Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

John Mackey - Co-Founder, Co-Chief Executive Officer and Director

A. Gallo - President and Chief Operating Officer

Cindy McCann - Vice President of Investor Relations and Vice President of Construction and Store Development

Glenda Chamberlain - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

Walter Robb - Co-Chief Executive Officer and Director

Analysts

John Heinbockel - Guggenheim Securities, LLC

Scott Mushkin - Jefferies & Company, Inc.

Karen Short - BMO Capital Markets U.S.

Joseph Parkhill - Morgan Stanley

Robert Ohmes - BofA Merrill Lynch

Edward Aaron - RBC Capital Markets, LLC

Charles Grom - JP Morgan Chase & Co

Whole Foods Market (WFMI) F1Q11 Earnings Call February 9, 2011 5:00 PM ET

Operator

Good day, everyone, and welcome to the Whole Foods First Quarter Earnings Call. [Operator Instructions] And it is now my pleasure to hand the call over to Cindy McCann, Vice President of Investor Relations. Please go ahead.

Cindy McCann

Good afternoon. Thank you for joining us for the Whole Foods Market First Quarter Earnings Conference Call. On the call today are John Mackey and Walter Robb, Co-Chief Executive Officers; A.C. Gallo, President and Chief Operating Officer; Glenda Flanagan, Executive Vice President and Chief Financial Officer; and Jim Sud, Executive Vice President of Growth & Development.

I'd like to remind you that the discussion we're having today will include forward-looking statements within the context of federal securities laws. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. We undertake no obligation to update forward-looking statements. These risks and uncertainties include those outlined in today's call, as well as any other risks identified from time to time in the company's public statements and reports filed with the SEC. Please note, our press release and scripted remarks are available on our website. I will now turn the call over to Walter Robb.

Walter Robb

Thank you, Cindy. Good afternoon, everyone. We assume you have read our press release, and we'll use this time to focus on highlights from the quarter. We're very proud of our results, which once again showed strong top and bottom line increases. On a 14% increase in sales, we produced: a 15% increase in gross profit; a 26% increase in EBITDA to $234 million; a 59% increase in earnings per share to $0.51; cash flow from operations of $253 million; and free cash flow of $162 million. Our solid execution is generating consistent free cash flow which we are using to pay off debt, invest in new and existing stores and return cash to shareholders. During the quarter, we repaid $100 million of our term loan and invested $91 million in capital expenditures. Subsequent to the end of the quarter, we repaid another $200 million and paid $17 million to our shareholders after reinstating our dividend last December.

The biggest news of the quarter is, despite increasingly tougher comparisons, we maintained our sales momentum and are reporting our fifth consecutive quarter of accelerating ident [identical] store sales growth on both a one- and a two-year basis. Identical store sales increased 9.1%, our highest result in four years, and an acceleration of 518 basis points to 11.6% on a two-year stacked basis. Average weekly sales per store for all stores increased 9% to $621,000, translating to sales per square foot of approximately $856.

We believe our value efforts and differentiation are continuing to gain traction as evidenced by our strong 7% increase in transaction count in identical stores. A 2% increase in basket size was driven primarily by customers putting more items in their baskets, and while there was a lot of discussion about inflationary pressures on product costs, our average price per item showed only a slight increase year-over-year. This is a reversal from slight decreases we have been seeing. We attribute this net overall result to our strategic price investments offsetting the selected pass-through of some higher product costs.

Our results underscored signs that consumer confidence continues to improve. Year-over-year, branded product sales growth outpaced our exclusive brand growth, and customers continued to shift towards organic products. We also saw an increase on the percentage of sales and transactions for baskets over $50.

Our identical store sales growth averaged 8.5% over the last four quarters and 8.6% for the first three weeks of Q2. With over a third of the year behind us, our idents have averaged 9% year-to-date. We are proud that we are continuing to gain market share at a much faster rate than most public food retailers and attribute a lot of our success to the progress we have made in our relative price positioning and to continuing to raise the bar in areas that matter to our customers.

Just last week, we announced our deeper commitment to improve the lives of farm animals with the adoption of the 5-Step Animal Welfare Rating System. This is big news for our producers, for our shoppers and most importantly, for the farm animals. The rating system is the signature program of the new non-profit Global Animal Partnership and recognizes producers for their efforts improving the welfare of the animals.

