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Whole Foods Market, Inc. (NASDAQ:WFM)

F2Q11 Earnings Call

July 27, 2011, 17:00 p.m. ET

Executives

Cindy McCann - Global V.P., Investor Relations

John Mackey - Co-Chief Executive Officer

Walter Robb - Co-Chief Executive Officer

Glenda Flanagan - EVP and CFO

Jim Sud - EVP, Growth and Business Development

Analysts

John Heinbockel - Guggenheim Securities

Karen Short - BMO Capital Markets

Mark Miller - William Blair

Scott Mushkin - Jefferies

Ed Aaron - RBC Capital Markets

Stephen Grambling - Goldman Sachs

Bob Summers - Susquehanna

Operator

Good day ladies and gentlemen, all sites are now online in a listen-only mode. (Operator Instructions). I’ll now turn the program over to our moderator for today, Cindy McCann, Vice President of Investor Relations. Please go ahead.

Cindy McCann

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

As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause the company’s actual results to differ materially from the expectations and assumptions discussed today, this may be due to a variety of factors that affect the company, including the risks specified in the company’s most recently filed Forms 10-Q and 10-K. Please note our press release and scripted remarks are available on our website. We assume you read our press release that will use this time to focus on highlights from the quarter and our initial outlook for next year.

I will now turn the call over to Walter Robb.

Walter Robb

Thank you, Cindy. Good afternoon everybody. We are very proud of the consistency of our third quarter results which were once again near peak levels. We produced 8.4% comparable store sales growth, average weekly sales per store of $653,000 translated into $896 of sales per square foot. 9.5% store contribution, 5.9% operating margin which we are proud to say is our ninth consequent quarter of the year-over-year operating margin improvement. 8.6% EBITDA margin and 30% increase in diluted earnings per share of $0.50 and 38% NOPAT ROIC for all stores.

Our solid execution combined with our capital discipline is generating strong consistent cash flow. Over the last four quarters we have produced 720 million in cash flow from operations and received 214 million in proceeds from stock option exercises. We have used our cash to invest 329 million in new and existing stores. Payoff the remaining 490 million of our term loan and to-date return $53 million in quarterly dividends to our shareholders.

We are pleased to be in a position where we can maintain a healthy cash balance and still have the capacity to internally fund our accelerated growth plans, increase our dividend and repurchase stock. We expect we will be using all three of these strategies overtime.

Turning to sales, we are very pleased to be reporting 8.4% comps or 7.8% excluding the positive impact of the Easter shift. This was our sixth consecutive quarter of comp growth of 7.8% or higher, we believe our efforts around value continue to be a significant contributor to our momentum helping drive a 5% increase in our transaction counts. We worked very hard over the last couple of years to successfully improve our price image, particularly in perishables and we remain focused on maintaining our relative price positioning in the marketplace.

With the return of inflation we are seeing our comp breakout move towards our historical pattern of 60% transaction count and 40% basket size. In Q3, our basket size increased 3% slightly higher than the 2% increase in Q2. This is driven entirely by higher average price per item as we selectively pass through some product cost increases and customers continue trading up.

Year-over-year sales continue to shift toward branded and organic products, higher priced tiers and to several discretionary categories. We also saw strong increases in the $50 plus size baskets. We are hopeful we can continue to strike the right balance between rising product costs in our retails based on our distribution network and our tools to manage value. We anticipate incremental increases in inflation in Q4, but our pricing study show that our competitors have been passing through product cost increases and we don’t have any reason to believe that’s going to change.

Our comparable store sales increased 8.5% year-to-date through Q3 and 9.5% for the first three weeks of Q4. We are proud that we are continuing to gain market share at a faster rate than most public retailers and attribute much of our success to our visible value efforts which could positively impacted our price image and then continuing to raise the bar in areas that matter to our customers particularly quality standards and health and wellness.

For example, we recently announced our new Whole Kids Foundation, a charitable organization that will provide children with access to healthy food choices through partnerships with schools, educators and organizations. We believe our new foundation is a natural extension of our role as America’s healthiest grocery store and hope that through collaborating with schools and parents, we can increase food and vegetable consumption both at schools and at home and make a significant contribution in the fight against childhood obesity. The foundation is first major initiative is the Whole Kids Garden Grant Project, a program designed for schools to help build healthy relationships between children and food for the power of gardening.

