Company Reports Diluted EPS of $0.19, Operating Cash Flow of $173 Million,
and Generates $98 Million of Free Cash Flow; Company Updates 2009 Outlook
to Reflect Year-to-Date Sales Results, Maintains Bottom-Line Guidance
May 13, 2009. Whole Foods Market, Inc. (NASDAQ: WFMI) today reported results for the 12-week second quarter ended April 12, 2009. Sales for the quarter were $1.9 billion, in line with the prior year. Comparable store sales decreased 4.8% versus a 6.7% increase in the prior year. Identical store sales, excluding seven relocations and two major expansions, decreased 5.8% versus a 5.1% increase in the prior year. Excluding the negative impact of foreign currency translation, comparable store sales decreased 4.1%, and identical store sales decreased 5.1%.
“We are very pleased with our second quarter results, including free cash flow of $98 million. Despite flat sales year over year, we exhibited strong expense control leading to a 10% increase in income from operations excluding non-cash asset impairment charges,” said John Mackey, chairman, chief executive officer, and co-founder of Whole Foods Market. “Based on our strong year-to-date results, we are maintaining our prior fiscal year ranges for estimated EBITDA, EBITANCE and diluted earnings per share, excluding asset impairment charges and assuming just under $8.0 billion in sales.”
For the second quarter, the Company’s effective tax rate was 42.5%, income available to common shareholders was $27.3 million, and diluted earnings per share were $0.19. These results included non-cash asset impairment charges of approximately $13 million, or $0.05 per diluted share.
Excluding the non-cash asset impairment charges, income from operations increased 10% to $82.7 million; adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) increased 9% to $143.8 million; and earnings before interest, taxes, depreciation and other non-cash expenses (“EBITANCE”) increased 8% to $154.8 million. Approximately $85.1 million relating to depreciation and amortization, asset impairments, share-based payments, and deferred rent was expensed for accounting purposes but was non-cash.
During the quarter, the Company produced $173.0 million in cash flow from operations and invested $74.9 million in capital expenditures, of which $60.4 million related to new stores. This resulted in free cash flow of $98.1 million. In addition, the Company paid a cash dividend to preferred stockholders of $8.5 million. Cash and cash equivalents, including restricted cash, increased to $362.8 million, and total debt was $743.5 million. Currently, the Company has approximately $260.9 million available on its credit line, net of $89.1 million in outstanding letters of credit. The Company continues to be in compliance with all applicable covenants in its credit agreements.
For the 28-week period ended April 12, 2009, sales were $4.3 billion, in line with the prior year. Comparable store sales decreased 4.4% versus an 8.2% increase in the prior year, and identical store sales (excluding nine relocations and three major expansions) decreased 5.3% versus a 6.2% increase in the prior year. Excluding the negative impact of foreign currency translation, comparable store sales decreased 3.6%, and identical store sales decreased 4.6%. The tax rate was 42.0%, income available to common shareholders was $55.1 million, and diluted earnings per share were $0.39. These results included $13.9 million, or $0.06 per diluted share, of legal costs related to the Federal Trade Commission (“FTC”) lawsuit and approximately $15 million, or $0.06 per diluted share, of non-cash asset impairment charges. Excluding asset impairment charges, adjusted EBITDA was $293.9 million, and EBITANCE was $323.1 million.
Whole Foods Market, Inc. 550 Bowie St. Austin, Texas 78703
512.477.5566 fax 512.482.7204
http://www.wholefoodsmarket.com
Year to date, the Company has produced $315.1 million in cash flow from operations and invested $185.2 million in capital expenditures, of which $142.5 million related to new stores. This resulted in free cash flow of $129.9 million. In addition, the Company has paid cash dividends to preferred stockholders of $11.3 million.
The Company’s average results for the last five fiscal years and quarterly results for the last five fiscal quarters are shown in the following table. Where applicable, percentages have been adjusted to exclude asset impairment charges, FTC-related legal costs, Hurricane Katrina charges and credits, and share-based payments expense related to the Company’s September 2005 accelerated vesting of stock options.