For our shoppers, the rating system offers a new level of transparency about the beef, pork and chicken that we sell. Some step-rated options are now available at all of our stores in the United States, and by May 9, all the beef, pork and chicken we carry in the fresh and pre-packaged cases will be rated.

In other news, we were extremely pleased to be ranked number 24 on Fortune's list of 100 Best Companies to Work For. To be one of only 13 companies ranked consecutively for 14 years validates our commitment to our core value of "Supporting Team Member Happiness and Excellence." For additional information about our new animal welfare rating system, Fortune ranking and more, please visit the newly expanded Investor Relations area of our website titled Beyond The Numbers. We plan to post supplemental information here each quarter to highlight our whole story, the whole story beyond just the financials.

Turning now to new store growth. During the quarter, we opened three new stores in Fairview, Texas; Huntington Beach, California and San Jose, California, and are pleased to announce today the signing of six new leases in Danbury, Connecticut, Jamaica Plain, Massachusetts; Lynnfield, Massachusetts; Marlboro, New Jersey; San Antonio, Texas; and Ottawa, Canada. We are very excited about our growth opportunities in Canada, where we currently have six stores and another three now in development. Over the next 10 years, we believe our business in Canada has the potential to grow and expand to over $1 billion in sales.

I will now give some additional color on our raised outlook for fiscal year 2011. Please refer to the press release for more detailed information.

Based on the consistently strong top and bottom line results, along with ongoing signs of increasing consumer confidence, we have raised our sales and earnings outlook for the year. We have raised our outlook for identical sales growth in fiscal year 2011 to 7% to 9% from a previous range of 5% to 7%. As we have frequently said, we do not have a crystal ball when it comes to sales. We can only look at our historical performance and current trends and try to make reasonable assumptions. We have reported five consecutive quarters of accelerating two-year ident store sales growth, a trend that has continued thus far in the second quarter. For the first three weeks of the second quarter, identical store sales increased 8.6%, or 15% on a two-year basis.

To put our new identical store sales guidance for the year in context, the low end of the 7% reflects the slight deceleration in growth on a two-year basis to approximately 14% from the 15% two-year idents we produced in the first three weeks of Q2. The high end of the 9% assumes some continued acceleration in two-year idents to approximately 17%, albeit at a more moderate rate of around 200 basis points versus the 518 and 341 increases we saw in Q1 and Q day [ph] to date, respectively. We believe these ranges appropriately reflect that we have met to cycle over our toughest comparisons, while also allowing for the possibility that our 9% year-to-date identical store sales growth could be sustainable, especially given the likelihood of some positive impact from inflation.

Based on our strong first quarter results and updated assumptions, we have raised our diluted EPS range for fiscal 2011 to $1.76 to $1.80, or $1.25 to $1.29 for the remaining three quarters of the year. We have very high year-over-year EPS growth in Q1, driven in large part by lower pre-opening, relocation and net interest expense. While the benefit of a lower net interest expense will continue, for the remainder of the year pre-opening and relocation expenses are expected to increase approximately $14 million to $17 million versus 2010. We expect a larger negative swing in LIFO of approximately $10 million to $11 million, and we expect to produce lower total sales growth on tough comparisons, which could make it difficult to leverage costs to the extent which we did in the first quarter. In addition, while G&A is still expected to average 3% for the year, we expect costs to be higher in Q2 due mainly to increases in wages and investments in other initiatives.

Our guidance represents a 23% to 26% year-over-year increase in EPS on an 11% to 13% increase in total sales growth, reflecting steady sales growth on tougher comparisons, as well as our commitment to delivering incremental operating margin improvement and earnings growth in excess of sales growth.

Our business has been highly successful, producing industry-leading comparable store sales growth, average weekly sales and sales per square foot. We have an expanded sense of our ultimate growth potential as our brand has continued to strengthen, consumer demand for natural and organic products continues to increase, and our flexibility on new store size has opened up additional market opportunities. While it's difficult to put a number on how many stores we can eventually have, we consider 1,000 stores to be a reasonable indication of the market opportunity. There's plenty of runway left here in the United States. Canada and the United Kingdom also hold great promise.

