For Immediate Release
Contact: Cindy McCann
VP of Investor Relations
512.477.4455
Whole Foods Market Reports First Quarter Results
Sales Increased 22%; Net Income Increased 27% and Diluted EPS Increased 21%; Company Announces Strategy for Future Stock Option Grants
February 9, 2005. Whole Foods Market, Inc. (NASDAQ: WFMI) today reported sales and earnings for the 16-week quarter ended January 16, 2005. For the quarter, sales increased 22% to $1.37 billion. This increase was driven by 15% weighted average year-over-year square footage growth and comparable store sales growth of 11.4%. Sales in identical stores (excluding one relocated store and two major store expansions) increased 10.7% for the quarter. Net income increased 27% to $49.1 million, diluted earnings per share increased 21% to $0.73, and Economic Value Added (EVA®) improved $3.3 million to $6.9 million.
| Store Returns for the Quarter | Average Size | Average Comps | NOPAT ROIC | # of Comp Stores |
| Stores over eight years old | 29,000 | 10.9% | 59% | 71 |
| Stores between five and eight years old | 34,000 | 7.8% | 43% | 28 | Stores between two and five years old | 35,000 | 13.8% | 23% | 38 |
| Stores less than two years old (including relocations) | 39,000 | 17.1% | 17% | 8 |
| Stores in comparable store base | 32,000 | 11.4% | 38% | 145 | Stores open at the end of the first quarter | 32,000 | - | 31% | 166 |
"I would like to appreciate all of our Team Members for their hard work and all of our customers for their continued support. Sales grew by 22% on top of a 21% increase last year and we produced 21% EPS growth on top of a 43% increase last year," said John Mackey, Chairman, Chief Executive Officer, and Co-Founder of Whole Foods Market. "We are very pleased with our performance this quarter, particularly in light of our difficult year-over-year comparisons; however as we have previously stated, we do not expect to see this same level of year over year increases in sales and earnings to continue throughout the year. We continue to expect comparable store sales increases for the year of 8% to 10% and for diluted earnings per share growth to be lower than sales growth primarily due to the anticipated acceleration in new store openings."
In the quarter, gross profit increased 18 basis points to 34.7% of sales, which was offset by a 19 basis point increase in direct store expenses to 25.4% of sales, resulting in store contribution of 9.2% of sales. For the 145 stores in the comparable store base, gross profit improved 66 basis points to 35.1% of sales, and direct store expenses improved 16 basis points to 25.1% of sales, resulting in an 82 basis point increase in store contribution to 10.1% of sales. General and administrative (G&A) expenses improved 25 basis points to 3.0% of sales.
As shown in the table below, the Company's quarterly results were in line with its historical four-year average results. While there may be more variability during a particular quarter, the Company points out the consistency of these line items as a percentage of sales over time.
| Historical Performance | FY01 | FY02 | FY03 | FY04 | 4-Year Average | 1Q05 | |
| Gross profit | 34.8% | 34.7% | 34.3% | 34.8% | 34.7% | 34.7% | |
| Direct store expenses | 25.3% | 25.1% | 25.2% | 25.5% | 25.3% | 25.4% | |
| Store contribution | 9.5% | 9.6% | 9.2% | 9.3% | 9.4% | 9.2% | |
| G&A | 3.6% | 3.6% | 3.2% | 3.1% | 3.4% | 3.0% | |
Capital expenditures in the quarter were $85 million of which $56 million was for new store development. During the quarter, the Company produced cash flow from operations of $122 million and paid approximately $9 million to shareholders in quarterly dividends. Cash and cash equivalents, including restricted cash, were approximately $261 million at the end of the quarter, and total long-term debt was approximately $101 million. During the quarter, approximately 137,000 of the Company's Zero Coupon Convertible Debentures were voluntarily converted by bondholders to approximately 1.5 million shares of common stock resulting in a decrease in the Zero Coupon Convertible Debt from $159 million at the end of last fiscal year to $89 million at the end of the first quarter.
In November, the Company announced that its Board of Directors approved a 27% increase in the Company's quarterly dividend. On January 17, 2005, the Company paid approximately $12 million to shareholders in quarterly dividends of $0.19 per share.
