Whole Foods Market, Inc., today reported results for the 12-week fourth quarter and 52-week fiscal year ended September 28, 2008. All year-over-year percentage increases for the current quarter and year have been adjusted to exclude the extra week in the fourth quarter last year. For the quarter, sales increased 13% to $1.8 billion. Excluding $49.2 million in sales last year from 35 subsequently divested Henry's and Sun Harvest stores and 13 of the subsequently closed Wild Oats stores, sales for the quarter increased 16%. Comparable store sales increased 0.4% versus an 8.2% increase in the prior year. Identical store sales, excluding eight relocated stores and two major expansions, decreased 0.5% versus a 6.0% increase in the prior year. The Wild Oats stores entered the comparable and identical store sales base in the fifty-third full week following the August 28, 2007 merger date and were included in results for the last four weeks of the quarter.
In a separate release, the Company also announced an agreement for $425 million of additional equity from the sale of Series A Preferred Stock to Green Equity Investors V, L.P., an affiliate of Leonard Green & Partners, L.P. This amount equates to an ownership interest, assuming conversion of the preferred stock to common stock, of approximately 17% at this time.
"We are pleased that Leonard Green & Partners, L.P., one of the most experienced and successful investors in the retail industry, has decided to make such a significant investment in Whole Foods Market. We view it as a strong vote of confidence in our business model and our long-term growth prospects, despite the current economic environment," said John Mackey, chairman, chief executive officer, and co-founder of Whole Foods Market. "This investment, combined with our strong cash flow from operations, gives us the financial flexibility to manage through these difficult economic times while continuing to prudently invest in our long-term growth. From both an operational and capital expenditure standpoint, we consider our current store development pipeline of 66 stores to be very manageable over the next four years."
For the quarter, store contribution was $119.5 million or 6.7% of sales, and G&A expenses were $54.7 million or 3.1% of sales. For the quarter, the Company's effective tax rate was 90.3%, net income was $1.5 million, and diluted earnings per share were $0.01, including significant charges in the quarter as follows:
-- $14.7 million, or $0.05 per diluted share, in charges related to idle
Wild Oats properties;
-- $5.5 million, or $0.02 per diluted share, in non-cash charges related to
13 lease terminations of Whole Foods Market stores in development;
-- $1.5 million, or $0.01 per diluted share, in non-cash charges related to
asset impairments at two Wild Oats locations; and
-- $6.1 million, or $0.04 per diluted share, in tax charges resulting from
the repatriation of $60 million in cash from the Company's Canadian
subsidiary in the fourth quarter.
The Company's high effective tax rates of 90.3% for the quarter and 44.5% for the fiscal year were primarily due to the repatriation of cash in the fourth quarter. Excluding the cash repatriation charge, the Company's effective tax rates were 50.8% for the quarter and 41.6% for the year. The 41.6% effective tax rate for the fiscal year, excluding the cash repatriation charge, was slightly higher than the 40.8% rate used to calculate net income and diluted earnings per share in the first three quarters of the year, resulting in a $1.4 million adjustment that increased the effective tax rate in the fourth quarter to 50.8%. The diluted per share amounts in the charges above were calculated using the Company's quarterly effective tax rate of 50.8% excluding the Canadian cash repatriation.
For the quarter, earnings before interest, taxes, depreciation and amortization ("EBITDA") were approximately $82 million, and earnings before interest, taxes, depreciation and other non-cash expenses ("EBITANCE") were approximately $97 million. Approximately $75 million relating to depreciation and amortization, share-based payments, LIFO and deferred rent was expensed for accounting purposes but was non-cash.