From a financial perspective, we are well positioned to reaccelerate our new store growth. Our new stores are performing well. Our strong top and bottom line performance, along with our capital expense and discipline, has resulted in consistent cash flow, lower debt and a very healthy balance sheet. We have signed 23 new leases over the last 12 months and expect to open a greater number of new stores beginning in 2012.

We will now take your questions but we limit participants to one question at a time so that everyone has an opportunity to participate. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] It looks like our first question will come from the site of John Heinbockel with Guggenheim.

John Heinbockel - Guggenheim Securities, LLC

Walter, two things I wanted to touch on. With regard to inflation, the slight increase in average selling price, that is different from your input cost inflation? I assume that input costs would be a little different or no?

Walter Robb

Can you just clarify the question please?

John Heinbockel - Guggenheim Securities, LLC

Yes, so you said your average selling price, which was I guess is one measure of inflation, was a slight increase, average selling price in the basket per item, right?

Walter Robb

Correct.

John Heinbockel - Guggenheim Securities, LLC

The input cost to you that you are seeing as you buy product, would that be materially different than the average selling price change or no?

Walter Robb

Not in the first quarter. I mean, actually, the increase -- both of them were fairly not material in the first quarter, not particularly significant. The inflation question, just to get it out there, it's pretty clear. I think we're pretty well buffered for Q2 because of contractual arrangements and so forth, but I think it is a concern for the back half of the year, and we're just going to have to see how that plays out in the marketplace. I mean, the competitors are behaving very rationally right now. We saw some increases happen in the last number of weeks and so there's some thought that some of this can be passed on. But in the first quarter, it wasn't particularly meaningful, either on the cost side or the seller side.

John Heinbockel - Guggenheim Securities, LLC

And as a follow-up to that, how do you think about pricing power and price elasticity? I assume you're willing to take a little bit less volume to get some pricing through. And do you think compared to 2008, do you have more pricing power today or less, or how would you compare the two?

Walter Robb

I think on that question, the marketplace ultimately sort of dictates where the pricing is going to go, and we saw the consumer, in the last couple of years, learn how to trade down or trade up in the other categories and resist price increases. And I think they've still learned that behavior and still have that flexibility. But at the same time, it looks like the marketplace is generally moving forward rationally and incrementally with these price increases. You've got corn and soy and these sorts of things, which are coming. We're a little more insulated from that in the traditional conventional grocer. But there's some incremental movement on those things coming ahead.

John Heinbockel - Guggenheim Securities, LLC

As you guys build cash here, which obviously is going to continue, how do you think -- I know you're going to increase the rate of expansion. But beyond that, how do you think about the use of cash? I assume there's not a whole lot out there that interest you acquisition-wise. Cash balances just continue to build until you find something more significant or how do you look at that?

John Mackey

John, John Mackey here. Well, first of all, that's a good problem to have. We're happy [ph] to have that problem. We are accelerating our growth so there will be more money going to capital expenditures as we get more stores in the pipeline. Although we're tending to build a little bit smaller stores than we have in the past and we're spending -- we have more discipline in our capital expenditures so we're spending less per square foot than we have in the past. So not quite yet as much as we have in the past. In addition, we are -- we have reinstituted our dividend, and I expect that over time, we'll see the dividend increase. We might -- we're going to continue to pay off our debt. We still have some debt outstanding so we'll pay that off. We'll also do what when [ph] our cash balances accumulate as well, and I guess, we'll certainly, at some point, begin to consider some possible stock buybacks as well. So we'll do it all from an EDA perspective, and we'll try to make decisions that are in the best long-term interest of our shareholders.

John Heinbockel - Guggenheim Securities, LLC

And am I right that acquisitions just don't look that interesting to you, the ones out there?

John Mackey

I mean, John, we're never going to comment on acquisitions in our call. I think we have made acquisitions in the last 12 months, so -- and I think it will be smaller stores that are already in the markets that we may want to enter into. So I don't think there are any Wild Oats acquisitions out there that we're looking. Anyway, we don't want to do any acquisitions that require FTC review, so we may do small acquisitions but don't look for any blockbusters.

