Whole Foods Comp Sales Down in Q1

MARK HAMSTRA

AUSTIN, Texas — Comparable-store sales declined 4% at Whole Foods Market here in the first quarter — marking the first negative comps number in the company's 29-year history — but efforts to cut costs resulted in better-than-expected profits for the beleaguered natural and organic specialist.

Despite the comp-store sales decline, shares of Whole Foods, which had been badly beaten down in the past two years, jumped nearly 40% on the day following the earnings report as analysts upgraded the stock.

“Comps fell slightly short of estimates, but some feared an even worse sales print,” noted Edward Aaron, an analyst at RBC Capital Markets, Denver. “Meanwhile, margins held up well, all things considered.”

Since announcing its expense reduction plan last August, Whole Foods said it had eliminated 306 positions, which it said would save an estimated $16 million in labor and benefit costs each year. The company also trimmed planned new-store openings for the current fiscal year to 15 from a prior range of 25-30, and terminated 11 leases in development. It also reduced the size on some leases and cut discretionary capital expenditures by 50%.

Net income for the quarter, which ended Jan. 18, declined 17.4%, to $32.3 million, on flat sales overall of about $2.47 billion, but Whole Foods reported that it shaved about 5.5% off of its general and administrative expenses in the period, to $82.6 million.

Earnings per share of 20 cents beat Wall Street estimates of about 15 cents.

“The earnings upside resulted from better-than-forecasted gross margin and direct store expense ratio, as cost control at headquarters and in the stores was well executed,” said Andrew Wolf, a Richmond, Va.-based analyst with BB&T Capital Markets.

Encouraging sales indications through the first four weeks of the second quarter also buoyed analysts' outlooks.

The results included $11 million in legal costs related to the Federal Trade Commission's antitrust lawsuit over the acquisition of Wild Oats Markets, which Whole Foods is seeking to settle.

Whole Foods said the comp-store sales decline was partly attributable to unfavorable currency exchange rates from its United Kingdom business, but it attributed the bulk of the decline to decreases in store traffic. Both basket sizes and customer counts declined in the quarter, the company said.

Excluding the negative impact of foreign currency translation related to Whole Foods' U.K. operations, comparable-store sales decreased 3.4%, and identical-store sales decreased 4.2%.

Whole Foods also said its campaign to improve its price image in the marketplace appears to be gaining traction, especially as customers continue to trade down.

“I think [consumers] have responded well to our value efforts in pricing,” said Walter Robb, co-president, Whole Foods, in a conference call discussing the results.

The company said it has focused particularly on emphasizing value in its perishables offering, but also noted that it has expanded its SKU count in private label by 11% in the past year, and said store brands now account for 22% of sales in the company's grocery and Whole Body departments.

The U.K. stores, most of which previously had been operating under the Fresh & Wild banner, have been rebranded as Whole Foods. The company now has five stores in the U.K., including its massive flagship Kensington location.

John Mackey, chairman and chief executive officer of Whole Foods, said the flagship store is “showing significant improvement in operating cash flow” and noted that overall cash flow in the U.K., adjusted for changes in currency valuation, was negative $1.7 million, compared with a negative $3.3 million a year ago.