In the quarter, the Company opened three new stores in Hingham, MA; Redwood City, CA and Sarasota, FL, ending the quarter with 166 stores totaling approximately 5.3 million square feet. The Company is pleased to announce the recent signing of 7 new store leases in Lake Oswego, OR; Seattle, WA; Novato, CA; Scottsdale, AZ; Pasadena, CA; Annapolis, MD (relocation) and Rockville, MD (relocation). The following table provides additional information about the Company's store development pipeline.
| Stores in Development | 2/9/05 | 2/11/04 | % Change |
| Number of stores in development | 58 | 41 | 41% |
| Average size (gross square feet) | 50,000 | 45,000 | 10% |
| As a percentage of existing store average size | 159% | 147% | - |
| Total square footage under development | 2,930,000 | 1,872,000 | 57% |
| As a percentage of existing square footage | 56% | 40% | - |
Future Growth Goals
The Company has a stated long-term growth goal of $10 billion in sales by the year 2010. As shown in the table below, the Company produced above-average sales and comparable store sales increases in fiscal year 2004 and will, therefore, face difficult comparisons in 2005, particularly in the second quarter when it will be comparing against a 17.1% comparable store sales increase and a 32% increase in diluted EPS.
| Historical Performance | FY00-FY04 Average | FY04 | FY00-FY03 Average |
| Sales growth (CAGR) | 20.5% | 22.8% | 21.0% |
| Comparable store sales growth | 9.1% | 14.9% | 10.3% |
| Two-year comps (sum of two years) | 18.0% | 23.5% | 19.1% |
For the fiscal year, the Company continues to expect sales growth of 15% to 20% driven by comparable store sales growth of 8% to 10% and weighted average square footage growth of approximately 15% based on the opening of 15 to 18 new stores, including four relocations. The Company does not expect the same level of year over year increases in sales and earnings produced in the first quarter to continue throughout the year. The Company continues to expect diluted earnings per share growth for the year to be lower than sales growth primarily due to the anticipated acceleration in new store openings, which is expected to result in pre-opening expenses in the range of $18 million to $20 million versus $10 million in the prior year. In addition, new stores could have some negative impact on store contribution, as new stores generally have lower gross margins and higher direct store expenses than more mature stores. The Company also expects G&A expenses for the remainder of the fiscal year to be higher as a percentage of sales as compared to the first quarter and as compared to the prior year, primarily due to the relocation of the Company's headquarters in January which is expected to add approximately $4 million in G&A expenses annually. Capital expenditures are still expected to be in the range of $300 million to $320 million.
In December the Financial Accounting Standards Board (FASB) finalized Statement 123R, Share-based Payment, which requires all companies to expense share-based payments, including stock options, at fair value. Absent any overruling by Congress, the new rules are effective for interim or annual periods beginning after June 15, 2005; therefore, the Company would expect to begin expensing stock options in the fourth quarter of fiscal year 2005.
Though not retroactive, it should be noted that the charge to earnings resulting from this new rule includes the impact of stock options granted in prior years, since the expense is recognized over the vesting period of the options, which for the Company has been four years. Even if the Company never granted another option after today, it would still have stock option expense until all past option grants were fully vested. In order to prevent this "overhang" from past option grants impacting future income statements, the Company is today announcing its intention, absent FASB 123R being overruled by Congress, to accelerate the vesting of all outstanding stock options (excluding options held by the Board of Directors and the members of the executive team) sometime prior to July 4, 2005, the date the new rules are effective for the Company. This accelerated vesting of options will create a one-time, mostly non-cash charge in the third fiscal quarter of this year of approximately $10 million, consisting of the estimated increase in value to the option holders caused by the acceleration plus accrual of certain payroll taxes that will be due upon exercise of the options. The actual amount of the expense will vary based on the closing stock price at the date of the acceleration.
The Company's current intention is to keep its broad-based stock option program in place, but going forward it will limit the number of shares granted in any one year so that net income dilution from equity-based compensation expense (EBCE) will not exceed 10% in future years. The EBCE will ramp up beginning in the fourth quarter of fiscal year 2005 until it reaches 10% of net income in fiscal year 2010. EBCE in the fourth quarter of fiscal year 2005 is expected to be approximately $500,000 consisting primarily of grants to the executive team and the Board of Directors, since the Company will not accelerate those options. This estimated expense does not impact the Company's annual guidance.
The Company believes this strategy is best aligned with its stakeholder philosophy because it limits future earnings dilution from options while at the same time retains the broad-based stock option plan which it believes is important to Team Member morale and to its unique corporate culture and its success.
Supplemental Information: The following pie chart depicts net income and certain expense categories, including salaries and benefits, as a percentage of sales for the sixteen weeks ended January 16, 2005.
The Company will host a conference call today to discuss this earnings announcement at 4:00 p.m. CT. The dial in number is 1-800-540-0559 and the conference ID is "Whole Foods." A replay will be available for approximately 48 hours at 1-402-220-2558, and a simultaneous audio webcast will be available at www.wholefoodsmarket.com.