Operator

And we'll move next to the site of Charles Grom with JPMorgan.

Charles Grom - JP Morgan Chase & Co

On your last call, you guys spoke to the traffic mix coming from both new and returning customers. I was wondering if that had continued? And then in addition, just on the quarter-to-date comps, there's been a number of retailers that have called out negative weather. Do you guys think that impacted you guys over the past few weeks?

A. Gallo

Charles, this is A.C. here. Well, first, yes, we still think that we're seeing the new customers as well as the mix of new customers. I think we got a lot of the returning customers back over the last year and a half or so. What we see from the purchases in the store is that we have introduced in the last six months or so several new lines of products, especially in extreme value categories, and regions have been doing different types of value promotions. And we think that we're getting a new customer in that wasn't shopping with us, maybe they shopped with us before, maybe not, we're not quite sure, because we see other products that we had doing well and then we see these new products selling really well in addition to that, so we think that we're still bringing in new customers that hadn't shopped with us before. As far as the weather goes, we have had a lot of fairly extreme weather over, let's say for the last month or so. But when we go back and look, we had some pretty significant weather events last year as well. So the usually these things even off with each other. We did have some disruptions due to some of these storms where stores had to close and distribution centers had a hard time getting product out. So we could see a little bit of an effect, but my feeling at this point is that if the weather at this point kind of eases off a little bit, it will probably be a fairly minimal difference from this year to last year. If we have another month of weather like we just had, then I think it will have some impact on the quarter.

Charles Grom - JP Morgan Chase & Co

If I look at the high end of your guidance of $1.80, back into all your other assumptions, the tax rate changing, the LIFO, the interest income now instead of interest expense. It looks like you have about 20 to 25 basis points of operating margin expansion, which on an 8% id seems a little bit lower than I would've presumed you would've been able to obtain. Just wondering if you could comment -- I know there's little bit of a shift in relo [relocation] and pre-opening timing between 1Q and the rest of the quarters but is there anything unusual from an SG&A perspective that's not allowing you to get greater flow-through on the operating margin line?

Glenda Chamberlain

This is Glen. There are actually pretty big shifts in the pre-opening line item and the LIFO line item. Based on the revised guidance, pre-opening and relocation costs, we would expect to be up about $14 million to $17 million in the last three quarters of the year, whereas they were down in the first quarter, $13 million. And then LIFO will have a negative shift of about $10 million to $11 million because we had credits last year and we'll have charges this year. So those are pretty big changes. And then also just the fact that we had sales growth of 14% in Q1 and are expecting that to be maybe 9% and 12% in the remainder of the year, so those are the biggest items that make it more difficult for us to deliver the same degree of earnings growth in the back half of the year or the back three quarters of the year.

Operator

And we'll move next to the site of Ed Aaron with RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC

I wanted to actually follow up on John's earlier question about pricing power. Philosophically, when you think about your pricing image, do you view it as entirely a relative gain versus other food retailers, or do you worry on some level that this bigger shock from higher prices would hurt your value image, even if you're not raising prices more than your peers are? So I guess sort of to ask the question a different way, does a more inflationary environment kind of require you to push even harder to manage your relative price points down than a different environment might?

A. Gallo

I think you're right. I mean, I think we have to look at both things. We certainly are very focused on what the competition is doing, and we're not going to raise prices relative to how we have ourselves currently positioned in the marketplace. But we also are very aware of the fact that even if everyone's raising prices, that it's potentially problematic, and we worked really hard for the last couple of years to improve our price image. And certain prices go up considerably could cause a problem there. So we're really aware of that, and we're also -- that's why we're still working really hard on developing new products that we can bring in that are of better value to our customer. During the first quarter, we introduced a line of extreme value wines called Three Wishes that has done extremely well. We're working on some other products right now so that even though some items might be going up, we may be also introducing really great values in certain commodity areas to kind of counteract maybe some other areas where prices may be going up.

