WILD OATS LOOKS TO 'CROSSOVER' CUSTOMERS

JON SPRINGER

BOULDER, Colo. -- Wild Oats Market here last week said it would expand its store size and product offerings in an attempt to capture more "crossover" customers and spark lagging sales.

The natural foods chain also said it would close as many as eight underperforming stores and position its Henry's Marketplace as a distinct brand appealing to more value-conscious customers.

Analysts told SN the announcement represents a philosophical shift for Wild Oats, but one that was necessary in light of poor same-store sales, including a dip of 2% in its fiscal first quarter ended April 1, and increased competition from its larger format rival, Whole Foods Markets, Austin, Texas.

One analyst described the move for Wild Oats as "less Birkenstock and more Gucci."

"What they're saying, pretty loudly, is that their old approach didn't work because the focus was too narrow," said Matthew Patsky, managing director for Adams Harkness & Hill, a Boston-based investment bank. "Whole Foods has been able to come into Wild Oats' markets and take some sales from them, as well as from traditional supermarkets."

Jim Lee, president and chief operating officer of Wild Oats, said in a lengthy conference call discussing the restructuring that both Wild Oats and Whole Foods "understand the way to grow the business is to go after traditional supermarkets." He added, however, that it does not mean that Wild Oats would abandon its traditional natural foods customers."

Wild Oats stock fell more than 14% to a 52-week low of $9 on the news. One analyst, Bonnie Tonneson at Chase H&Q, San Francisco, lowered her rating from "buy" to "market perform."

Wild Oats said it would grow the average size of its Wild Oats format store to 28,000-30,000 square feet and refine its product mix to include more gourmet and prepared foods, crossover products, and housewares and gift items. The expanded product offerings could include "any product that meets our standards," Lee said, adding that the company's product standards would not change.

According to the company's Web site, its products must be free of artificial preservatives and artificial colors, and be "organically grown whenever possible," the "least processed or unadulterated version available," non-irradiated and cruelty-free.

The chain will also accelerate the expansion of its Henry's Marketplace brand stores, which are smaller in size (around 20,000 square feet) and specialize in bulk food and produce. Henry's, the San Diego-based, 11-store chain which Wild Oats acquired in 1999, will be positioned toward more value conscious customers.

Wild Oats will expand the Henry's brand into Orange County, Calif., and other Southwest states. Lee called the chain, "the best-kept retail secret outside of San Diego."

The restructuring will improve average sales per customer, average annual revenues per store, average sales per square foot and comparable store sales, said Mike Gilliland, chief executive officer. Gilliland said Wild Oats management has been "sorely disappointed" with same-store sales, which after an 8% gain in the second quarter of 1999, fell to to 4% in the third and fourth quarters of 1999. The company expects a 1% falloff in same-stores sales this quarter.

Gilliland said Wild Oats' rapid acquisition pace -- it has grown from 14 stores in 1994 to 113 stores currently -- has proven more difficult than the company expected. Stores have taken longer than anticipated to integrate and in some cases Wild Oats has cannibalized itself by placing stores too close to one another. He also said some smaller stores have been hurt by competitors.

The company intends to close or sell eight stores during the second and third quarters. It did not say which stores would be closed. Officials declined to comment on speculation that a Connecticut store where employees are planning to organize would be one of the stores to close.

Yudi Bahl, senior analyst for U.S. Bancorp Piper Jaffray, Minneapolis, said, "Whenever a company restructures there are a lot of pains and questions about how quickly they can deliver on their promises. But I think it's great that they're taking such a hard look at themselves. It's a good move for them long term."