Turning to new store growth. During the quarter we opened four new stores in Lafayette, California, Encinitas, California, Fairfield, Connecticut and Houston, Texas. As well as relocated three stores in Rockville, Maryland, Franklin, Tennessee, and Charlottesville, Virginia. In the fourth quarter to-date we have opened one new stores actually today in Marietta, Georgia, temporarily relocated our store in upper Arlington Ohio, and we expect to open three new additional stores including one relocation over the remainder of the fiscal year. We would encourage you to visit the Beyond the Number section of our Investor Relations webpage for more information about newest a Houston, Texas store, our Whole Kids Foundation, our wellness club website and more including the now infamous Whole Foods Parking Lot Wrap.

I will now give you some additional color on our updated outlook for fiscal year 2011 and the initial outlook for 2012.

Please refer to our press release for more detailed information.

Based on our Q3 results, recent comp trends and updated assumptions for Q4, we have raised our diluted EPS range for fiscal 2011 to $1.91 to $1.92, which implies a range of $0.40 to $0.41 in diluted EPS for Q4. Please note that our fourth quarter is seasonally our weakest quarter of the year in terms of average weekly sales and store contribution.

For fiscal 2012, which is a 53-week year, our initial outlook is for diluted EPS of $2.21 to $2.26, a year-over-year increase of 16 to 18% on 13 to 15% total sales growth. On a 52-week to 52-week basis, this translates to diluted EPS growth of 13 to 15% and total sales growth of 11 to 13%.

Since our second quarter earnings release, we have signed eight new leases averaging 30,000 square feet in size in Tucson, Arizona; Fremont, California; Newport Beach, California ; Basalt, Colorado; Detroit, Michigan; Columbia, South Carolina; Virginia Beach, Virginia and Cheltenham, United Kingdom. We have now signed 31 new leases over the last 12 months and believe we are on track to open between 24 and 27 new stores in fiscal ‘12 and 28 to 32 new stores in fiscal 2013.

As reflected in our outlook, even though we are projecting to open a record number of new stores, we are not expecting a meaningful impact on our earnings growth from this acceleration in new store openings. While new stores produce lower store contribution than mature stores, we estimate new stores will account for only 5% of our total sales in fiscal 2012 and thus should not have a material negative impact on our results. In addition, our new stores are performing well. On average, they are smaller, less expensive to build, and are expected to achieve higher returns on invested capital than the larger stores we opened in the recent past.

From a cash and infrastructure perspective, we are well positioned to internally fund and execute the acceleration in our new store growth. Our fiscal 2012 guidance reflects strong comparable store sales growth, a record number of new store openings, EBITDA approaching $1 billion, significant operating margin improvement, and earnings growth in excess of sales growth. We are very pleased to be producing consistently strong results that are in line with our historical operating ranges and expect the lessons we learned during the great recession will drive even higher levels of both operating performance and returns on invested capital over time.

Our business has been highly successful, producing industry-leading comparable store sales growth, average weekly sales and sales per square foot. We see a new era of possibility for Whole Foods Market as customers increasingly embrace healthier lifestyles, and we look forward to accelerating our growth in the coming years. Over the longer term, we consider 1,000 stores to be a reasonable indication of our market opportunity in the United States. Our brand continues to strengthen, consumer demand for natural and organic products continues to increase, America’s healthcare crisis is creating a new frontier for health and wellness, and our flexibility on new store size has opened up additional market opportunities. We believe Canada and the UK hold great promise as well.

We will now take your questions. Please limit your questions to one at a time so that everyone has an opportunity to participate. Our call will be ending today at 4:45 Central Time. Thank you so much.

Question-and-Answer Session

Operator

(Operator Instructions) First we will go to the side of John Heinbockel from Guggenheim Securities. Please go ahead.

John Heinbockel - Guggenheim Securities

A couple of things, two things as it relates to your consumer. Obviously, the sales have been very good. You’ve got the right demographic. When you think about what your customer would be concerned about and then whatever work you do with regard to consumer research, what would that be that might weaken confidence in your particular customer? Is there any it doesn't sound like there's any reason for that to happen anytime soon. And then as a follow-up, what are your thoughts, current thoughts, on price elasticity as it relates to inflation pass-through?

John Mackey

I mean over our 30 plus year history we have seen consistently strong same-store sales growth in a variety of different economic environment. And if you ask what could deflate it, I mean in one time that we didn’t see strong same-store sales growth in our 30 year history was back when the panic hit in 2008, 2009. So, if such a panic was to occur again where people just stop spending money because they are frightened and I’m obviously that would be bad for everyone including Whole Food, but generally, even in up times or bad times or just average times we seen strong same-store sales growth. So, unless there is some type of crisis, we anticipate going forward that why we are accelerating our growth where food is going to flourish in a variety of different economic environments.