Walter Robb

This is Walter. I'm going to add a little bit to A.C.'s comments, which is that, first of all, we are not -- we said before last year, we're going to continue to be a competitive retailer and we are not backing down. If anything, we're stepping more into that statement, we're committed to that and we have become a better retailer over the last couple of years with respect to managing those investments and the pricing, and we're going to continue down that road. So remember that we're a little less exposed to the pure commodity swings than other retailers because of the mix of our business, the higher percentage of organic and natural products. Some of those contractual arrangements are different than on this pure commodity market. But as A.C. said, we are going to continue to develop this value. I think it's pretty clear from the Nielsen studies and so forth that customers continue to want those choices. We're going to continue to offer them and develop them. And at the same time, we now have over 400 exclusive brands that we've developed, and we're continuing to develop our differentiation into our seafood standards and our meat standards. So if you were to think of us as running a retail symphony, so to speak, we're going to continue to play the bass note where the value is going to keep thumping. You're going to keep hearing that bass note of the value, and we're bringing in the sweet strings of differentiation through these other areas. And it's that particular combination that's unique to us, which does give us some more pricing flexibility and power. At the same time we're maturing as a company, we're picking up stuff on the buy side that perhaps other more mature companies have picked up already through our distribution contracts, our movement to cost to serve, our buying disciplines that had brought us lots of gross margin on the buy side, so it's all playing into our ability to have some pricing power. But ultimately, I think we like our position in the marketplace even in a more inflationary environment, which we think is going to be more tempered. It's not going to be -- even though there are lots of noise out there about all that, there's typically a lag in the retails from the producer index. We've seen that historically. We think it's going to temper down, and we're certainly going to watch it, and we're going to be very careful about where we take those increases. But it does look like the marketplace is moving up incrementally and rationally so that will allow that to happen, and then we're going to have to manage it very carefully and watch for consumers' reaction to those price increases. I think everyone's going to do that in the months ahead.

Edward Aaron - RBC Capital Markets, LLC

Last quarter, you mentioned you spoke to some transitional issues and taxes with the distribution. Has that been entirely resolved?

Walter Robb

Absolutely. The fill rates of both of those facilities are well into the high 90s now so we're well past those issues, yes.

Operator

And it looks like our next question will come from the site of Scott Mushkin with Jefferies & Company.

Scott Mushkin - Jefferies & Company, Inc.

Wanted to just clarify a little bit on this inflation, and then I want to get something different. But what has been historically more important to you guys, basket mix and consumers trading up and down or inflation? And what are you seeing with mix right now? I know Walter, I think you talked a little bit about it but I don't know if you had any more color?

Walter Robb

Okay Scott, so I mean, mix to mix [ph], the sales strength that we're reporting here today is consistent, it's strong across all quarters and across all departments. I mean, there is some additional strength in the perishable departments. But really, the story of the last five quarters has been the growth in the customer account, and that has continued to lead the way here and to A.C.'s comments earlier, it's a nice blend of existing customers and new customers, whether they're coming back or whether they're just discovering the company for the first time. And that's a very strong driver of what's happening here and we're pleased to see the beginnings of that turning into a little higher basket, which has some nice potential for us to continue to grow sales. But does that address your question though, Scott?

Scott Mushkin - Jefferies & Company, Inc.

Yes, I guess what I'm trying to -- I mean, we all look at inflation as really, it could be a bad thing but if taken in a vacuum, and I was just -- the consumers obviously, their wealth is growing, they're going back to work, not much for you guys but their wealth is growing. So it seems to me a trade up to a sirloin maybe outweighs any kind of margin compression you could have if sirloin's going through the roof, if more, a lot more customers are buying sirloin versus last year's ground beef. And I didn't know if you have any thoughts on that?

Walter Robb

Ground beef or sirloin, which ones, you mean?

Scott Mushkin - Jefferies & Company, Inc.

Yes, if we trade up to the sirloin, is that more important than whatever inflation you're seeing in those two items?

Walter Robb

Yes. Well, I think what you're going to see is, I think you're going to see a combination of that because consumers have rediscovered value, and then some are going to choose the sirloin and then some are -- I think what we're seeing here is a continuation of the value efforts that, like A.C. mentioned earlier, the value, the extreme value -- these things are working extremely well, and we're going to continue to do them. At the same time, we're seeing customers get incrementally more comfortable with the premium choices, and they're making those choices. So when you got a lot of things working here, we're going to have to see how it plays out.

