ODAK EXITS WILD OATS AS YUCAIPA EXERTS INFLUENCE

JON SPRINGER

BOULDER, Colo. - Perry Odak, whose bumpy five-year turnaround at Wild Oats Markets met with mixed reviews from investors and analysts, announced his resignation last week. Gregory Mays, chairman of the natural food retailer, will serve as interim CEO until a successor is found, Wild Oats said.

The resignation came shortly after the company announced that it had not reached agreement on an extension of Odak's contract, which was scheduled to expire in March. As recently as July, Odak told analysts he expected a deal would get done.

Analysts and observers contacted by SN last week said they were not surprised at the departure given the influence of Yucaipa Cos., which over the past two years became Wild Oats' largest investor. Since Yucaipa's initial investment 17 months ago, several senior Wild Oats executives, including heads of finance and merchandising, have left the company. In June, Mays and Hal Brice, each with Yucaipa ties, were named to the Wild Oats board.

"Odak was pushed out because of subpar performance," Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va., told SN. "The Yucaipa people are assuming control."

The leadership change also signals that Wild Oats would accelerate its pursuit of larger stores in more urban markets, observers said, with an eye on at least doubling the size of the 114-store chain. These were strategies that Odak had resisted for most of his tenure at Wild Oats, but were employed by rival Whole Foods Market as that chain widened its lead over Wild Oats among natural/organic grocers.

"You know how 7-Up is the un-Cola? Perry wanted to be the un-Whole Foods," analyst Scott Mushkin of Bank of America Securities, New York, told SN. "Suburban locations, small stores, less adventurous in prepared foods and perishables. Hindsight is 20/20, but it turned out a lot of those decisions were wrong."

Odak joined Wild Oats in 2001 with little experience in retail but with a reputation as a turnaround specialist forged at companies like Ben & Jerry's. Analysts credited him for uniting a scattered collection of acquired banners into a chain with common systems and a consistent focus, but noted his reign was also marked by earnings disappointments, strategic missteps and inconsistency in keeping sales on pace with growth of the natural/organic industry. His successor, they said, still has big-picture issues to contend with - not the least of which is whether the retail models developed under Odak's leadership can be competitive over the long term.

"To be fair, the state of the company when [Odak] took over was worse than anyone had imagined. It was disastrous, honestly, cobbled together from various acquisitions and wasn't an operating company at all. Merchandising was all over the place. Certain stores had combinations of conventional products and organics, others had rigid standards," Mushkin said. "He made some headway in revamping the company by instituting standards for what was acceptable and what wasn't acceptable."

In a statement, Mays credited Odak for executing a successful turnaround and for helping establish Wild Oats as a "true lifestyle brand." He said the company would conduct a search for a successor "who understands our customer base and will lead this company and brand into its next phase of growth."

Analysts expect the next chief executive to have experience managing a growth company, and a strong background in food, particularly perishables. Some suggested a possible internal candidate is Roger Davidson, a former H.E. Butt Grocery, Ahold and Supervalu executive who becomes Wild Oats' senior vice president of merchandising and marketing effective today.

"I think it's a big deal they were able to get a guy like Roger Davidson," Mushkin said. "He has a good reputation as a merchant and a good reputation among [suppliers]."

Luring a top executive from rival Whole Foods would be an intriguing possibility, but one analysts said would be a longshot.

"What would be ideal is for one of the senior guys at Whole Foods to come over, but that's probably unlikely given the competitive perception Whole Foods has of Wild Oats," Scott Van Winkle, an analyst for Canaccord Adams, Boston, told SN.

Michael Krestell, an analyst with M Partners, Toronto, said Odak is leaving the company with the bulk of its turnaround complete, noting improvements in gross margin and EBITDA over the last fiscal year. He anticipates the company will shortly announce plans to accelerate store growth beyond its previously stated rate of 10%.

"We think the turnaround phase is at or near an end, and the platform for growth has been set," Krestell told SN. "With the P&L stabilized, and with some of the programs they now have in place, they have a platform from which to grow."

Wild Oats will look to build and/or acquire larger stores than the 35,000-square-foot box favored by Odak, however, said John Heinbockel, analyst for Goldman Sachs, New York.

"Ron Burkle has suggested that the company would be well-served by building larger stores and focusing on more urban markets than they have in the past," Heinbockel told SN. "Stores that are more like Whole Foods."

Wild Oats under Odak has made strides in technology and execution at its stores, Heinbockel added, "but the real question is, if you're going to get this company from 100 stores to 200 or 300, what's the best store model to do that? How are you going to go to market? How are you going to compete with Whole Foods? It's really more about growth from here on out, as opposed to internal capabilities."

Some analysts speculated that Wild Oats would pursue growth under a single trade name and format, jettisoning its Henry's Farmers Market banner in California and Arizona and closing Wild Oats stores that couldn't be expanded to a larger format. The company recently said that it would take a charge of nearly $1 million as a result of abandoning a site under development in Arizona. Though the filing did not indicate which banner was under development there, the area had been targeted for growth of the Henry's banner.

Henry's is struggling against Sprouts in Arizona, a source said last week.

Others suggest Wild Oats could combine forces with Pathmark, the East Coast chain also partly owned by Yucaipa. Mays is also on the board of Pathmark. Reports suggesting Wild Oats was an acquisition target were discounted last week by analysts.

The closure of dozens of Albertsons stores in the wake of the Supervalu merger earlier this year appeared to provide Wild Oats an opportunity to strike at several large, well-located stores. Odak had previously said the company had its eye on as many as 30 former Albertsons locations. But it was not known as of late last week whether any bids for former Albertsons stores were successful.

One source told SN that Wild Oats had been negotiating with a third party to purchase former Albertsons stores, then lease the locations from the buyer, but that deal seemed to have been delayed.