Whole Foods Reports Record Sales, but Comp Sales Falls

Total sales increased to a record $3.50 billion in Q4 FY16 from $3.44 billion

w1Whole Foods Market Inc. (NASDAQ: WFM), a leading natural and organic foods supermarket, announced its Q4 FY16 and full year FY16 financial results on November 2nd, 2016.

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. It currently has 464 stores in the U.S., Canada, and the U.K. Read more about Whole Foods’ financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Whole Foods’ total sales increased to a record $3.50 billion from $3.44 billion in the year-ago period. Comparable store sales decreased 2.6%, as the supermarket chain was faced with food deflation, putting pressure on margins.

w2During the reporting quarter, last in first out (LIFO) credits totaled $9 million versus $2 million last year, a positive impact of 19 basis points Y-o-Y. Excluding LIFO, gross margins declined 53 basis points to 33.9%, driven by increases in cost of goods sold, primarily reflecting the Company’s value efforts, and occupancy costs as a percentage of sales. Excluding $80 million of asset impairment and restructuring charges in the prior year, SG&A increased five basis points to 29.1% of sales. A 68-basis-point improvement in wages was more than offset by higher marketing, depreciation, healthcare and technology expenses as a percentage of sales.

Despite higher costs, Q4 FY16 net income grew to $88 million, or 2.5% of sales, with diluted EPS of $0.28. EBITDA was at $276 million, or 7.9% of sales, and return on invested capital (ROIC) was 13%.

FY16 financial highlights

During FY16, the company’s total sales increased 2.2% to a record $15.7 billion versus $15.38 billion in the year-ago period. Comparable store sales decreased 2.5% during the year. Average weekly sales per store were $682,000, translating to sales per gross square foot of approximately $915. Net income decreased to $507 million, or 3.2% of sales, with diluted EPS of $1.55. EBITDA was at $1.4 billion, or 8.6% of sales for the year.

Other highlights

Cash flow: During Q4 FY16, the Company reported $352 million in cash flow from operations and invested $195 million in capital expenditures. Whole Foods ended Q4 FY16 with $1.1 billion of total debt and $1.2 billion of total available capital. For FY16, the Company reported $1.1 billion in cash flow from operations and invested $716 million in capital expenditures, resulting in $400 million of free cash flow.

w3Share buyback and dividends: During Q4 FY16, Whole Foods returned $44 million in dividends to shareholders, and repurchased $15 million, or 0.5 million shares of common stock. For FY16, the Company returned $177 million in quarterly dividends to shareholders, and repurchased $944 million or 31.6 million shares of common stock. The Company currently has $443 million remaining in repurchase authority. The Board of Directors declared an increase in the quarterly dividend to $0.14 per share from $0.135 per share, representing annual returns to shareholders of approximately $179 million. The next dividend is payable on January 24th, 2017, to shareholders on record as of January 13th, 2017.

Store update: During Q4 FY16, the Company opened five stores, including two 365 by Whole Foods Market stores and one relocation. So far in Q1 FY17, the Company has opened nine Whole Foods Market stores, including one relocation, expanding into five new markets. Five additional stores, including one relocation, are expected to open over the remainder of Q1 FY17. The company plans to open up to 22 stores in H1 FY17.

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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 expects to incur a charge of approximately $13 million associated with Mr. Robb’s separation agreement. The estimated $0.03 impact of this charge is not reflected in FY17 guidance.

Strategic initiatives: Whole Foods is more than half way towards two-year $300 million expense reduction goal in FY16. 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 U.S. than any other food retailer. Whole Foods also launched a unified point-of-sale system, including EMV technology, across all its U.S. stores.

Guidance for full year FY17

In FY17, the Company forecasts sales growth of 2.5% to 4.5%, comps of -2% to 0%, and ending square footage growth of approximately 6%, reflecting approximately 30 new stores, including up to six relocations and four 365 stores. Diluted EPS is forecasted at $1.42 or greater, excluding any potential share repurchases. EBITDA margin are predicted at approximately 8.2%, and capital expenditures are forecasted at 4% of sales, with ROIC of 11% or greater.

Stock Performance

w5Whole Foods’ stock stood at $32.24, gaining marginally 0.66%, at the close on Tuesday, November 15th, 2016, having vacillated between an intraday high of $32.54 and a low of $31.60 during the session. The stock’s trading volume was at 6,967,100 for the day. The Company’s market cap was at $10.27 billion as of Tuesday’s close.

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