A. Gallo

What I would add to that is that, it seems like one of the biggest things that happened when recession hit was that customers -- it broke a lot of patterns that people were in, like I just used -- I just buy this cut of meat and that's what I cook all the time, and I just buy this brand of cereal and -- people started to really move around a lot and really, we saw to how much they responded to specials on different cuts of products and things. So I think that -- I don't think they unlearned that habit. I think if prices go up a little bit, people who could afford it will do it. But I think if prices start moving around a lot, I think people will start moving again, which is why we felt it's so incredibly important to offer ranges of products at different prices to wrap the full range in each category so that if people want to move around in one category, maybe they'll move down in one category but they'll stay where they are in another and move up in another. We want to have all those ranges for people because we think that people have seen much more mobile within categories than they used to be.

Scott Mushkin - Jefferies & Company, Inc.

The store contribution and operating margins prior to the financial crisis were about 50 bips higher than they're currently running, although obviously, you guys have done a great job getting them up. Do you believe we can get back into that historical range or maybe even a little bit higher? And what are the couple of levers that you pulled to do it?

A. Gallo

Were you asking whether you can increase your model, Scott? I think the answer is, we think we can get there eventually but we're certainly not guiding to that. And it depends upon our ability to continue to open good stores. Good thing is that, one of the things we took out of that recession was a lot more discipline in our capital expenditures, a lot more discipline on direct store expenses, and we're working on all the different angles of the business right now. So I think that, that is a goal that we are striving for, but I'm not going to predict we're going to get there anytime soon.

Scott Mushkin - Jefferies & Company, Inc.

And is there any main levers, like a strength like in the perimeter, a lever you think you can pull? Is there anything you want to point to as something...

Walter Robb

We're pulling that lever. We've reduced strength tremendously. You can see by how we've reduced inventories and our working capital a lot more efficient than it was pre-recession. So I think there are lots of levers, and we got a whole team of people working on those levers, trying to get incremental gains in direct store expenses and capital expenditures and on the buy side for gross margins and it all adds up. We've had some accelerating operating margins, and if we manage our business well and we continue to see good comp sales growth, I would look to those trends to continue into the future.

Operator

We'll move next to the site of Karen Short with BMO Capital.

Karen Short - BMO Capital Markets U.S.

Just a quick question following up on that, I mean, I guess, as you've answered in previous Q&A questions, you're in a lazer [ph] LIFO charge, you kind of kept your G&A flat and your pre-opening came up a little bit. But where -- I mean, your leverage is really cutting from gross margins. I'm wondering if you could just elaborate a little bit on that?

Glenda Chamberlain

Is your question about what we're expecting for the rest of the year or where...

Karen Short - BMO Capital Markets U.S.

Yes, I mean where it's coming from and what your expectations are going forward?

Glenda Chamberlain

We raised our guidance for the year by about $0.09 to $0.10 from what it was previously. And most of that comes in from store contribution percentage, although then there's a little bit from a lot of other things that play into it, although a slightly lower tax rate and pre-opening and interest and slightly higher LIFO and share count. But the majority of that is coming in store contribution percentage, and we don't really break that out between gross margin and direct store expenses. But if you just look at past trends, you can probably come to a reasonable estimate there. We did the first quarter to the same degree that it looks like if you look at the Street numbers, because we did beyond our own expectations both in sales and in bottom line slightly but not to the same degree that we did for the Street. So we're showing a pretty nice increase in store contribution percentage in the last three quarters compared to our prior guidance, and that reflects what we saw in the first quarter as well as our updated higher sales estimates for the rest of the year.

Karen Short - BMO Capital Markets U.S.

And then I guess I'm curious, you talked about -- well obviously, you gave us store opening expectations for a couple of years going forward. But when do you really think you can actually reaccelerate square footage growth? And what do you think is a reasonable rate once you've kind of filled the pipeline?

Walter Robb

Well, we think that beginning in 2012, we'll open 20 stores and then start to accelerate from there. So we've got 56 stores in the pipeline. We've got another 10 leases that are currently in lease negotiations. We have 15 sites that are queued up for real estate committees. So we got a great pipeline and as we fill it, it will increase, it will naturally increase the rate at which they come out. But I would say beginning in 2012, at least 20 stores and then increasing from there.

