Whole Foods Market Reports Third Quarter Results

AUSTIN, Texas, July 28, 2005 /PRNewswire-FirstCall via COMTEX/ -- Whole Foods Market, Inc. (WFMI) today reported sales and earnings for the 12-week quarter ended July 3, 2005. For the third quarter, sales increased 23% to $1.1 billion. This increase was driven by 13% weighted average year-over-year square footage growth and comparable store sales growth of 15.2%. Sales in identical stores (excluding four relocated stores and two major store expansions) increased 13.2% for the quarter. Net income increased 31% to $41.7 million, diluted earnings per share increased 25% to $0.60, and Economic Value Added (EVA) improved $6.5 million to $10.4 million.

For the 40-week period ended July 3, 2005, sales increased 22% to $3.6 billion, with sales in comparable stores increasing 12.6% and sales in identical stores increasing 11.3%. Net income increased 27% to $131.6 million, diluted earnings per share increased 21% to $1.93, and EVA improved $12.8 million to $30.1 million.

"We are producing impressive sales and earnings results even as we compare against one of the best years in our company's history. Our comparable stores have produced a sales increase of 12.6% year to date on top of a 15.2% increase last year, our new stores continue to perform above our expectations, producing a record $618,000 in average weekly sales during the quarter, and our net income has increased 27% year to date on top of a 34% increase last year," said John Mackey, Whole Foods Market CEO, Chairman and Co-founder. "We are working hard to capitalize on the tremendous growth opportunities that lie ahead of us by steadily increasing our store development pipeline, which at 3.5 million square feet currently represents 64% of our existing square footage. We believe our goal of $10 billion in sales by the year 2010 is well within our reach."

In the quarter, gross profit increased 72 basis points to 35.2% of sales, and direct store expenses decreased 13 basis points to 25.3% of sales, resulting in store contribution of 9.9%. For the 159 stores in the comparable store base, gross profit improved 96 basis points to 35.5% of sales, and direct store expenses improved 31 basis points to 25.1% of sales, resulting in a 127 basis point increase in store contribution to 10.4%. General and administrative (G&A) expenses increased 49 basis points to 3.5% of sales.

The following table 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 $81 million of which $51 million was for new store development. During the quarter, the Company produced cash flow from operations of $89 million and paid approximately $16 million to shareholders in quarterly dividends of $0.25 per share. Cash and cash equivalents, including restricted cash, were approximately $361 million at the end of the quarter, and total long-term debt was approximately $19 million. During the quarter, approximately 124,000 of the Company's zero coupon convertible debentures were voluntarily converted by bondholders to approximately 1.3 million shares of common stock, resulting in a decrease in the zero coupon convertible debt from $79 million at the end of the second quarter to $13 million at the end of the third quarter.

In the third quarter, the Company opened three new stores in Toronto, Canada; Middletown, NJ; and Metairie, LA (a relocation), ending the quarter with 170 stores totaling approximately 5.5 million square feet. The Company expects to open five stores during the fourth quarter, ending the fiscal year with 175 stores and approximately 5.8 million square feet in operation.

The Company is pleased to announce the recent signing of ten new store leases representing a total of approximately 616,000 square feet which are as follows: Cupertino, CA (63,000 s.f.); Hollywood, CA (61,000 s.f.); San Jose, CA (45,000 s.f.); Pembroke Pines, FL (55,000 s.f.); Schaumberg, IL (67,000 s.f.); Minneapolis, MN (73,000 s.f.); Paramus, NJ (77,000 s.f.); South Hills, PA (68,000 s.f.); Dallas, TX (51,000 s.f.); and Madison, WI (55,000 s.f.). The following table provides additional information about the Company's current store development pipeline.

For fiscal year 2005, the Company expects sales growth slightly above its previously stated range of 15% to 20% and comparable store sales growth slightly above its previously stated range of 9% to 11%. Weighted average square footage growth is expected to be approximately 13% based on the opening of 15 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 a previously announced one-time charge in the fourth quarter now estimated at approximately $10 million to $15 million, caused by the anticipated acceleration in vesting of the Company's outstanding stock options. The Company expects pre-opening and relocation expense of $23 million to $24 million for the year. The Company expects G&A expenses for the remainder of the fiscal year to be higher as a percentage of sales 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 at the high end of the Company's previous guidance range of $300 million to $320 million.

The Financial Accounting Standards Board ("FASB") recently issued a proposed FASB Staff Position on accounting for rental costs incurred during the construction period that, if adopted, would require construction-period rentals to be recognized as expense for reporting periods beginning after September 15, 2005. If earlier adoption is permitted, the Company may decide to retroactively apply these requirements to its fiscal year 2005 and prior- year results to conform to the new accounting rules. The Company's guidance excludes any impact from these lease accounting rule changes, as FASB has not issued a final statement. For the first two quarters of fiscal 2005, the impact on earnings would be approximately $0.02 per diluted share each quarter, and the Company estimates that the impact on earnings in the third and fourth quarters would be approximately $0.03 to $0.04 per diluted share each quarter. The impact would be higher in the second half of the year primarily due to more stores under construction.

Growth Goals for Fiscal Year 2006

The Company has a stated long-term growth goal of $10 billion in sales by the year 2010. For fiscal year 2006, the Company expects total sales and earnings growth of 15% to 20% despite difficult comparisons due to the Company's above-average results in 2004 and so far in 2005. The Company also expects a weighted average year-over-year increase in square footage in line with its stated 15% goal.

Stock Option Strategy

In December 2004, FASB finalized Statement 123R, Share-based Payment, which requires all companies to expense share-based payments, including stock options, at fair value. The Company expects to begin expensing options in the first quarter of fiscal year 2006.

Though not retroactive, the charge to earnings resulting from this 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 results, the Company previously announced its intention to accelerate the vesting of all outstanding stock options sometime in September unless there are further delays and/or the rule is overturned. The 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 to $15 million. The actual amount of the expense will vary depending on a number of factors, primarily 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 will not exceed 10% in future years. 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, its unique corporate culture and its success.

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 171 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 impact of competition, and other risks detailed from time to time in the Company's SEC reports, including the report on Form 10-K/A Amendment No. 2 for the fiscal year ended September 26, 2004. The Company does not undertake any obligation to update forward-looking statements.

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