Whole Foods Ramps Up New Stores

ELLIOT ZWIEBACH

AUSTIN, Texas — Whole Foods Market here said last week it plans to accelerate its rate of growth with a record number of openings in each of the next two years.

After opening 16 stores last year and projecting 18 by the end of this year, the company said it expects to open between 24 and 27 new locations in fiscal 2012 and between 28 and 32 more in fiscal 2013 — all funded through cash flow, with enough capacity remaining to also increase the dividend and repurchase stock.

However, unlike prior years, the ramp-up in new store openings is unlikely to have a meaningful negative impact on earnings, Walter Robb, co-chief executive officer, told analysts during a conference call last week.

“While new stores produce lower store contribution than mature stores, we estimate new stores will account for only 5% of our total sales in fiscal 2012 and thus should not have a material negative impact on results.

“In addition, our new stores are performing well. On average they are smaller and less expensive to build, and they are expected to achieve higher returns on invested capital than the larger stores we opened in the recent past.”

New stores will average 35,000 square feet, compared with 42,600 square feet for stores opened last year and 37,700 square feet for stores opened this year.

Scott Van Winkle, an analyst for Canaccord Genuity, Boston, said store-level contributions to earnings is near 10% “and still rising, so the Whole Foods investment case has never been stronger. As square footage growth accelerates, the smaller, more cost-effective new stores are providing new unit returns that haven't been seen in years.”

For the fiscal third quarter, which ended July 3, net income rose 34.6% to $88.5 million, and sales climbed 10.9% to $2.4 billion, with comparable-store sales up 8.4%. For the year to date, net income increased 41.8% to $$267.1 million and sales jumped 12.2% to $7.8 billion, with comparable sales up 8.5%.

Comps for the first three weeks of the fourth quarter were up 9.5%, Robb said.

The chain raised its earnings guidance for the year to between $1.91 and $1.92 per share, up from the previous guidance of $1.89, with 2012 earning expected to fall within a range of $2.21 to $2.26 per share, compared with previous guidance of $2.20; with EBITDA for this year expected to be around $835 million, sales expected to climb between 11% and 13% and comps expected to rise between 6.8% and 8.8%.

Whole Foods' efforts to boost its value image are contributing to the company's momentum, “helping drive a 5% increase in transaction counts,” Robb pointed out.

Basket size during the quarter rose 3%, up from 2% in the second quarter, he noted, “which was driven entirely by a higher average price per item as we selectively passed through some product cost increases and as customers continued to trade up.”

The company also saw “strong increases” in baskets exceeding $50, he added.

With more consumers interested in healthier lifestyles and eating habits, “we are perfectly positioned for a major demographic evolution,” John Mackey, chairman and co-CEO, said.

“Our competitive advantage historically has been the store experience, service levels and the differentiated product mix.

“Now we're getting better at being more efficient — we're still in the early innings on that count — and we've got a lot more efficiencies ahead of us.”

Analysts were upbeat on prospects for the chain.

“The story at Whole Foods remains robust, [and] the Whole Foods investment case could be categorized as having never been stronger,” Van Winkle said.

“Supported by a favorable backdrop of strong natural/organic/healthy food trends, Whole Foods has been capable of improving value for consumers while at the same time providing enhanced profitability metrics. This trend is the secret of [its] success.”

Edward Aaron, an analyst with RBC Capital Markets, New York, said Whole Foods possesses “a rare combination of accelerating top line — in terms of comps and square-footage growth — and solid margin and return-on-invested-capital improvement characteristics [with] secular growth prospects and execution [that] are unquestionably good.

“Comps are more consistent than in the past — no doubt helped by improved consumer value perceptions, which are likely to strengthen further as Whole Foods leverages its large and growing scale advantage.”

Scott Mushkin, an analyst with Jefferies & Co., New York, said he believes Whole Foods' sales will remain strong because of the chain's ability to control in-store expenses, take costs out of the supply chain and hold down pre-opening expenses by opening smaller stores. “This tightening of the screws should drive further leverage from Whole Foods' industry-leading comps in the coming years,” he said.

Q3 RESULTS