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 timely development and opening of new stores, the integration of acquired stores, the impact of competition, and other risks detailed from time to time in the Company's SEC reports, including the report on Form 10K for the fiscal year ended September 26, 2004. The Company does not undertake any obligation to update forward-looking statements.
Whole Foods Market, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(In thousands, except per share amounts)
| Sixteen weeks ended | ||||
| January 16, 2005 | January 18, 2004 | |||
| Sales | $ | 1,368,328 | $ | 1,118,148 |
| Cost of goods sold and occupancy costs | 894,186 | 732,704 | ||
| Gross profit | 474,142 | 385,444 | ||
| Direct store expenses | 347,846 | 282,195 | ||
| Store contribution | 126,296 | 103,249 | ||
| General and administrative expenses | 40,401 | 35,869 | ||
| Pre-opening and relocation costs | 3,573 | 1,796 | ||
| Operating income | 82,322 | 65,584 | ||
| Other income (expense): Interest expense |
(1,708) | (2,478) | ||
| Investment and other income | 1,194 | 1,464 | ||
| Income before income taxes | 81,808 | 64,570 | ||
| Provision for income taxes | 32,723 | 25,828 | ||
| Net income | $ | 49,085 | $ | 38,742 |
| Basic earnings per share | $ | 0.78 | $ | 0.64 |
| Weighted average shares outstanding | 62,794 | 60,309 | ||
| Diluted earnings per share | $ | 0.73 | $ | 0.60 |
| Weighted average shares outstanding, diluted basis | 69,013 | 66,634 | ||
| Dividends per share | $ | 0.19 | $ | 0.15 |
| A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands): | ||||
| Sixteen weeks ended | ||||
| January 16, 2005 | January 18, 2004 | |||
| Net income (numerator for basic earnings per share) | $ | 49,085 | $ | 38,742 |
| Interest on 5% zero coupon convertible subordinated debentures, net of income taxes |
1,393 | 1,422 | ||
| Adjusted net income (numerator for diluted earnings per share) | $ | 50,478 | $ | 40,164 |
| Weighted average common shares outstanding (denominator for basic earnings per share) | 62,794 | 60,309 | ||
| Potential common shares outstanding: Assumed conversion of 5% zero coupon convertible subordinated debentures |
3,076 | 3,283 | ||
| Assumed exercise of stock options | 3,143 | 3,042 | ||
| Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share) |
69,013 | 66,634 | ||
| Basic earnings per share | $ | 0.78 | $ | 0.64 |
| Diluted earnings per share | $ | 0.73 | $ | 0.60 |
Whole Foods Market, Inc.
Condensed Consolidated Balance Sheets
January 16, 2005 (unaudited) and September 26, 2004
(In thousands)
| Assets | 2005 | 2004 | ||
| Current assets: Cash and cash equivalents |
$ | 228,112 | $ | 198,377 |
| Restricted cash | 33,212 | 23,160 | ||
| Trade accounts receivable | 61,880 | 64,972 | ||
| Merchandise inventories | 165,209 | 152,912 | ||
| Prepaid expenses and other current assets | 30,479 | 16,702 | ||
| Deferred income taxes | 28,894 | 28,894 | ||
| Total current assets | 547,786 | 485,017 | Property and equipment, net of accumulated depreciation and amortization | 936,443 | 889,771 |
| Goodwill | 112,503 | 112,186 | ||
| Intangible assets, net of accumulated amortization | 23,628 | 24,831 | ||
| Other assets | 6,050 | 20,302 | ||
| Total assets | $ | 1,626,410 | $ | 1,532,107 |
| Liabilities And Shareholders' Equity | 2005 | 2004 | ||
| Current liabilities: Current installments of long-term debt and capital lease obligations | $ | 5,972 | $ | 5,973 |
| Trade accounts payable | 95,060 | 90,751 | ||
| Accrued payroll, bonus and other benefits due team members | 113,645 | 100,536 | ||
| Dividends payable | 12,200 | 9,361 | ||
| Other accrued expenses | 137,472 | 124,641 | ||
| Total current liabilities | 364,349 | 331,262 | ||
| Long-term debt and capital lease obligations, less current installments | 95,330 | 164,770 | ||
| Deferred rent liability | 25,361 | 25,880 | ||
| Other long-term liabilities | 1,581 | 1,581 | ||
| Deferred income taxes | 20,175 | 20,175 | ||
| Total liabilities | 506,796 | 543,668 | ||
| Shareholders' equity: Common stock, no par value, 150,000 shares authorized; 64,791 and 62,771 shares issued; 64,283 and 62,407 shares outstanding in 2005 and 2004 respectively |
627,573 | 535,107 | ||