| | | FY04-FY08 | | | | | | | | | | | | | | | | |
| | | Average | | | | 2Q08 | | | | 3Q08 | | | | 4Q08 | | | | 1Q09 | | | | 2Q09 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Sales growth | | | 20.5 | % | | | 27.6 | % | | | 21.6 | % | | | 15.5 | % | | | 0.4 | % | | | -0.5 | % |
| Comparable store sales growth | | | 10.2 | % | | | 6.7 | % | | | 2.6 | % | | | 0.4 | % | | | -4.0 | % | | | -4.8 | % |
| Identical store sales growth | | | 9.1 | % | | | 5.1 | % | | | 1.9 | % | | | -0.5 | % | | | -4.9 | % | | | -5.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 34.7 | % | | | 34.9 | % | | | 34.4 | % | | | 33.3 | % | | | 33.4 | % | | | 34.7 | % |
| Direct store expenses | | | 25.9 | % | | | 26.6 | % | | | 26.6 | % | | | 26.6 | % | | | 26.4 | % | | | 26.2 | % |
| Store contribution | | | 8.8 | % | | | 8.3 | % | | | 7.7 | % | | | 6.8 | % | | | 6.9 | % | | | 8.5 | % |
| G&A expenses | | | 3.3 | % | | | 3.6 | % | | | 3.3 | % | | | 2.9 | % | | | 2.9 | % | | | 2.9 | % |
For the quarter, gross profit decreased 16 basis points to 34.7% of sales. The LIFO charge was zero versus $2.7 million last year, a positive impact of 14 basis points. An improvement in cost of goods sold, excluding the positive impact of LIFO, was more than offset by an increase in occupancy costs as a percentage of sales. Direct store expenses improved 38 basis points to 26.2% of sales. This included a 30 basis point improvement in workers’ compensation costs as a percentage of sales driven by an unusually low number of claims and average cost per claim in the quarter. In addition, for the second consecutive quarter, the Company generated an improvement in wages as a percentage of sales. This improvement partially offset increases in health care and depreciation as a percentage of sales. As a result, store contribution improved 22 basis points to 8.5% of sales, excluding the asset impairment charge.
For stores in the identical store base, gross profit improved 16 basis points to 35.0% of sales, and direct store expenses improved 69 basis points to 25.9% of sales. As a result, store contribution improved 85 basis points to 9.1% of sales.
G&A expenses improved 57 basis points to 3.1% of sales due to the elimination of G&A expenses at the former Wild Oats home office in Boulder, along with the cost-containment measures implemented at the Company’s global and regional offices. Results in the current quarter included $2.8 million, or $0.01 per diluted share, of FTC-related legal costs. Excluding these costs, G&A expenses were 2.9% of sales.
Additional information on the quarter for comparable stores and all stores is provided in the following table.
| | | | | | NOPAT | | | # of | | | Average | | | Total | |
| Comparable Stores | | Comps | | | ROIC (1) | | | Stores | | | Size | | | Square Feet | |
| | | | | | | | | | | | | | | | |
| Over 11 years old (15.6 years old, s.f. weighted) | | | -5.6 | % | | | 79 | % | | | 90 | | | | 27,200 | | | | 2,448,100 | |
| Between eight and 11 years old | | | -3.4 | % | | | 48 | % | | | 58 | | | | 30,800 | | | | 1,784,800 | |
Between five and eight years old (2) | | | -8.5 | % | | | 43 | % | | | 39 | | | | 35,200 | | | | 1,374,600 | |
| Between two and five years old | | | -5.3 | % | | | 17 | % | | | 54 | | | | 47,000 | | | | 2,536,300 | |
| Less than two years old (including seven relocations) | | | 3.3 | % | | | -1 | %(3) | | | 26 | | | | 55,500 | | | | 1,442,800 | |
| | | | | | | | | | | | | | | | | | | | | |
| All comparable stores (7.8 years old, s.f. weighted) | | | -4.8 | % | | | 30 | % | | | 267 | | | | 35,900 | | | | 9,586,600 | |
| All stores (7.3 years old, s.f. weighted) | | | | | | | 25 | % | | | 280 | | | | 36,700 | | | | 10,264,200 | |
(1) Reflects only store-level capital and NOPAT, including pre-opening expense.
(2) This age category was impacted by a higher percentage of cannibalized stores.
(3) Excluding the Kensington store in London, NOPAT ROIC was 1%.
Whole Foods Market, Inc. 550 Bowie St. Austin, Texas 78703
512.477.5566 fax 512.482.7204
http://www.wholefoodsmarket.com
Growth and Development
The Company opened three stores in the second quarter, including one relocation. So far in the third quarter, the Company has relocated stores in Vancouver, B.C. and Annapolis, MD and currently has 280 stores totaling 10.3 million square feet. Two additional stores, including one relocation, are expected to open in the third quarter, and three stores are expected to open in the fourth quarter.
Since the Company’s first quarter earnings release, the Company has terminated three leases totaling approximately 155,000 square feet for stores previously scheduled to open in fiscal years 2011 through 2013. The Company also has downsized three leases in development by an average of 10,500 square feet each.
