WFM

Whole Foods Market, Inc. (WFM)

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Exchange: NASDAQ
Industry: Consumer Services
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Whole Foods Market, Inc. (WFM)

F4Q12 Earnings Call

November 7, 2012 5:00 am ET

Executives

Cindy McCann - Vice President of Investor Relations

John Mackey - Co-Chief Executive Officer, Director

Walter Robb - Co-Chief Executive Officer, Director

Glenda Flanagan - Executive Vice President and Chief Financial Officer

David Lannon - Executive Vice Presidents of Operations

A. C. Gallo - President, Chief Operating Officer

Analysts

Edward Kelly - Credit Suisse

Priscilla Tsai- JPMorgan

Edward Aaron - RBC Capital Markets

Mark Miller - William Blair

Kate Wendt - Wells Fargo

Karen Short - BMO Capital

Charles Grom - Deutsche Bank

Mark Wiltamuth - Morgan Stanley

Presentation

Operator

Good day, everyone and welcome to today’s program. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the Q&A session. (Operator Instructions)

It is now my pleasure to turn the program over to Cindy McCann.

Cindy McCann

Good afternoon and thank you for joining us. On today's call are John Mackey and Walter Robb, Co-Chief Executive Officers, A.C. Gallo, President, Glenda Flanagan, Executive Vice President and Chief Financial Officer, Jim Sud, Executive Vice President of Growth and Development and David Lannon and Ken Meyer, Executive Vice Presidents of Operations.

As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in our 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 have read our press release, so we will use this time to focus on highlights from the quarter and year as well as out future outlook.

Please note fiscal year 2012 was 53-weeks, with the extra week falling in Q4, making it a 13-week quarter. I will now turn the call over to John Mackey.

John Mackey

Thank you, Cindy. Good afternoon, everyone. I would like to begin by expressing sympathy for the many people including our team members, customers, suppliers and investors impacted by Hurricane Sandy. On behalf of our leadership team, I would also like to thank our team members for their exceptional efforts in the wake of the storm. We are proud to have been among the last to close and the first to re-open up doors in so many communities impacted by this powerful and destructive storm.

Turning now to our financial results. Our Q4 performance reflected another quarter of strong sales momentum and earnings growth. On a 12-week to 12-week basis, we produced 33% earnings per share growth on 14% sales growth. We delivered significant year-over-year improvement and record Q4 results including a 76 basis point increase in gross margin to 35.3%, a 40 basis point decrease in direct store expenses to 25.5% of sales, a 117 basis point improvement in store contribution to 9.8% of sales, a 105 basis point increase in operating margin to 6%, marking our third consecutive quarter of over 100 basis points of improvement, 79 basis point improvement of EBITDA margin to 8.7% and 157 basis point improvement in return on invested capital to 12.7%.

Our comparable store sales increased 8.5%, and our identical store sales increased 8.3%. Given the continued moderation and inflation and sluggish economic data points, we were very pleased to produce an acceleration in our two and three year stacked idents. Our three year stacked ident increased 25.4% reflecting three years of 8% plus increases.

In line with the trends we have seen all year, transaction count increased seven percent, with broad-based sales momentum across regions, departments, and store age classes. Year over year, our customers continued to shift their purchases toward organic products and discretionary categories. We also continued to see meaningful increases in $50 plus sized baskets.

Our robust sales and focused operating disciplines along with moderating inflation helped generate another quarter of healthy margin performance. Our 54 basis point increase in gross margin, ex-LIFO, was driven by improvements in both occupancy costs and cost of goods sold.

Sequentially from Q3, we saw an approximate 70 basis point decrease in total gross margin. This decrease is in line with our three-year average sequential drop and is due primarily to seasonality, as well as some impact from our price investment strategy to improve our relative value positioning.

The success of this ongoing strategy is reflected in our continued sales momentum and the results from our most recent competitive survey. The survey indicates we meaningfully improved our pricing position versus our competitors during the quarter, resulting in our most competitive position in more than three years.

An important element to our value strategy is to continue to expand our private label offering. We are very excited about our recent launch of 70 new 365 and Whole Foods Market exclusive brand frozen items. These high-quality dishes are at a value price point and cover key categories such as skillet meals, pizzas, appetizers, desserts and ice creams. The products just started hitting our stores in late September and initial sales results are very positive.

During the quarter, we opened seven stores in West Des Moines, Iowa, Basalt, Colorado, New York City, Charlotte, North Carolina, San Francisco, San Antonio, and Newport Beach, California. West Des Moines, Basalt and Charlotte are all new markets for us.

These seven stores vary in size from 27,000 to 51,000 square feet and encompass trade areas with a broad range in the percentage of college grads, population density and median household income levels. We believe the diversity of these locations speaks to the breadth and variety of market opportunities available to us in new and existing markets as well as both urban and suburban locations.

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