| Accumulated other comprehensive income | 3,932 | 2,053 | ||
| Retained earnings | 488,109 | 451,279 | ||
| Total shareholders' equity | 1,119,614 | 988,439 | ||
| Commitments and contingencies | ||||
| Total liabilities and shareholders' equity | $ | 1,626,410 | $ | 1,532,107 |
Whole Foods Market, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
| Sixteen weeks ended | ||||
| January 16, 2005 | January 18, 2004 | |||
| Cash flows from operating activities Net income |
$ | 49,085 | $ | 38,742 | Adjustments to reconcile net income to net cash provided
by operating activities: Depreciation and amortization |
38,486 | 32,182 |
| Loss on disposition of assets | 515 | 529 | Tax benefit related to exercise of employee stock options | 9,199 | 6,666 |
| Interest accretion on long-term debt | 2,269 | 2,314 | ||
| Other | 1,604 | 1,521 | ||
| Net change in current assets and liabilities: Trade accounts receivable |
2,775 | (8,708) | ||
| Merchandise inventories | (13,297) | (14,758) | ||
| Prepaid expense and other current assets | 1,082 | (1,723) | ||
| Trade accounts payable | 4,309 | 3,451 | Accrued payroll, bonus and other benefits due team members | 13,109 | 13,862 |
| Other accrued expenses | 12,452 | 10,330 | ||
| Net cash provided by operating activities | 121,588 | 84,408 | ||
| Cash flows from investing activities Development costs of new store locations |
(55,663) | (35,211) | ||
| Other property, plant and equipment expenditures | (29,403) | (33,929) | ||
| Acquisition of intangible assets | - | (49) | ||
| Increase in restricted cash | (10,052) | (17,859) | ||
| Payment for purchase of acquired entities, net of cash acquired | - | (3,172) | ||
| Other investing activities | - | 1,815 | ||
| Net cash used in investing activities | (95,118) | (88,405) | ||
| Cash flows from financing activities Dividends paid |
(9,416) | (9,079) | ||
| Issuance of common stock | 12,765 | 11,932 | ||
| Payments on long-term debt and capital lease obligations | (84) | (5) | ||
| Net cash provided by financing activities | 3,265 | 2,848 | ||
| Net increase in cash and cash equivalents | 29,735 | (1,149) | ||
| Cash and cash equivalents at beginning of period | 198,377 | 165,779 | ||
| Cash and cash equivalents at end of period | $ | 228,112 | $ | 164,630 |
| Supplemental disclosure of cash flow information: Interest paid |
$ | 364 | $ | 503 |
| Federal and state income taxes paid | $ | 13,070 | $ | 19,403 |
Whole Foods Market, Inc.
Other Financial Information
(In thousands, except per share amounts)
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides information regarding Economic Value Added (“EVA”) in the press release as additional information about its operating results. This measure is not in accordance with, or an alternative to, GAAP. The Company’s management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses this measure for reviewing the financial results of the Company and for incentive compensation and capital planning purposes. The following table reflects a reconciliation of this non-GAAP financial measure to GAAP net income, which the Company believes to be the most directly comparable GAAP financial measure.
EVA
| Sixteen weeks ended | ||||
| January 16, 2005 | January 18, 2004 | |||
| GAAP Net income | $ | 49,085 | $ | 38,742 |
| Provision for income taxes | 32,723 | 25,828 | ||
| Interest expense and other | 2,997 | 3,737 | ||
| NOPBT | 84,805 | 68,307 | ||
| Taxes (40%) | (33,922) | (27,323) | ||
| NOPAT | 50,883 | 40,984 | ||
| Capital Charge (9%) | (43,945) | (37,351) | ||
| EVA | $ | 6,938 | $ | 3,633 |
The following tables reflect the pro forma effects of recognizing compensation cost for stock options in accordance with Statement of Financial Accounting Standards No. 123: Stock-Based Compensation |
||||
| Sixteen weeks ended | ||||
| Net income | January 16, 2005 | January 18, 2004 | ||
| Net income | $ | 49,085 | $ | 38,742 |
| After-tax pro forma expense | (9,425) | (6,235) | ||
| Pro forma net income | $ | 39,660 | $ | 32,507 |
| Dilution | 19% | 16% | ||
Earnings per share Net income |
$ | 0.73 | $ | 0.60 |
| After-tax pro forma expense | (0.13) | (0.09) | ||
| Pro forma net income | $ | 0.60 | $ | 0.51 |
| Dilution | 18% | 15% | ||
— EVA® is a registered trademark of Stern Stewart & Co.