Whole Foods Clocks Record Sales, but Comp Sales Falls

Total sales increased to a record $4.9 billion in Q1 FY17

Whole Foods Market Inc. (NASDAQ: WFM), a leading natural and organic foods supermarket, announced its Q1 FY17 financial results on February 08th, 2017.

The Austin, Texas-based company is the first national “Certified Organic” grocer, and uniquely positioned as America’s Healthiest Grocery Store. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, grocery, and household goods. In FY16, the Company had sales of approximately $16 billion and currently has 469 stores in the US, Canada, and the UK. Read more about Whole Foods’ financial results below.

Q1 FY17 financial highlights

During Q1 FY17, Whole Foods’ total sales increased 1.9% to a record $4.9 billion versus $4.8 billion in the year-ago same period. Comparable store sales decreased 2.4% during the reporting quarter. Gross margin declined 43 basis points to 33.6% driven by increases in occupancy costs and cost of goods sold as a percentage of sales. Excluding the charge related to Mr. Robb’s separation agreement, SG&A increased 12 basis points to 28.6% of sales. A 42-basis point improvement in wages was more than offset by higher marketing and depreciation expenses as a percentage of sales. As a result, operating income plunged to $171 million from $252 million in the year-ago comparable period.

Consequently, Q1 FY17 net income plunged to $95 million, or 1.9% of sales; diluted EPS was $0.30 with EBITDA at $360 million, or 7.3% of sales. The quarterly results included a non-cash charge of $34 million, or $0.06 per diluted share, related to store and facility closures and a charge of $13 million, or $0.03 per diluted share, associated with Mr. Robb’s separation agreement. Excluding these charges, Q1 FY17 net income was $123 million, or 2.5% of sales; diluted EPS was $0.39 with EBITDA margin at 7.6% and return on invested capital at 12%.

Whole Foods has been struggling with falling traffic as lower-price competitors offer organic foods at a discount. Indeed, while customers put more items in their baskets during the first quarter, fewer shoppers made transactions in its stores. Whole Foods has also been struggling to grow sales in a deflationary environment. To remedy this, Whole Foods is evolving its purchasing operating model while developing data-rich, customer-centric category management capabilities to its go-forward merchandising, pricing, marketing, and affinity strategies.

Other highlights

Cash flow: During Q1 FY17, the Company generated $284 million in cash flow from operations and invested $245 million in capital expenditures. Whole Foods ended the quarter with $1.1 billion of total debt and $1.2 billion of total available capital.

Dividends: During Q1 FY17, Whole Foods returned $43 million in dividends to shareholders.

Store update: During Q1 FY17, the Company opened 13 stores, including 2 relocations. So far in Q2 FY17, the Company has opened 3 stores, including 1 relocation, and expects to open 3 additional stores, including 1 relocation. The Company also closed 1 commissary kitchen and will be closing 9 stores and the Company’s last 2 remaining commissary kitchens during the quarter. The Company recently terminated 2 leases and signed 4 new leases and currently has 93 stores under development.

Structural and leadership changes: The Board of Directors of Whole Foods announced changes to the leadership structure that includes transitioning from two co-CEOs to a sole CEO, with co-founder John Mackey to serve as CEO. Walter Robb, the other co-CEO, will remain on the Company’s Board of Directors and continue to serve as Chairman for both Whole Kids Foundation and Whole Cities Foundation. He will officially transition his co-CEO responsibilities on December 31st, 2016, and will continue to be a senior advisor to the Company. Robb has served the company for 25 years, most recently as co-CEO for the previous six years.

Executive Vice President and Chief Financial Officer Glenda Flanagan will retire at the end of FY17. The company also announced today that Mary Ellen Coe, Vice President of Sales and Product Operations for Google, has joined the Board of Directors.

In Q1 FY17, the Company incurred a charge of about $47 million, or $0.09 per diluted share, associated with Mr. Robb’s separation agreement as well as store and facility closures.

Strategic initiatives: With the successful launch of new value format, 365 by Whole Foods Market™, the company reported sales of over $5 billion in exclusive brands, prepared foods and bakery items. The company also enhanced the customer experience with its new Whole Foods Market app, including digital coupons and sales flyer.

Whole Foods also piloted a new rewards program in the Dallas/Fort Worth area. It also announced Instacart ordering available through the Whole Foods Market website, offering fresh grocery delivery to more homes in the US than any other food retailer. Whole Foods also launched a unified point-of-sale system, including EMV technology, across all its US stores.

Updated guidance for FY17

For FY17, the Company has updated its outlook and now forecasts sales growth of 1.5% or greater, comps of -2.5% or better, and ending square footage growth of approximately 5% net of closures, reflecting approximately 30 new stores, including up to six relocations and three 365 stores. Diluted EPS is forecast at $1.33 or greater, excluding any potential share repurchases. EBITDA margin are predicted at approximately 8%, and capital expenditures are forecast at 4% of sales, with ROIC of about 11%.

In Q2 FY17, the Company expects to incur an additional charge related to store closures of approximately $30 million, or $0.06 per diluted share. The Company plans to reduce its cost structure in FY17, but expects these savings to be more than offset by investments in marketing, value and technology, as well as higher occupancy, depreciation and other costs.

Stock Performance

Whole Foods’ stock stood at $30.46, slipping 0.52%, at the close on Thursday, March 02nd, 2017, having vacillated between an intraday high of $30.68 and a low of $30.25 during the session. The stock’s trading volume was at 3,958,993 for the day. The Company’s market cap was at $9.69 billion as of Thursday’s close.

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