Whole Foods Refills Its New-Store Pipeline

ELLIOT ZWIEBACH

AUSTIN, Texas — Whole Foods Market here is ratcheting up the number of new-store openings as it re-accelerates an aggressive growth program.

After a period during which it slowed new-store growth to invest in price, the company said it expects to open 17 new stores in 2011 and 19 in 2012, compared with 15 stores opened last year and 15 more expected this year.

“As long as we can get good stores, we are going to open as many as we can,” John Mackey, co-chief executive officer, told analysts last week during a conference call. “We're sort of bullish and optimistic about our future potential growth. We have the capital for it, our balance sheet has been renewed, we've got the infrastructure in place and we have the leadership in place. We can grow faster and intend to grow faster.”

The company said during the call it had recently signed six new leases for sites: one each in San Francisco; Boise, Idaho; Minneapolis; and Washington D.C.; plus two in its headquarters city of Austin. The sites average 34,000 square feet.

In response to an analyst's question, Jim Sud, executive vice president, growth and development, said Whole Foods is seeing most of its new-store development opportunities in second-generation retail spaces, as opposed to new ground-up development.

He noted, however, that the company is “seeing a lot of opportunities in real estate, and the quality of deals we're seeing is picking up.”

Whole Foods said it also was ramping up expansion in Canada, where it recently reviewed “several” markets and signed deals for “a couple” of new stores.

“We are doing very well there,” Mackey said. “The two markets that we're in, Toronto and Vancouver, are doing extremely well for us. So we do anticipate definitely many more stores in Canada.”

In addition, the company said it is pleased with sales trends at its U.K. stores and said it could have more announcements soon about plans to expand there with stores in the 25,000- to 30,000-square-foot range.

The moves come after Whole Foods in 2008 sharply curtailed spending and cut back on new-store development amid a decline in its fiscal performance. Since then, the company has taken on a new investment partner — Los Angles-based Leonard Green & Partners — and turned its sales trends sharply positive.

In the conference call last week, Whole Foods said its customers are beginning to trade up and it is seeing transactions and basket size on the rise as the chain's value message takes hold.

Walter Robb, co-CEO, said average basket size rose 1% during the third quarter, which ended July 4, to approximately $33 — a figure that jumps to $62 among customers using Whole Deal coupons, A.C. Gallo, president and chief operating officer, added. Traffic counts were up 7.4%.

Robb also said branded products are outpacing sales of private labels, “and customers are selectively trading up to higher-priced items in certain areas,” including wine and floral.

Net income for the third quarter rose 53.6% to $65.7 million while sales rose 15.2% to $2.2 billion, and identical-store sales jumped 8.4%, “despite tough comparisons and the recent dip in reported consumer confidence,” Mackey pointed out.

For the 40-week period, net income increased 70.6% to $188.3 million, while sales were up 11.4% to $6.9 billion and IDs climbed 5.9%.

Commenting on the results, Andrew Wolf, managing director at BB&T Capital Markets, Richmond, Va., said, “Top-line momentum has been due to a substantially improved value image, coupled with a relatively more upbeat demographic,” with independent polling indicating that upscale shoppers are more confident and likely to spend more than average consumers.

“This has led to a return of customers, plus new customers, to the channel and the store, with increased transactions driving nearly 90% of the third-quarter same-store sales gain while more items per basket drove the rest of the sales productivity growth.”