AUSTIN, Texas -- Whole Foods Market here last week posted a sharp decline in fourth-quarter profits, although the natural food retailer continues to far outpace traditional operators in its top-line sales growth.
The company said a combination of factors hurt the bottom line in the 12-week fourth quarter that ended Sept. 25, including higher pre-opening expenses related to larger store size and the number of prepared food departments, a non-recurring charge for estimated losses from Hurricane Katrina and a one-time higher tax rate on a stock option acceleration charge. Net income was $9.1 million, down 67.8% from year-ago levels.
Investors punished the stock price following the news, taking it down about 5% to $139.66 on the day after the earnings announcement. The stock, one of the industry's top performers in recent years, was still up more than 30% since January.
Robert T. Campagnino, an analyst with Prudential Equity Group, New York, said overall the fourth quarter was a "good one," although it "failed to meet heightened performance expectations."
"Despite a robust top-line ... the result does fall short of consensus, and the release was messier than we have grown accustomed to -- both these factors are likely [to pressure the stock price]," he said.
Eric Weissman, an analyst with Goldman Sachs, New York, said he was not overly concerned with the earnings decline, "given that comp growth remains robust and that the primary source of the shortfall -- rising pre-opening expenses resulting from early adoption of a new lease accounting policy adjustment and increasing store size -- does not imply a deterioration in fundamentals."
Sales for the quarter rose 20.3% to $1.1 billion, compared with year-ago results, and comps were up 13.4%.
Whole Foods also said it expects bureaucratic delays to result in a modest slowdown in the rate of new-store openings next year, with average square-footage growth of 14%, compared with earlier projections of 15% -- a cause for slight concern among industry analysts.
Although Whole Foods has 64 stores in its pipeline -- totaling 3.6 million square feet -- John Mackey, chairman and chief executive officer of the 175-store chain, declined to pinpoint in a conference call with analysts how many stores it expects to open in 2006, saying he prefers analysts concentrate on top-line sales growth rather than the number of stores opened.
Steve Chick, an analyst with JP Morgan, New York, pointed out it is taking Whole Foods an average of 22 months from the time a lease is signed until a store actually opens, compared with 12 to 18 months in the past.
According to Meredith Adler, an analyst with Lehman Bros., New York, "Clearly the focus on opening new stores in great locations in dense, affluent urban and suburban markets makes it challenging to get stores opened quickly."
During the call, Mackey said Whole Foods was raising its sales goal for 2010 by 20%, saying the company expects sales to hit $12 billion within five years, rather than the $10 billion goal it set several years ago.
Whole Foods also disclosed plans for a 20% increase in its quarterly dividend and a special dividend of $4 per share; a stock repurchase program of up to $200 million over the next four years; and a 2-for-1 stock split on Dec. 27.
Adler of Lehman Bros. said the initiatives are "a direct reflection of Whole Foods' inability to put capital to work building new stores."
Whole Foods boosted its sales-growth guidance for fiscal 2006 to 18% to 20%, up from15% to 20%, and projected comparable-store sales growth at 8% to 11%.