Whole Foods Market Reports First Quarter Results

AUSTIN, Texas, Feb 09, 2005 /PRNewswire-FirstCall via COMTEX/ -- Whole Foods Market, Inc. (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.

"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.

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 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.

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.

About Whole Foods Market: Founded in 1980 in Austin, Texas, Whole Foods Market(R) is the largest natural and organic foods retailer. The Company had sales of $3.9 billion in fiscal year 2004 and currently has 166 stores in the United States, Canada and the United Kingdom.

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.

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