Whole Foods Eyes Profit Gains at Wild Oats Stores

MARK HAMSTRA

AUSTIN, Texas — Whole Foods' first priority was to share its corporate culture with Wild Oats, and now it is focusing on the bottom line.

After paring its acquisition down to 62 Wild Oats locations — seven of which are still slated for closure once nearby Whole Foods stores open up — Whole Foods has been busy upgrading the merchandising and product assortment in an effort to drive profitability to the level it achieves at its namesake chain.

In Whole Foods' first fiscal quarter, the company said sales at the 62 acquired stores that have not been shuttered totaled $228 million. Identical-store sales at the locations were up 8.6%.

The remaining Wild Oats locations average 24,000 square feet and are 9.4 years old. Average weekly sales per store in the first quarter were $230,000, or $495 per square foot, Whole Foods said.

Although profit contributions from the acquired stores have been minimal during the transition, John Mackey, chairman and chief executive officer, Whole Foods, said he expects profitability at the acquired stores to ramp up over time.

“Just compound it out a few years, and sales per square foot go from $495 per square foot to $930 per square foot, as Whole Foods' average is, and those stores will start producing 9%, 10%, 11%, 12% contribution margins similar to Whole Foods Market,” he said in the company's most recent earnings conference call.

Although Whole Foods has slotted about $40 million to $50 million in capital improvements for the acquired stores, the company has yet to invest in major remodels.

“Most of the money has been spent for smaller stuff,” A.C. Gallo, a co-president of Whole Foods, said during the call. “In order to remerchandise a lot of these stores, we had to put new bowls in the deli department, new racks for the produce department and new bins for displaying fruit. A lot of it has been small stuff spread out on quite a lot of stores just to bring the merchandising levels up.”

Walter Robb, the other Whole Foods co-president, said during the call that he expects to begin more aggressive remodeling later in the year.

“There are a number of these stores out there that are really going to yield nice results with the remodel,” he said. “We really haven't played that card yet.”

Edward Aaron of RBC Capital Markets, Denver, told SN the merger is expected to yield better results as time goes on.

“It's a big integration process, because it's a highly decentralized company buying a highly centralized company,” he said. “Wild Oats had a whole different way of doing business than Whole Foods does — Whole Foods is a highly customer-centric business focused on generating comps, and Wild Oats was more of a cost-control-focused company trying to do whatever they can do to protect their margins.”

He said early results indicate that Wild Oats had a lot of “low-hanging fruit” that Whole Foods was able to harvest in the form of store improvements.

“There are a lot of stores that I think are going to benefit from the fact that they haven't been invested in in a long time,” he said. “They are old and tired, and I think when Whole Foods throws some money at them, you're going to see sales move to an even higher level.”