AUSTIN, Texas -- The country's two largest natural/organic foods supermarket companies posted strong quarterly results last week at a time when most mainstream supermarket companies have been experiencing flat sales at best.
But industry analysts wondered if Whole Foods Markets, Austin, Texas, and Wild Oats Markets, Boulder, Colo., would be able to expand their store base fast enough to maintain their current high level of comparable-store sales growth.
At Whole Foods, comps for the 12-week third quarter ended July 7 rose 10.5%. While the company's newer, larger stores (those less than two years old average 35,300 square feet) had the highest comps (an average of 32.5%), many analysts said that the ability of the smaller, older stores (those more than five years old average 24,900 square feet) to continue to produce impressive comps (an average of 6.3%) is a good measure of Whole Foods' success at execution.
Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, told SN, "Comp sales at Whole Foods' mature stores are six to seven times the industry average. Because their execution is so good, they are taking share within a growing niche."
At Wild Oats, comparable-store sales were up 5.2% over year-ago levels in the second quarter ended June 29. Included in that sales gain was an increase of almost 2.3% in customer counts and an increase of a little less than 3% in basket size, said Ed Dunlap, chief financial officer, in a conference call with analysts.
"Item counts in the basket are increasing more than customer counts, and that is helping comps and margins," he said.
Analysts told SN they wondered if the chains will be able to expand fast enough to sustain their recent comps.
At Wild Oats, the biggest impediment to growth has been money, the analysts noted.
Ziegler said, "Wild Oats needs to complete its equity offering and get new stores open. It needs an aggressive unit-growth program."
Monica Aggrawl, equity analyst, Merrill Lynch, voiced a similar assessment. "Wild Oats is still waiting for its equity financing to come through," she said. "Then we will see if they can carry out their pretty ambitious expansion plan. They have to go out and find sites that have the perfect demographics -- the right incomes and the right density. After that, it become a question of execution."
Analysts expressed concern that Whole Foods' growth rate has been slowed by an overly perfectionist approach.
Carole Buyers, research analyst, RBC Capital Markets, said, "Because they strive for perfection at the store level," she wasn't sure if Whole Foods could grow faster enough to "maintain 10% to 15% same-store sales growth."
Ziegler observed, "They are generating a pretty good cash flow. Can they accelerate the rollout of new units?"
Wild Oats said in the conference call that it pushed back into next year some of its store openings that previously were slated for later this year. The company plans to open two Wild Oats stores in Portland, Maine, and Lexington, Ky., and one Henry's Marketplace store in Costa Mesa, Calif. The stores will incorporate the slimmed-down features of Wild Oats' newest 26,000-square-foot prototype in Long Beach, Calif., which offers less than 10,000 stockkeeping units from less than 200 vendors.
"That will be our model going forward," said Perry D. Odak, president and chief executive officer.
The store is "running at productivity levels that are 20% above company average," Dunlap added.
Wild Oats is planning an equity offering of 4.45 million shares, which Odak said would be used to finance growth of 10-20 new stores per year, with a focus on improving penetration in existing markets.
Jason Whitmer, analyst, Midwest Research, Cleveland, said he was impressed with the company's second-quarter performance but questioned its growth projections.
"If they continue to push out store openings, it makes you wonder how they're really doing financially if they're really banking on that equity offering to fund that new-store growth," he said.
Growth was the only issue raised by the analysts. Wild Oats also faces the very serious challenge of competing with Whole Foods, they noted.
Buyers noted, "Wild Oats is not out of the woods yet. Wild Oats sets the stage in a market, then Whole Foods enters. I don't think they're coming after Wild Oats, but ultimately Whole Foods has the better strategy, the better execution.
"Wild Oats is turning around their operations, but when they turn around, Whole Foods is right there."
Andrew Wolf, equity analyst, BB&T Capital Markets, Richmond, Va., said, "Wild Oats is not considered to be in Whole Foods' league. Whole Foods has annual sales of $730 per square foot. Wild Oats has around $400 per square foot. Whole Foods is dominant in assortment and service."
Aggrawl observed, "As Wild Oats opens more stores, they're going head-to-head more often against Whole Foods."
In the third quarter, Whole Foods' sales rose 21.1% to $648.8 million, and net income rose 37.3% to $22.1 million. Earnings per share were 36 cents vs. 29 cents for last year's third quarter.
For the first 40 weeks of fiscal 2002, Whole Foods' sales were up 23.5% to $2.1 billion, comparable-stores sales rose 10%, and net income increased 6.8% to $62.4 million. Earnings per share were $1.04 vs. $1.05 for the first three quarters last year. (Earnings for the first 40 weeks last year benefited from income of $12.3 million, or 22 cents per share, from discontinued operations.)
At Wild Oats, second-quarter net income totaled $1.5 million, vs. a loss of $38.1 million in the year-ago period on a sales gain of 3%, to $236.2 million. Year-ago sales included results from eight stores that have been shuttered.
Through the first two quarters, profits were $2.2 million, vs. a loss of $38.2 million a year ago that included charges for restructuring and other one-time charges.