The following table provides additional information about the Company’s store openings in fiscal year 2008 and year-to-date in fiscal year 2009, leases currently tendered but not opened, and total development pipeline for stores scheduled to open through fiscal year 2013. For accounting purposes, a store is considered tendered on the date the Company takes possession of the space for construction and other purposes, which is typically when the shell of the store is complete or nearing completion. The average tender period, or length of time between tender date and opening date, will vary depending on several factors, one of which is the number of acquired leases, ground leases and owned properties in development, all of which generally have longer tender periods than standard operating leases.
| | | Stores | | | Stores | | | Current | | | Current | |
| | | Opened | | | Opened | | | Leases | | | Leases | |
| New Store Information | | FY08 | | | FY09 YTD | | | Tendered | | | Signed (1) | |
| | | | | | | | | | | | | |
| Number of stores (including relocations) | | | 20 | | | | 10 | | | | 21 | | | | 60 | |
| Number of relocations | | | 6 | | | | 5 | | | | 2 | | | | 9 | |
| Number of lease acquisitions, | | | | | | | | | | | | | | | | |
| ground leases and owned properties | | | 4 | | | | 3 | | | | 6 | | | | 7 | |
| New markets | | | 3 | | | | 1 | | | | 4 | | | | 8 | |
| Average store size (gross square feet) | | | 53,000 | | | | 52,700 | | | | 43,400 | | | | 46,500 | |
| As a percentage of existing store average size | | | 146 | % | | | 145 | % | | | 119 | % | | | 128 | % |
| Total square footage | | | 1,060,700 | | | | 527,100 | | | | 911,200 | | | | 2,826,200 | |
| As a percentage of existing square footage | | | 11 | % | | | 5 | % | | | 9 | % | | | 27 | % |
| Average tender period in months | | | 9.7 | | | | 13.1 | | | | | | | | | |
| Average pre-opening expense per store (incl. rent) | | $ | 2.5 mil | | | | | | | | | | | | | |
| Average pre-opening rent per store | | $ | 1.1 mil | | | | | | | | | | | | | |
| Average development cost (excl. pre-opening) | | $ | 15.8 mil | | | | | | | | | | | | | |
| Average development cost per square foot | | $ | 297 | | | | | | | | | | | | | |
(1) Includes leases tendered
FTC Update
As previously announced, the Company is awaiting final approval of the settlement agreement reached with the FTC resolving its antitrust challenge to the Company’s acquisition of Wild Oats Markets, Inc. Under the terms of the agreement, a third-party divestiture trustee has been appointed to market for sale: leases and related assets for 19 non-operating former Wild Oats stores, 10 of which were closed by Wild Oats prior to the merger and nine of which were closed by Whole Foods Market; leases and related fixed assets (excluding inventory) for 12 operating acquired Wild Oats stores and one operating Whole Foods Market store; and Wild Oats® trademarks and other intellectual property associated with the Wild Oats stores. The 13 operating stores had combined sales of approximately $24.6 million in the second quarter of fiscal year 2009, or approximately 1.3% of the Company's total sales of $1.9 billion.
Whole Foods Market, Inc. 550 Bowie St. Austin, Texas 78703
512.477.5566 fax 512.482.7204
http://www.wholefoodsmarket.com
The divestiture trustee has six months to market the assets to be divested. For any good faith offers that are not finalized by September 6, 2009, an extension of up to six months may be granted. This twelve-month period may be extended further to allow the FTC to approve any purchase agreements submitted within that time period. The only other obligations imposed on the Company by the settlement agreement are in support of the divestiture trustee process.
After receiving final approval by the FTC, the Company expects to record a non-cash charge of up to $5.5 million to adjust certain long-lived assets to fair value relating to the potential sale of the 13 operating stores. This is lower than the Company’s original estimate primarily due to non-cash asset impairment charges recorded during the second quarter to adjust four of the 13 operating stores to fair value, which is determined based on long-term discounted cash flow projections.
The Company also will incur some cash expenses relating to legal and trustee fees which are not expected to be material. No material additional charges are expected related to the 19 non-operating properties, for which a lease liability reserve is already recorded, or related to the trademarks which have been fully amortized.
Assumptions for Fiscal Year 2009
For the first four weeks of the third quarter ended May 10, 2009, comparable store sales decreased 3.9%, and identical store sales decreased 5.0%. Excluding the negative impact of foreign currency translation, comparable store sales decreased 3.3%, and identical store sales decreased 4.4%. These results are slightly better than the Company’s second quarter results; however, the uncertain economic environment makes it highly difficult to forecast future results. If the Company’s comparable and identical store sales in the second half of the year are consistent with its year-to-date results, total sales in fiscal year 2009 would be just under $8.0 billion, including the opening of seven new stores in the second half of the year, three of which are relocations.