Karen Short - BMO Capital Markets U.S.

Just walking in the stores, I'd noticed a definite change in store offerings, much more focused on health and wellness. I mean, I don't know if you can just elaborate a little bit on some new initiatives going forward, obviously tipping the competition?

John Mackey

Well, this is a very exciting area, of course, Karen. We're seeing great gains in the areas where we've been emphasizing. We're educating our Team Members, we're educating our customers. Probably the thing that -- it's out there. We haven't made any big public announcements about it but we've been talking about it. We're going to open five prototype wellness clubs in the next, in 2011, one in New York, one in Chicago, one in Boston and one in Oakland and one in Princeton. And we've got to work out the bugs of that business model but we're pretty excited about it. And assuming those prototypes, of course, do well, then we would look to be opening a lot more wellness clubs in 2012. That could potentially be a good growth initiative for our company. And in any case, we do think it's going to help educate customers about healthy eating. We're still convinced that Whole Foods Market has a big part of the solution to the healthcare crisis in America, which we see is primarily due to unhealthy lifestyles and diet. That the diseases, of heart disease, stroke, diabetes, obesity and even cancer correlate very closely with poor lifestyle choices and eating patterns. And so we're taking upon ourselves to begin to educate people about how to change their lifestyles and how to eat in a more healthy way that will allow them to achieve their highest degree of health potential. So this is -- we've shifted in this direction but as Walter was telling me today, we're only in the first inning of this, and we've got a long way to go and a lot of opportunities. And those are going to be -- you're going to see that steadily happen over the next several years so this will be areas that...

Karen Short - BMO Capital Markets U.S.

The timing of those openings of the prototype wellness clubs?

John Mackey

I think the first ones begin to open this summer, June or July, and then we'd start opening one every month. And we'll have them all -- all five will be opened before 2011 is over.

Walter Robb

Karen, beyond the wellness centers that John's talking about, the bigger picture here is the Health Starts Here initiative, which you see HSH in the stores, and that's a big envelope that we've kind of put together that brings all of these initiatives, whether it's the Team Member customer education, the wellness centers, the nutrient density scores in the store, the offerings in the various departments. We're going through the different departments and revitalizing the product mix with respect to these things. And we're really just at the beginning of really bringing that whole suite of things to the marketplace. And it's pretty exciting when you think about where the larger conversation in this country is or around the world really about the connection between diet and health and lifestyle. And I think we're positioned to be the authentic source of information and product for those changes that are coming and they need to come. And it's a nice envelope, it's a big envelope, it's a broad envelope but it's generally moving in a way that makes a lot of sense, and customers are responding extremely well. So like certain things with vegetables, we're seeing ridiculous growth year-over-year as those things are presented with that sort of information. And I think we're moving far ahead of the others out there in the marketplace with their particular initiatives. This is very much more holistic and broader and deeper, and I think it's giving us a real leg up in the marketplace.

John Mackey

I think Whole Foods is going to be the leader in this category. That's our intention, and we think our brand is going to evolve in the marketplace considerably over the next several years. Right now, we're kind of known for selling natural foods and organic foods. I think increasingly, Whole Foods is going to be seen as the place people go who are dedicated to a healthy lifestyle. I really think that's going to become really what we're primarily known for. And I think we're in that early part of that transition, but I think that couldn't be -- I wouldn't underestimate the contribution that was made to our sales and earnings growth.

Walter Robb

This will be the longest answer on record but let me just add to that. The other part of it is just this movement to greater transparency around product because we have set a course here to provide our customers with all the information about their seafood choices and their protein choices. That's where we're really focused on, on the meat and on the seafood, and we're moving in that direction with respect to produce. And I think we're going to usher in a new era, a new generation, where people have that sort of information to help them about how their products are raised and where they're raised and to help them make their sorts of choices, and I think that is revolutionary potentially. And so we're really excited about that and customers are responding.

John Mackey

.

