused on balancing rising product costs with maintaining our relative value positioning to drive sales over the longer term.

During the holidays, it was important to get the center of the plate in order to get the rest of the holiday meal, so we were very sensitive to maintaining the right price levels in our meat departments despite sharp cost increases in beef. Inflation isn't going away, but we believe the moderation will give us additional flexibility to consistently deliver gross margin on an annual basis within our historical range of 34% to 35% while maintaining our sales momentum.

Turning to new store growth. During the first quarter we opened six new stores in Folsom, California; Jamaica Plain, Massachusetts; Minnetonka, Minnesota; Yonkers, New York; and our first stores in Oklahoma City and Scotland. Our new stores continue to generate a lot of excitement. In Folsom, we had a 1000 customers waiting for our doors to open, with some even camping out the night before or first. Folsom is about 20 miles outside of Sacramento and is one of the areas of the country that was hit fairly hard by the housing collapse. It's a good example of the success we are seeing with our broader real estate approach and our ability to go into some of the smaller, more suburban markets. In many cases, these markets offer less competition, allowing our differentiated store experience to stand out even more in the marketplace than it does in some of the larger, more competitive markets. The economic case is compelling because rent is significantly less and with the smaller size, our capital spend is less as well.

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