SUPPLY CHAIN TRANSITIONS SINK WILD OATS' EARNINGS 2004-03-01 (1)

DAVID GHITELMAN

BOULDER, Colo. -- Wild Oats Markets here said last week the effort to change distributors for the second time in two years was the principal reason its net income declined dramatically in both the fourth quarter and the fiscal year that ended Dec. 27.

However, some industry analysts said the distribution switch was merely an example of "continued mis-execution" at the company.

During a conference call with analysts to discuss results for the quarter and fiscal year, Perry Odak, Wild Oats' president and chief executive officer, was asked what he had learned from the company's September 2002 decision to change its primary distributor from United Natural Foods Inc., Dayville, Conn., to Tree of Life, St. Augustine, Fla., a subsidiary of Netherlands-based Wessanen, a move Wild Oats reversed last October.

"We probably didn't do our homework as thoroughly as we should have," Odak said.

To the same question, Ed Dunlap, Wild Oats' chief financial officer, replied, "Don't do a distributor change and major [stockkeeping unit] rationalization at the same time."

Dunlap said he had thought reducing the number of items the company's stores would carry would make the distributor transition easier. "We found out differently," he observed.

The transition to UNFI as primary distributor should be completed by the end of the month, he said.

However, some industry analysts said the company's challenges go beyond supply chain issues.

Merrill Lynch, New York, issued a research report after Wild Oats reported its quarterly results, but prior to the conference call, that cited the company for its "continued mis-execution."

"The performance and long-term outlook at Wild Oats remains obscure as it is still struggling to reignite comps through an accelerated new-store opening program with unproven economics," the report stated, "and continues to have supply chain issues as it transitions back to its old distributor."

Merrill Lynch warned that Wild Oats is highly unlikely to duplicate the performance of its principal competitor, Whole Foods Market, Austin, Texas.

"We remind investors," the note said, "that Whole Foods is in a class of its own, having some of the strongest comps as well as accelerating return-on-invested capital in all of food retailing."

Gary Giblen, director of research and senior vice president at C L King Associates, New York, voiced similar doubts about the prospects of Wild Oats. "They're not executing very well," he said. "The strategy and execution are OK, but not excellent."

During the call, Dunlap said the company expected to see comparable-store sales grow between 2% and 4% in 2004, a figure that Giblen termed "pathetic."

Still, he expressed some hope for the company. "Wild Oats is fixable, but it's taking longer than people had thought. It had been an '03 story, then an '04 story, and now it's an '05 story."

Scott Van Winkle, an equity analyst at Adams, Harkness & Hill, Boston, observed that restoring a company to profitability is not a job for the impatient.

"Turnarounds always take longer than expected," he said. "There have been some mistakes. The distribution switch a year ago was a poor move, and everybody in the industry recognized it except Wild Oats.

"But look at the big picture. We know the category is attractive. We know this concept can work. Wild Oats has stores that have shown it can work.

"The questions are: Are these the right people? Do they have the capital? And do they have the concept? I think Perry Odak is the right guy. They do have the capital. And the new stores look like they're working."

Van Winkle than posed another question: "Can they get it done in time to satisfy the investors who are providing the capital?"

In the 13-week quarter, sales rose 14.5% to a record $253.9 million, and comparable-store sales grew 9.9%. Yet, net income declined 69.2% to $800,000, and earnings per share were 3 cents, vs. 9 cents in the previous fourth quarter. Removing the benefit from the ongoing Southern California strike-lockout to Wild Oats' 20 stores in the region, the company said its comps were 2.2%.

In fiscal 2003, sales rose 5.4% to $969.2 million, and comps grew 2.4%, but net income fell 47.8% to $3.6 million, and earnings per share were 12 cents, vs. 26 cents in fiscal 2002.

4th-Quarter Results

Qtr Ended 12/27/03 12/28/02

Sales $253.9 million $221.8 million

Change 14.5%

Comp-store 9.9%

Net Income $800,000 $2.6 million

Change -69.2%

Inc/share 3 cents 9 cents

52 Weeks 2003 2002

Sales $969.2 million $919.1 million

Change 5.4%

Comp-store 2.4%

Net Income $3.6 million $6.9 million

Change -47.8%

Inc/share 12 cents 26 cents