Whole Foods' Mackey Blames Q3 Profit Slip on New Store Push

AUSTIN, Texas -- "Simple mathematics" was how Whole Foods Market's c.e.o. John Mackey here explained the natural and organic foods retailer's drop in profit for its fiscal third quarter, during an earnings conference call yesterday.

"As long as we're accelerating our sales growth, our profits will initially decline," Mackey said. "As the number of new stores increases, the average age of our stores decreases, and since it's at the older stores where we have the largest return, profits drop. When store growth slows, the opposite happens. We've seen this happen numerous times during the 15 years we've been public."

The company has been on a building spree since the year began, the c.e.o. said. "We are opening a record number of 18 to 20 stores this year, many of which are incredibly exciting stores that will help us continue to redefine the marketplace and further differentiate our shopping experience from other food retailers," said Mackey.

The company's net income for the fiscal third quarter was $49.1 million, or 35 cents per share, compared to $53.9 million, or 37 cents per share, in the period last year. Sales increased 13.2 percent to $1.5 billion, driven by 14 percent square footage growth and a 7 percent increase in comparable store sales on top of a 9.9 percent increase in the prior fiscal. Comps were negatively impacted from Easter shifting from the third quarter last year to the second this year.

Still, the retailer maintained its guidance of 13 percent to 17 percent sales growth, six percent to eight percent comparable sales growth, and 18 to 20 new store openings resulting in 16 percent ending square footage growth, and expects operating income before pre-opening and relocation costs as a percentage of sales will be in line with our 5.9 percent results year to date.

Mackey said his confidence in maintaining this guidance is bolstered by the company's continuing efforts to experiment with new formats and differentiate its product offerings.

The 58,000-square-foot average of Whole Foods' is an example of this experimentation. "We have continued to sign and open smaller stores, typically in markets where it is hard to find larger boxes, while experimenting with opening some very large format stores," said Mackey. "We currently operate 14 stores over 60,000 square feet. We plan to continue to selectively sign sites for these larger format stores, which showcase extensive prepared foods and sit-down venues, but they will predominantly be in dense urban markets or relocations of some of our very successful existing stores."

Product initiatives include the continued expansion of Whole Foods' private label initiative, which saw a 14 percent increase in SKU count year over year and currently represents 18 percent of its total grocery and Whole Body sales.

The retailer also expanded its "Buying Local" efforts and local product selection, as well as its Whole Trade Program; and recently launched a Five-Step Animal Welfare Rating Program, which helps shoppers understand how the animals used to produce the meat and poultry products they are buying were raised and treated.

During a conference call to discuss Whole Foods' third quarter earnings, meanwhile, c.e.o. John Mackey said he expects to receive a ruling by the middle of August on an attempt by the Federal Trade Commission to block his chain's proposed merger with Wild Oats.

The FTC action was the focus of a hearing today in U.S. District Court for the District of Columbia.

"We are hopeful that the court will rule in our favor and that we will be allowed to move forward," Mackey said. "However, we believe that merger or no merger, Whole Foods has a very bright future. We currently have 94 stores in our pipeline representing 70 percent of our existing square footage, and we believe we are on track to meet our goal of $12 billion in sales in 2010. If the merger is approved, just as we have done with our many previous acquisitions - we will improve the Wild Oats stores to make them more profitable and create an improved shopping experience for customers."

Mackey declined to comment on the controversy swirling around years' worth of anonymous financial forum postings he made on the Web regarding his ocmpny and Wild Oats, citing an ongoing SEC investigation.
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