Whole Foods Sets Expansion Target: 1,000 Stores

ELLIOT ZWIEBACH

AUSTIN, Texas — Whole Foods Market here has sufficient operating capital “to grow as fast as we want to grow,” John Mackey, co-chief executive officer, told analysts last week — setting a goal for the chain of 1,000 stores.

“We are positioned to internally fund the acceleration in our new-store growth,” Mackey said during a conference call discussing second-quarter financial results, “and there is still plenty of runway [space] left in the U.S., and Canada and the United Kingdom hold great promise.

“We consider 1,000 stores to be a reasonable indication of our market opportunity as our brand continues to strengthen, as consumer demand for natural and organic products continues to increase and as our flexibility on new-store size opens up additional market opportunities.”

Whole Foods currently operates 304 stores, with four new stores and two relocations planned for the third quarter, and 50 stores in its development pipeline, the company said.

Industry analysts said they see nothing to halt the chain's accelerated growth pace.

Meredith Adler, an analyst with Barclays Capital, New York, said she sees “plenty of potential ahead” for Whole Foods.

“The company continues to benefit from a recovery in spending by more affluent customers, as well as from its own initiatives to offer greater value. Even with inflation, it has more flexibility to raise prices since its customers are less price-sensitive than the average.”

Square-footage growth appears to be sustainable at around 8% a year, Adler noted, “which may be a slower pace than very bullish investors had expected but [one that] is very realistic.

“Management believes a high single-digit growth rate, an average store of 40,000 to 45,000 square feet and carefully controlled construction costs can be absorbed without too much pressure on earnings.

“And Whole Foods has more than ample internally generated cash and the internal infrastructure to handle an even faster store-opening plan than is currently contemplated.”

Edward Aaron, an analyst with RBC Capital Markets, New York, said the chain's solid, stable sales trends in the quarter “will cause investors to embrace plans for accelerated store growth, [and] the smaller size and lower cost of stores in development should enable stores to open at higher levels of profitability than in years past.”

Mackey said results for the 12-week second quarter, which ended April 10, were the company's strongest in the past five years, with net income rising 33.3% to $89.9 million, on sales growth of 11.6%, to $2.4 billion. Comparable- and identical-store sales increased 7.8%, despite the negative impact of 50 basis points from the shift of Easter from last year's second quarter to this year's third quarter, the company said.

ID sales through May 1 — the first five weeks of the third fiscal quarter — were up 8.1%, “which should offset any misperception that Whole Foods' sales momentum is slowing,” Ajay Jain, a senior analyst at Hapoalim Securities, New York, said.

With customer transaction count up 6% in the second quarter and transaction counts up 10.9% over a two-year period, “Whole Foods should be able to effectively manage product cost increases without sacrificing gross margins,” he added.

For the first half, net income increased 45.7% to $178.7 million, while sales rose 12.8% to $5.4 billion and comps and ID sales were up 8.5%, including a negative impact of 24 basis points from the Easter shift.

The company said it is raising its earnings per share estimate for the year by 10 cents, to a range of $1.87 to $1.90.

Mackey said the chain is continuing to gain market share at a much faster rate than most food retailers, which he attributed to improved pricing at Whole Foods.

According to Walter Robb, co-CEO, Whole Foods is trying to counter inflation-driven price increases by developing “even better selections of value items in each category,” including extreme-value lines of wine and cheese — a process that will be expanded to other categories, he noted.

Besides building smaller stores, the company is beginning to cluster smaller units in urban locations, Mackey said. “In places like West Los Angeles, where it's hard to find big-store real estate, we are opening smaller stores that are more densely located. We're also doing some of that in the Washington, D.C., market and San Francisco and Chicago. And we would hope to see it in Manhattan as well.”

The company also said it was changing its trading symbol to WFM from WFMI, effective last Friday.