Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=164634
Story Retrieval Date: 5/22/2013 6:12:26 AM CST
Whole Foods Market Inc. nearly doubled its second-quarter profits and beat Wall Street’s expectations, triggering a 6 percent jump in its stock price Thursday.
The natural and organic food supermarket chain earned $67.5 million, or 39 cents per diluted share, in the period ended April 11, up 91 percent from $35.3 million, or 19 cents per diluted share, in the prior-year period.
Analysts surveyed by Bloomberg LP were expecting earnings of 36 cents per diluted share.
Sales were $2.11 billion, up 13 percent from $1.86 billion from the same period last year, mainly due to an increase in store traffic. Comparable-store sales, which includes locations open at least a year, were up 8.7 percent.
Company executives and analysts were optimistic during Wednesday’s conference call. The second quarter upturn follows a hard hit by the recession in September 2008, when the company earned only $1.5 million.
“As the customer confidence has come back and people realize how much more value they can get in our stores . . . we’re really seeing a big swing back,” said A.C. Gallo, co-chief operating officer, during the call.
Edward Jones analyst Matt Arnold said Whole Foods has “enough traction” in its business to conclude that it has in fact emerged from the recession. The company’s recovery, which has been much quicker and more substantial than its grocery competitors, comes down to its affluent target consumer, according to Arnold.
“The recession was more perception than reality for them,” Arnold said. “They were affluent then and still are. They just feel better about spending now.”
Differentiating itself from stores such as Kroger and Safeway, Whole Foods doesn’t plan to slash prices to gain customers, said CEO John Mackey, but seeks to maintain its image of purveying healthy offerings and specialty items.
“We’re sticking with our goal of offering competitive prices on known value items, day in and day out,” Mackey declared.
With the average price per item remaining flat, Mackey attributed the healthy growth in store sales to increases in both transaction count and basket size. This marked the first increase in basket size since the fourth quarter of 2008.
Perishable items sales have been “growing quite dramatically,” a shift from when the recession first hit and sales gains were focused on non-perishables towards the center of the store, Gallo explained.
However, Whole Foods saw a small jump in beef and vegetables prices during the first quarter. The chain passed along a price increase of “less than 1 percent” to customers in areas where “the competitive environment allowed,” according to Gallo, who said he isn’t anticipating any further price increases through the end of next year.
Significant cash flow generation this quarter puts Whole Foods in a position to accelerate square footage growth, according to a note by RBC Capital Markets Corp. analyst Edward Aaron.
“Based on recent new store trends . . . we see ample runway for unit expansion,” Aaron said.
Smaller Whole Foods stores have been producing higher profit margins than larger stores. During the quarter, Whole Foods opened three stores in Dallas; Kahului, Hawaii; and Long Island, N.Y. Since January, the company has debuted 19 stores, weighing in around 47,000 square feet each, 9 percent smaller in size than the 21 new stores opened at the same time last year. The stores added this year have produced 25 percent higher average weekly sales per store of around $660,000, primarily due to lower occupancy costs and direct store expenses, Mackey said. The company plans to introduce 15 to 20 stores through 2011.
Though Arnold said he was “definitely impressed” with Whole Foods earnings report, he gave the stock a “hold” rating and warned investors from “chasing” the stock after the runup.
“They’re definitely seeing momentum in business, but after a period of rebound, it no longer becomes all that compelling of a value,” Arnold said.
In the first half ended April 11, Whole Foods earned $122.6 million, or 72 cents per diluted share, up 81 percent from $67.6 million, or 39 cents per diluted share, in the prior-year period.
Sales totaled $4.75 billion, up 10 percent from $4.32 billion last year.
Whole Foods, which began as a small store in Austin, Texas, now has more than 280 stores in the U.S., Canada and the U.K. and employs more than 54,000. It was recently named No. 284 on the Fortune 500 list of largest U.S. public corporations.
The stock closed Thursday at $42.50, up $2.25.