Year to date, sales have averaged approximately $154 million per week, a level at which the Company has demonstrated strong discipline around gross margin, direct store expenses and G&A, a discipline the Company hopes to maintain for the remainder of the year. However, the Company expects new store sales to increase as a percentage of total sales and may choose to increase its value offerings to drive sales, both of which could negatively impact store contribution as a percentage of sales. In addition, the Company historically has experienced lower average weekly sales beginning in the summer months through September which typically results in lower gross profit and higher direct store expenses as a percentage of sales, particularly in the fourth quarter. For these reasons, the Company expects store contribution as a percentage of sales in the second half of the year to be approximately in line with the 6.9% the Company produced in the first quarter.
The Company is continuing to conduct periodic reviews for other asset impairments by evaluating changes in the results and/or economics of its stores. At this time, the Company does not see any further impairments on the horizon, unless the Company were to experience a further decline in sales and cash flow from current levels.
Based on the Company’s strong year-to-date earnings results and assuming just under $8.0 billion in sales, the Company is maintaining its prior fiscal year ranges for estimated EBITDA, EBITANCE and diluted earnings per share, excluding asset impairment charges, in fiscal year 2009. The Company estimates EBITDA in the range of $525 million to $545 million, EBITANCE in the range of $580 million to $605 million, and diluted earnings per share in the range of $0.71 to $0.76, including approximately $0.06 to $0.08 in estimated dilution from FTC-related legal costs and approximately $0.17 in dilution from the Series A Preferred Stock.
The following table provides additional information about the Company’s estimated store openings for the remainder of fiscal year 2009 through 2013 based on the Company’s current development pipeline. These openings reflect estimated tender dates, which are subject to change, and do not incorporate any potential new leases, terminations or square footage reductions.
The Company is committed to producing positive free cash flow on an annual basis and is confident it will produce operating cash flow in excess of the capital expenditures needed to open the 60 stores in its development pipeline.
Whole Foods Market, Inc. 550 Bowie St. Austin, Texas 78703
512.477.5566 fax 512.482.7204
http://www.wholefoodsmarket.com
| | | Total | | | | | | | | | Total Square | | | Average Square | |
| | | Openings | | | Relocations | | | New Markets | | | Footage | | | Feet per Store | |
| | | | | | | | | | | | | | | | |
| FY09 remaining stores in development | | | 5 | | | | 1 | | | | 0 | | | | 274,600 | | | | 54,900 | |
| FY10 stores in development | | | 16 | | | | 0 | | | | 4 | | | | 662,000 | | | | 41,400 | |
| FY11 stores in development | | | 16 | | | | 2 | | | | 0 | | | | 695,700 | | | | 43,500 | |
| FY12 stores in development | | | 14 | | | | 4 | | | | 1 | | | | 700,400 | | | | 50,000 | |
| | | 9 | | | | 2 | | | | 3 | | | | 459,200 | | | | 51,000 | |
Total (1) | | | 60 | | | | 9 | | | | 8 | | | | 2,791,900 | | | | 46,500 | |
(1) Total square footage excludes one expansion in development.
About Whole Foods Market
Founded in 1980 in Austin, Texas, Whole Foods Market (www.wholefoodsmarket.com) is the leading natural and organic foods supermarket, America’s first national certified organic grocer, and was named “America’s Healthiest Grocery Store” in 2008 by Health magazine. In fiscal year 2008, the Company had sales of approximately $8 billion and currently has 280 stores in the United States, Canada, and the United Kingdom. Whole Foods Market employs more than 53,000 Team Members and has been ranked for 12 consecutive years as one of the “100 Best Companies to Work For” in America by Fortune magazine.
Forward-looking statements
The following constitutes a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this press release are forward-looking statements that involve risks and uncertainties, which could cause our actual results to differ materially from those described in the forward-looking statements. These risks include but are not limited to general business conditions, the successful integration of acquired businesses into our operations, changes in overall economic conditions that impact consumer spending, including fuel prices and housing market trends, the impact of competition, changes in the Company’s access to available capital, the successful resolution of ongoing FTC matters, and other risks detailed from time to time in the SEC reports of Whole Foods Market, including Whole Foods Market’s report on Form 10-K for the fiscal year ended September 28, 2008. Whole Foods Market undertakes no obligation to update forward-looking statements.
The Company will host a conference call today to discuss this earnings announcement at 4:00 p.m. CT. The dial-in number is 1-800-862-9098, and the conference ID is “Whole Foods.” A simultaneous audio webcast will be available at www.wholefoodsmarket.com.
Whole Foods Market, Inc. 550 Bowie St. Austin, Texas 78703
512.477.5566 fax 512.482.7204
http://www.wholefoodsmarket.com
