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WILD OATS EYEING EXPANSION

BOULDER, Colo. - Interesting times lie ahead for Wild Oats Markets.The retailer, based here, has long struggled to profit from the growth of the natural/organic niche of its birthplace, but a combination of recent events and a long turnaround effort has poised the company to write a new future, analysts and observers said.In coming weeks, the retailer is expected to announce candidates to fill three

BOULDER, Colo. - Interesting times lie ahead for Wild Oats Markets.

The retailer, based here, has long struggled to profit from the growth of the natural/organic niche of its birthplace, but a combination of recent events and a long turnaround effort has poised the company to write a new future, analysts and observers said.

In coming weeks, the retailer is expected to announce candidates to fill three positions on its eight-member board of directors. In coming months, Wild Oats will debut its newest, largest and most elaborate store prototype. Further down the road, Wild Oats could potentially expand that concept - called "revolutionary" by Perry Odak, its chief executive officer - through the acquisition of real estate it expects to come to market as the result of industry consolidation.

"Wild Oats is a company with a tremendous amount of promise that has yet to deliver," Neil Stern, senior partner with McMillan-Doolittle, Chicago, told SN.

Though Wild Oats' stock recently gained following news that its chairman, Robert Miller, was leaving to become CEO of the Albertsons stores soon to be acquired by Cerberus Capital, analysts told SN last week that they doubted it meant Cerberus would go after Wild Oats as an acquisition. However, their futures may be intertwined in other ways: Odak said in a recent investor conference that the company was interested in as many as 30 Albertsons stores Cerberus may cast aside, as well as some Winn-Dixie locations that could come to market as those chains enact respective turnaround strategies.

If the opportunity arose to make an acquisition, Odak said, the company would likely seek to raise money in the debt or equity markets.

"We have looked at [Albertsons] boxes, and of 450 we looked at, 30 of them make a lot of sense for us. So we'll be working very hard on that opportunity," Odak said at an investor conference earlier this month. "Both Winn-Dixie and Albertsons stores we know are coming to market, we've run them up against our model, and think there's some opportunity there."

Three vacant seats on the board of directors appear to provide Ron Burkle's Yucaipa Cos. the opportunity for which it had recently petitioned: Yucaipa over the last year became Wild Oats' largest shareholder and said in a recent government filing that it may seek director seats and take a more active role in the direction of the company, including a potential recapitalization or mergers with other retailers. In addition to Miller leaving, two other Wild Oats directors, David Chamberlain and Mark Retzloff, chose not to seek re-election.

Officials of Yucaipa, based in Los Angeles, were not available for comment.

Miller, a veteran executive of Albertsons and Fred Meyer, joined Wild Oats as a nonexecutive chairman 14 months ago and is scheduled to leave to become the new Albertsons' chief in early May. While analysts said Miller wasn't heavily involved in the day-to-day operation of the chain, his term saw the appointment of a new chief financial officer, Bob Dimond, and a new senior vice president of operations, Sam Martin (who replaced Dan Bolstad, who served only for a month), moves that analysts said provided the company with "a better pedigree" of management.

"I don't know if there were any fundamental changes that happened as a result of Miller joining, other than getting more high-quality people," Scott Van Winkle, managing director of Canaccord Adams, Boston, told SN. "Generally, the quality of people running the show around Perry Odak are better than they were two or three years ago. That's a credit to Miller's presence."

Miller's tenure also included Yucaipa taking a 14.9% ownership in Wild Oats. Its stock price rose from below $9 when Miller joined last December to more than $19 last week.

"It's gone from a stretch buyout candidate at $8 [a share] to someone who looks like they could be issuing money to buy other things," one analyst, who asked not to be identified, told SN. "That will be significant from a supermarket standpoint because it's one more guy who'll be capitalized to bid on any excess Albertsons leases. I think they'll try to turn themselves into a grower."

Speaking at an investor conference earlier this month, Dimond said new executives at the company, himself included, are merely implementing the plan under way before their arrival, and making only minor changes in operations at the store level. (He likely was referring to Wild Oats' gradual relaxing of previously stringent product standards over the last year, facilitating the introduction of more mainstream products).

"We've been implementing the plan that has been at work for several years now. The turnaround under Perry Odak was complete in '04, and '05 was a period of stabilizing and the beginning of growth," Dimond said.

Yucaipa has thus far been a "passive investor," Dimond added, saying that in two meetings with the company over the last year, Yucaipa "seemed very happy and supportive," of Wild Oats' plans. "It was an interchange like you'd have with any investor. [Yucaipa] indicated they had studied the space and was happy. They have not dictated any course."

Wild Oats reported sales of $1.1 billion in fiscal 2005, an increase of 7.2%, and net income of $3.2 million, rebounding from a $40 million loss in fiscal 2004. Officials credit turnaround initiatives under Odak - including technology investments, centralized buying and marketing, and distribution efficiencies - for the improving performance.

Analysts said they are awaiting further advances, particularly relating to real estate. The company carries too many underperforming locations and generally has struggled to compete with rival Whole Foods in markets where the two operate, they said.

Wild Oats faces a "structural headwind," related to poor real estate, Jason Whitmer, an analyst for FTN Midwest Securities, Cleveland, told SN. Whitmer earlier this month placed a "sell" rating on Wild Oats' stock.

While paring away poor locations is one priority, another is building additional stores to better leverage costs, analysts said. Wild Oats operates 112 stores in 24 states and one Canadian province, with plans to build 10 new stores and remodel six during the current fiscal year. "What Wild Oats needs is scale," said Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va., told SN.

On the drawing board is a new prototype set to open late this year or in early 2007 in Boulder. Odak said in a conference call earlier this year the Boulder location "will be the most revolutionary design ever executed in the grocery industry," but has not shared further details publicly. Earlier this month, published reports said a $1 million wine-and-spirits shop called Vino 29, also to be run by Wild Oats, will attach to the 40,000-square-foot store. The project, a mixed-use development on the site of a demolished shopping mall, will also include new corporate headquarters for Wild Oats.

A study commissioned by Wild Oats recently identified 450 potential new sites. That is why the company will be one to watch as stores such as Albertsons or Winn-Dixie come to market, analysts said.

"They still need to close some stores and open new ones, and the knock on them is that they've never met their targets on store development," Van Winkle said. "The pace of their turnaround is going to be determined by the pace of the real estate portfolio, and it better get better."