During the quarter, the Company produced approximately $59 million in cash flow from operations and invested $130 million in capital expenditures, of which approximately $75 million related to new stores and approximately $8 million related to Wild Oats stores. In addition, the Company paid a cash dividend to shareholders of approximately $28 million in the quarter. Cash and cash equivalents, including restricted cash, increased to $31 million at year end, and total debt was $929 million, including $195 million drawn on the Company's $350 million credit line. Subsequent to the end of the quarter, the Company paid down approximately $32 million on its credit line, effectively reducing the amount drawn to approximately $164 million. Currently, the Company has approximately $102 million available on its credit line, net of $84 million in outstanding letters of credit, and intends to pay down the line fully once proceeds from the equity investment are received. The Company is in compliance with all applicable covenants in its debt agreements.
Results Excluding the Impact of Wild Oats
The following information excludes the estimated quantifiable impact of acquired operations.
The following table shows the Company's growth in sales, comparable store sales, and ending square footage for the fiscal year compared to its historical five-year ranges and averages. The table also shows the Company's fiscal year results for certain line items as a percentage of sales compared to its historical five-year ranges and averages, and the percentage of sales from identical as well as new and relocated stores compared to its historical five-year ranges and averages. The Company believes this is relevant information as new and relocated stores tend to have lower gross profit and higher direct store expenses as a percentage of sales, resulting in a lower store contribution than identical stores. Where applicable, historical percentages have been adjusted to exclude Hurricane Katrina charges and credits, as well as share-based payments expense incurred in fiscal year 2005 related to the Company's September 2005 accelerated vesting of stock options.
For the fourth quarter, sales increased 9% to $1.6 billion. Gross profit decreased 139 basis points from the prior year to 33.5% of sales. The LIFO charge was $4.7 million versus $2.6 million in the prior year due mainly to an increase in inflation reflected in CPI indices. Direct store expenses increased two basis points to 26.3% of sales. As a result, store contribution decreased 140 basis points to 7.2% of sales.
For stores in the identical store base, gross profit decreased 106 basis points from the prior year to 33.9% of sales primarily due to higher occupancy costs driven by an increase in utilities and property taxes as a percentage of sales and, to a lesser degree, higher cost of goods sold as a percentage of sales driven by cost increases that were greater than the Company's increase in average retail prices. Direct store expenses improved 43 basis points from the prior year to 25.8% of sales due primarily to leverage in wages which was partially offset by an increase in depreciation as a percentage of sales. As a result, store contribution decreased 62 basis points to 8.1% of sales.
For the quarter, relocation, store closure and lease termination expense was $10.4 million which includes $5.5 million, or $0.02 per diluted share, related to 13 lease terminations of Whole Foods Market stores in development and $2.6 million, or $0.01 per diluted share, related to the closure of two regional bakehouses and one Fresh & Wild store in Bristol, England. The remaining $2.3 million related to other closure and relocation expenses.
The Company closed two Wild Oats stores during the quarter in connection with the opening of new Whole Foods Market stores. Sales at the 55 continuing Wild Oats stores for the quarter were $159.3 million, and comparable store sales growth for the last four weeks of the quarter was 4.6%. To date, 45 Wild Oats stores have been re-branded.
As highlighted in the following table, the Company estimates the negative impact on net income from Wild Oats in the quarter was approximately $25.4 million, or $0.09 per diluted share, calculated using a 50.8% effective tax rate. These results include charges of $14.7 million, or $0.05 per diluted share, related to idle Wild Oats properties and $1.5 million, or $0.01 per diluted share, related to asset impairments at two continuing Wild Oats locations. This estimate of dilution excludes unquantifiable synergies and costs in the core business.
On July 29, 2008, the United States Court of Appeals for the District of Columbia, in a split decision, reversed the denial of the FTC's request for an injunction regarding the Company's acquisition of Wild Oats and remanded the case to the U.S. District Court for further evidentiary proceedings. Whole Foods Market has sought review of the July 29th decision by the entire Court of Appeals. While the Company disagrees with the reversal of the lower court decision denying the FTC's request for a preliminary injunction, the decision acknowledges that neither the Court nor the FTC has found the merger to be unlawful. Separately, the FTC has resumed its administrative action challenging the acquisition. The administrative case is currently in the pretrial discovery phase and is scheduled to go to trial February 16, 2009. Whole Foods Market is vigorously contesting the administrative case and defending the merger which has benefited, and continues to benefit, both customers and Team Members.