And one thing, I think it's important to add so there's no confusion that these wellness clubs are going to be within existing stores, using existing store space. We're not going out and renting new space to open up a club.

Karen Short - BMO Capital Markets U.S.

Right, it's upstairs in Tribeca, right?

John Mackey

Right, right, correct.

Operator

And we'll move next to the site of Robbie Ohmes with Bank of America.

Robert Ohmes - BofA Merrill Lynch

I was just curious when you're speaking with your real estate team, you're looking at new sites, and you look at the small stores and some of the success you've had and the flexibility, and you're talking about the response you're getting to relative price positioning. Is it enough that you can start to lower not a lot but maybe a little bit, the income demographics required to open up a Whole Foods store? And is that where you're seeing maybe the ultimate number of stores in the U.S. start to really move up? Or is it too early to sort of feel that you can move a little bit lower in the income demographic?

John Mackey

I feel like I've been swimming upstream on this question for 30 years, and I'm going to keep trying to swim upstream against it. Whole Foods Market does not locate stores on the basis of income. That's just a myth out there. It's about education. It's about awareness. We have sites that do extremely well in areas that are not of high income. But it does require a certain level of consciousness, and that generally indicates better education and, of course, income correlates with education. But that is the bigger predictor of our success is not income but people's education levels. So if I can rephrase your question, are we going to be looking in areas that maybe are a little bit and don't have quite as high education levels? And it's a great question, and we don't really know the answer but we're going to find out. We are going to be opening some stores in areas that don't have quite the same density of college graduates that we've done previously, and they will probably be smaller stores. So we think we have tremendous opportunities. We've been kind of surprised. We have opened some stores in markets that have done a lot better than we thought they would do. It turns out that interestingly enough, in some of the markets where education and then income consequently are slightly less, they also tend to have less competition for our kind of products and our types of services provided. So the fact that we've done well in these markets has been very encouraging to us. And as a result, we're not going to get to our 1,000-store objective if we're not successful doing that but I think we will be. So the answer and a roundabout way to your question is, yes. We think we can and we will.

Robert Ohmes - BofA Merrill Lynch

You guys mentioned at the beginning of the call the sign of consumer confidence picking up, and at the same time, you're real happy with the improvement in your relative price positioning. And can you just remind me what you guys look at to decide that the consumer confidence is improving even though the response to price is accelerating?

Walter Robb

We look at sales...

John Mackey

Sales!

Walter Robb

Sales, and we dissect them and bisect them in every which way known to humankind. We do that and we look at it and we look them across, and that's the greatest indicator of people's confidence. And we also study the basket sizes, break it down in the quintiles. So in all those different ways, that's what telling us it's moving up.

John Mackey

Customers vote every single day. They're coming in our stores and voting, and we pay a lot of attention to their voting patterns.

Operator

And it looks like our next question will come from the site of Mark Wiltamuth with Morgan Stanley.

Joseph Parkhill - Morgan Stanley

It's actually Joe Parkhill in for Mark. I have two quick questions for you. Number one, I mean, it sounds like you haven't seen much inflation yet but I was wondering if you could kind of tell us what type of inflation you're inferring from your $5 million expected LIFO charge?

Glenda Chamberlain

We're expecting a very small amount of inflation. That number reflects just maybe 1% inflation, nothing of significance.

Joseph Parkhill - Morgan Stanley

And then also just looking at the comps by store age, I mean, they all seem still to be healthy but there's a little bit of deceleration in the older stores. Has there been any variability in sales by region?

Glenda Chamberlain

Well, I want to be sure that you're looking at the comparable numbers because we did, for the first time, break out stores over 14 years old. So you wouldn't be able to compare that to anything that's been published previously.

A. Gallo

You'd have to average the two top categories together.

Operator

And it appears that we have no further questions at this time. I'd like to hand the call back over for any closing remarks.

Walter Robb

Thank you all for listening in, and join us in May for our second quarter earnings. A transcript of the scripted portion of this call along with the recording of the call is available now on our website at www.wholefoodsmarket.com. Thanks, everyone. See you next quarter.

Operator

And this does conclude today's teleconference. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Whole Foods Market's CEO Discusses F1Q11 Results - Earnings Call Transcript
This Transcript
All Transcripts