AUSTIN, Texas, May 4, 2005 /PRNewswire-FirstCall via COMTEX/ -- Whole Foods Market, Inc. (WFMI) today reported sales and earnings for the 12-week quarter ended April 10, 2005. For the second quarter, sales increased 20% to $1.1 billion. This increase was driven by 13% weighted average year-over-year square footage growth and comparable store sales growth of 11.6%. Sales in identical stores (excluding three relocated stores and two major store expansions) increased 10.2% for the quarter. Net income increased 22% to $42.0 million, and diluted earnings per share increased 17% to $0.61.
For the 28-week period ended April 10, 2005, sales increased 21% to $2.5 billion, with sales in comparable stores increasing 11.5% and sales in identical stores increasing 10.5%. Net income has increased 25% to $89.9 million, and diluted earnings per share increased 20% to $1.33.
The Company also announced in a separate release that based on new determinations by the SEC, the Company will return to and continue its previous practice of capitalizing rent during the construction period. The Company is thereby reducing the lease accounting charge for the first quarter of the current fiscal year from $0.04 to $0.02 per diluted share and the charge for fiscal year 2004 from $0.11 to $0.06 per diluted share. The remaining charge primarily reflects the additional pre-opening costs and depreciation of the asset resulting from rent allocated to the construction period. The Company's reported results for the second quarter and prior year reflect the return to this previous accounting practice.
"This quarter we produced an 11.6% comparable store sales increase, which was on top of our record-breaking 17.1% comparable store sales increase in the second quarter last year," said John Mackey, Chairman, Chief Executive Officer, and Co-Founder of Whole Foods Market. "We are very pleased with our performance year to date, particularly in light of our difficult year-over- year comparisons. Due to our strong sales growth, we are raising our comparable store sales guidance for the year to a range of 9% to 11% from 8% to 10%. We continue to expect 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 29 basis points to 35.7% of sales, and direct store expenses decreased three basis points to 25.5% of sales, resulting in store contribution of 10.2% of sales. For the 156 stores in the comparable store base, gross profit improved 56 basis points to 36.0% of sales, and direct store expenses improved 28 basis points to 25.3% of sales, resulting in an 84 basis point increase in store contribution to 10.7% of sales. General and administrative (G&A) expenses were relatively flat, increasing one basis point to 3.2% of sales.
The table below shows the Company's quarterly results compared to 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.
Capital expenditures in the quarter were $74 million of which $51 million was for new store development. During the quarter, the Company produced cash flow from operations of $128 million and paid approximately $12 million to shareholders in quarterly dividends of $0.19 per share. Cash and cash equivalents, including restricted cash, were approximately $331 million at the end of the quarter, and total long-term debt was approximately $91 million.
On April 5, 2005, the Company announced a 32% increase in its quarterly dividend to $0.25 per share from $0.19 per share. On November 10, 2004, the Company announced a 27% increase in the quarterly dividend to $0.19 per share from $0.15 per share. The first $0.25 per share dividend was paid on April 25, 2005.
In the second quarter, the Company opened two new stores in Swampscott, MA and New York City, NY and relocated two stores in Austin, TX and Thousand Oaks, CA, ending the quarter with 168 stores totaling approximately 5.4 million square feet. The Company today opened its third store in Canada and expects to open two additional stores during the third quarter, including one relocation.
The Company is pleased to announce the recent signing of seven new store leases in San Francisco, CA; Naples, FL; Portland, ME; West Orange, NJ; Nashville, TN; Milwaukee, WI; and Vancouver, Canada. The following table provides additional information about the Company's store development pipeline.
Future Growth Goals and Updated Guidance
The Company has a stated long-term growth goal of $10 billion in sales by the year 2010. For fiscal year 2005, the Company expects sales growth at the higher end of its previously stated 15% to 20% range. The Company expects comparable store sales growth to be in the range of 9% to 11% versus its previously stated range of 8% to 10%, with weighted average square footage growth of approximately 15% based on the opening of 15 to 18 new stores, including three relocations. 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 $9 million to $11 million for the remainder of the year. In addition, the Company continues to expect new stores may have some negative impact on store contribution, as new stores generally have lower gross margins and higher direct store expenses than more mature stores. Due to the remaining charges for changes in lease accounting regarding the recognition of rent expense and depreciation for certain leases, the Company expects store contribution to be approximately $2 million to $4 million lower for the remainder of the year than it would have been under the original method of accounting. The Company expects G&A expenses for the remainder of the fiscal year to be higher as a percentage of sales 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 expected to be in the range of $300 million to $320 million.
Stock Option Strategy Update
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.
Though not retroactive, 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 previously announced its intention, absent FASB 123R being overruled by Congress, to accelerate the vesting of all outstanding stock options sometime prior to July 4, 2005, the date the new rules were to be effective for the Company.
In view of the recent action by the SEC to delay the effective date of option expensing, the Company now expects to begin expensing options in the first quarter of fiscal year 2006. Consequently, it plans to delay the acceleration of vesting of all outstanding options until September unless there are further delays and/or the rule is overturned.
This accelerated vesting of options will create a one-time, mostly non- cash charge in the fourth 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 first quarter of fiscal year 2006 until it reaches 10% of net income in fiscal year 2010.
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 twelve weeks ended April 10, 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 1-877-707-9628 and the conference ID is "Whole Foods." A replay will be available for approximately 48 hours at 1-402-220-1178, and a simultaneous audio webcast will be available at http://www.wholefoodsmarket.com .
About Whole Foods Market: Founded in 1980 in Austin, Texas, Whole Foods Market(R) is a Fortune 500 company and the largest natural and organic foods retailer. The Company had sales of $3.9 billion in fiscal year 2004 and currently has 169 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.