Growth and Development
In the fourth quarter, the Company opened eight stores, closed one Fresh & Wild store in Bristol, England, and closed one Whole Foods Market store and two Wild Oats stores in connection with the opening of new Whole Foods Market stores. The Company ended the quarter with 275 stores totaling 9.9 million square feet. Subsequent to the close of the quarter, the Company relocated two stores in Las Vegas, NV and Millburn, NJ and opened two stores in Roseville, CA and Wellington, FL.
"Our new stores opened during the fourth quarter are off to a strong start. Our Venice Beach store in California ranks as our highest volume store in the Southern Pacific region, and we opened our first of four stores in Hawaii," said Mr. Mackey. "At just under 30,000 square feet, we are pleased to report our Honolulu store is producing excellent sales per square foot since opening."
The Company recently signed three new store leases averaging 38,200 square feet in size in San Francisco, CA; Marietta, GA; and North Raleigh, NC. These three stores currently are scheduled to open after fiscal year 2010. Since the Company's third quarter earnings release on August 5th, the Company has terminated eight additional leases totaling approximately 434,800 square feet and has downsized three additional leases by an average of 17,000 square feet each. Of the terminated leases, five were for stores previously scheduled to open in fiscal year 2010, and three were for stores previously scheduled to open in fiscal year 2011.
The following table provides additional information about the Company's store openings in fiscal years 2007 and 2008 and year to date in fiscal 2009, leases currently tendered but not opened, and total development pipeline for stores scheduled to open through fiscal year 2012. 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.
Outlook for Fiscal Year 2009
The uncertain and rapidly changing economic environment makes it highly difficult to forecast future results. Therefore the Company has chosen not to give comparable store sales growth guidance at this time. The Company has, however, provided base-case assumptions using flat comparable store sales, which would put total sales in the range of $8.3 billion for fiscal year 2009 driven by the opening of 15 new stores, seven of which are relocations.
The Company notes that year-over-year sales comparisons are difficult in the first half of the year and become less difficult on a quarterly basis throughout the year. For the first five weeks of the first quarter ended November 2, 2008, comparable store sales decreased 2.1% versus a 9.0% increase in the prior year, and identical store sales decreased 3.3% versus a 6.7% increase in the prior year.
The Company has opened four stores year to date. Of the Company's 11 currently tendered stores, six are expected to open in fiscal year 2009, with five scheduled to open in fiscal year 2010. One additional store is expected to open in the first quarter this year; four stores are expected to open in the second quarter, and six are expected to open in the second half of the fiscal year.
The Company expects G&A expenses of approximately 3.1% of sales. In addition, the Company expects to incur significant costs related to the FTC lawsuit of $15 million to $20 million in fiscal year 2009, including $8 million to $10 million in the first quarter and $5 million to $7 million in the second quarter.
The Company expects total pre-opening and relocation costs in the range of $55 million to $60 million. Approximately half of this amount relates to pre-opening rent for stores scheduled to open in fiscal year 2009 and beyond.
The Company expects net interest expense in the range of $35 million to $40 million for the year.
The Company expects an annualized effective tax rate in the range of 41% to 42%.
Based on these assumptions and using flat comparable store sales growth, the Company estimates EBITDA in the range of $525 million to $545 million and EBITANCE in the range of $580 million to $605 million in fiscal year 2009. The Company estimates diluted earnings per share would be in the range of $0.95 to $1.00, excluding approximately $0.06 to $0.08 in estimated dilution from FTC-related legal costs and an estimated $0.19 impact from the Preferred Series A stock.
The Company expects capital expenditures in the range of $400 million to $450 million for the fiscal year.
The following table provides additional information about the Company's estimated store openings for fiscal years 2009 through 2012, including four stores that have already opened in fiscal year 2009, 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.