Company Reports Diluted EPS of $0.25, Operating Cash Flow of $160 Million, and Generates $93 Million of Free Cash Flow
AUSTIN, Texas, Aug. 4 /PRNewswire-FirstCall/ -- Whole Foods Market, Inc. (Nasdaq: WFMI) today reported results for the 12-week third quarter ended July 5, 2009. Sales for the quarter increased 2% to $1.9 billion. Comparable store sales decreased 2.5% versus a 2.6% increase in the prior year. Identical store sales, excluding nine relocations and two major expansions, decreased 3.8% versus a 1.9% increase in the prior year. Excluding the negative impact of foreign currency translation, comparable store sales decreased 2.0%, and identical store sales decreased 3.3%.
"We are very pleased with our third quarter top-line and bottom-line results. We saw our first sequential improvement in comparable store and identical store sales trends in six quarters driven by both average transaction count and basket size trends," said John Mackey, chairman, chief executive officer, and co-founder of Whole Foods Market. "We believe we are continuing to strike the right balance between sales and gross margin while exhibiting strong cost control, producing a 23% increase in income from operations. We also generated $93 million of free cash flow, ending the quarter with $448 million in total cash and $335 million available on our credit line."
For the third quarter, income from operations increased 23% to $78.9 million. The Company's effective tax rate was 41.0%, income available to common shareholders was $35.0 million, and diluted earnings per share were $0.25. These results included a LIFO credit of $5.8 million, or $0.02 per diluted share, versus a $2.7 million charge last year and $6.8 million, or $0.03 per diluted share, in non-cash asset impairment charges primarily related to the Federal Trade Commission ("FTC") settlement agreement.
Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") increased 22% to $148.2 million, and earnings before interest, taxes, depreciation and other non-cash expenses ("EBITANCE") increased 14% to $153.9 million. Approximately $75.0 million relating to depreciation and amortization, asset impairments, LIFO, share-based payments, and deferred rent was expensed for accounting purposes but was non-cash in the current quarter.
During the quarter, the Company produced $159.6 million in cash flow from operations and invested $66.9 million in capital expenditures, of which $54.5 million related to new stores. This resulted in free cash flow of $92.7 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 $448.0 million, and total debt was $742.2 million. Currently, the Company has approximately $335.2 million available on its credit line, net of $14.8 million in outstanding letters of credit.
For the 40-week period ended July 5, 2009, sales increased 1% to $6.2 billion. Comparable store sales decreased 3.8% versus a 6.4% increase in the prior year, and identical store sales, excluding 12 relocations and three major expansions, decreased 4.9% versus a 4.9% increase in the prior year. Excluding the negative impact of foreign currency translation, comparable store sales decreased 3.1%, and identical store sales decreased 4.2%. The tax rate was 41.6%, income available to common shareholders was $90.1 million, and diluted earnings per share were $0.64. These results included $14.2 million, or $0.06 per diluted share, of legal costs related to the FTC lawsuit and approximately $22.2 million, or $0.09 per diluted share, of non-cash asset impairment charges. Year to date, adjusted EBITDA increased 10% to $442.0 million, and EBITANCE increased 7% to $477.0 million.
Year to date, the Company has produced $474.7 million in cash flow from operations and invested $252.1 million in capital expenditures, of which $196.9 million related to new stores. This resulted in free cash flow of $222.6 million. In addition, the Company has paid cash dividends to preferred stockholders of $19.8 million year to date.
The Company's results for the last five fiscal quarters and comparable and identical store sales results for the current quarter to date are shown in the following table. Where applicable, percentages have been adjusted to exclude asset impairment charges and FTC-related legal costs.
QTD
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
---- ---- ---- ---- ---- ----
Sales growth 21.6% 15.5% 0.4% -0.5% 2.0%
Comparable
store sales
growth 2.6% 0.4% -4.0% -4.8% -2.5% -1.1%
Two-year comps
(sum of two
years) 9.6% 8.6% 5.3% 1.9% 0.1% 0.4%
Identical store
sales growth 1.9% -0.5% -4.9% -5.8% -3.8% -2.7%
Two-year idents
(sum of two
years) 7.7% 5.6% 2.2% -0.7% -1.9% -1.9%
Gross profit 34.4% 33.3% 33.4% 34.7% 35.2%
Gross profit
excluding
LIFO 34.5% 33.6% 33.5% 34.7% 34.8%
Direct store
expenses 26.6% 26.6% 26.4% 26.2%(1) 26.6%
Store
contribution 7.7% 6.8% 6.9% 8.5% 8.5%
Store
contribution
excluding
LIFO 7.9% 7.0% 7.1% 8.5% 8.2%
G&A expenses 3.3% 2.9% 2.9% 2.9% 2.8%
(1) Unusually low number of workers' compensation claims and average cost per claim in the quarter
For the quarter, gross profit increased 79 basis points to 35.2% of sales. The LIFO adjustment was a $5.8 million credit versus a $2.7 million charge last year, a positive impact of 45 basis points. Excluding LIFO, gross profit increased 33 basis points to 34.8% of sales, with an improvement in cost of goods sold more than offsetting higher occupancy costs as a percentage of sales. Direct store expenses were even with last year at 26.6% of sales. For the third consecutive quarter, the Company generated an improvement in labor costs 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 80 basis points to 8.5% of sales.
For stores in the identical store base, gross profit, excluding LIFO, improved 59 basis points to 35.1% of sales, and direct store expenses improved 31 basis points to 26.2% of sales. As a result, store contribution improved 89 basis points to 8.9% of sales.
G&A expenses improved 50 basis points to 2.8% of sales primarily driven by cost-containment measures implemented at the Company's global and regional offices in the fourth quarter of last year. FTC-related legal costs totaled $0.4 million in the third quarter.
For the quarter, relocation, store closure and lease termination costs were $18.2 million. This included $6.7 million in non-cash asset impairment charges primarily related to the potential sale of certain operating stores under the FTC settlement agreement. In addition, the Company continues to make ongoing store closure reserve adjustments primarily related to changes in certain sub-tenant income estimates driven by the outlook for the commercial real estate market. In the third quarter, these adjustments totaled $9.7 million, bringing the year-to-date adjustment to $13.5 million.
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 (15.5 years
old, s.f. weighted) -3.5% 78% 94 27,100 2,545,600
Between eight
and 11 years old -3.1% 45% 55 31,300 1,722,600
Between five
and eight years old -6.0% 46% 42 36,700 1,540,500
Between two and
five years old -3.4% 12% 50 49,100 2,455,700
Less than two
years old
(including nine
relocations) 11.6% 1% 28 54,800 1,534,200
---------------- ---- --- --- ------ ---------
All comparable
stores (7.7 years
old, s.f. weighted) -2.5% 28% 269 36,400 9,798,700
All stores (7.3
years old, s.f.
weighted) 25% 281 37,100 10,419,700
(1)Reflects store-level capital and net operating profit after taxes ("NOPAT"), including pre-opening expense
Growth and Development
The Company opened four stores in the third quarter, three of which were relocations. So far in the fourth quarter, the Company has opened one store in Capitola, CA and currently has 282 stores totaling 10.4 million square feet. Two additional stores are expected to open in the fourth quarter.
Since the Company's second quarter earnings release, the Company has terminated two leases totaling approximately 121,100 square feet for stores previously scheduled to open in fiscal years 2012 and 2013.
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 13 19 55
Number of relocations 6 6 1 7
Number of lease acquisitions,
ground leases and owned
properties 4 4 4 4
New markets 3 1 4 8
Average store size (gross
square feet) 53,000 52,400 42,100 45,700
As a percentage of
existing store
average size 146% 142% 114% 123%
Total square footage 1,060,700 681,600 800,000 2,546,800
As a percentage of
existing square
footage 11% 7% 8% 24%
Average tender period
in months 9.7 13.2
Average pre-opening
expense per store
(incl. rent) $2.5 mil $3.0 mil(2)
Average pre-opening rent
per store $1.1 mil $1.1 mil(2)
Average development cost
(excl. pre-opening) $15.8 mil
Average development cost
per square foot $297
(1) Includes leases tendered
(2) For stores opened in Q1-Q3 of fiscal year 2009
FTC Update
As previously announced on June 1, the FTC approved a final consent order of the settlement agreement 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 was appointed to market for sale: leases and related assets for 19 non-operating former Wild Oats stores; leases and related fixed assets (excluding inventory) for 12 operating acquired Wild Oats stores and one operating Whole Foods Market store; and Wild Oats(R) trademarks and other intellectual property associated with the Wild Oats stores.
For any good faith offers 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.