Walter Robb

(Inaudible) John that what the research has shown us that customers are they are concerned about value and they appreciate the visible value efforts that we have been doing that is clearly resonating with folks. But they are also thinking about their health and it's seems like our Americas healthiest grocery store people really realize and that’s important to them and that’s translating into their purchasing decision. So, both of those things are showing a pretty strongly in the research that we are doing. With respect to inflation, look it's incremental, it's manageable, everything I see is that and from all the other reports that there be elasticity is there to continue to pass on as long as it stays incremental and manageable. And I think that’s where we are for the next three to six months, we will have to see how it plays out, but right now pretty good elasticity.

John Heinbockel - Guggenheim Securities

Then just finally, cash is building. Given how you're building stores today, that's not going to change even if you step up expansion. So when you think about putting to work the cash balance that you've got and not having that dilute return on capital, are there things and I'm not thinking about acquisitions per se or because I'm not sure that there's that many opportunities out there. But from a financial instrument perspective, are there other things you can invest in that give you a better return than maybe what you're investing in today, or it will just be highly liquid kind of low-return instruments that give you more flexibility to use as you need it?

John Mackey

We're thinking about plunging it all into gold.

John Heinbockel - Guggenheim Securities

Social networking stocks.

John Mackey

Yes, exactly. We’re taking a fly on a Facebook IPO. I mean yes, we are going to be conservative as for shareholders cash and it's going to be in short-term instruments that don’t produce a whole lot of interest at this point. But I mean we have lot of uses for our cash John besides just piling it up. For one thing we are reaccelerating our growth. So, we do think a more rapid growth over the next several years is going to soak up more capital than we have seen in the last few years as our growth slowdown a bit. So, that’s going to take part of it. We anticipate growing our dividends as well. Thirdly, we've done stock repurchases in the past, and we would certainly consider doing that again in the future as well. We paid off our debt so we are not going to be doing any of that. But I do not anticipate we are going to be speculative in any way regarding the cash reserves. I floated that idea by our Board several years ago and it got shot down. So, I’m looking to do that again.

Walter Robb

And by the way piling it up little bit, feels pretty good by about now. (inaudible). Thank you for your questions John.

Operator

Next we will go to the side of Karen Short from BMO Capital Markets. Please go ahead.

Karen Short - BMO Capital Markets

Congratulations on a good quarter. Just one housekeeping and then bigger picture. Your preopening and relocation expenses or at least through your guidance in ‘12 seem fairly low given that ramp in new stores. Anything noteworthy there?

Glenda Flanagan

Actually, one thing that’s not is apparent just looking at that is that the number of relocations in any year can have a bigger than average impact on that number and we had six [reloads] in the current year and we are planning for two next year. So, that’s the reason that it turns out flat even though we have higher number of stores.

Karen Short - BMO Capital Markets

Got it, okay. Then I guess I was wondering. Thinking about the natural and organic space in general, as you guys said, there's obviously growing demand for healthier eating and manufacturers are responding accordingly. I guess I'm just curious kind of bigger picture how do think about balancing your offering and your strategy so that you continue to carry some of the more mainstream products, because that's where the demand is, but also maintaining your differentiation and kind of continuing to distance yourself from the competition? Can you maybe just talk about that a little bit?

Walter Robb

I think our philosophy is to continue to offer a range of choices but I think we are moving decidedly in a favor of differentiating ourselves across the board in every departments we are just continuing to set the standards. I mean you have seen what we have done and because you have seen what we have done and we talked about it. You have seen how we set the bar in Whole body area and the Health Starts Here program, which is not another program out there and like that in the super market industry. So, I think we are less concerned about the mainstream products and more concerned about continue to have a range of choices or range of price points within those categories according to our standards and continuing to raise the bar on the quality standards. I know if I’m exactly at your question Karen, but do you want to rephrase it or?

Karen Short - BMO Capital Markets

No, no, I think it's just more as products go more mainstream that your stance is to try to not be mainstream. So how do you balance that a little bit?

Walter Robb

Well I mean in the [essence] we are investing in the farm system, we have been aggressively developing local products in all parts of the country, loaning them money, we have a very nice local loan program. We have continued to nurture the next generation of products and product suppliers and that are equating a lot of excitement in all parts of the country and the company. So, I actually think that we will continue to set our own streams so to speak in the product quality going forward. And the differentiation is going to be a big of that effort.

Karen Short - BMO Capital Markets

Then last, do you have an up-to-date on the Wellness Centers in terms of what cost associated with it, and how it's kind of shaping in terms of how you think about it strategically?

John Mackey

Well, we got our first one open and that’s in Boston, a Devon store has opened it's a soft opening we haven’t started marketing it yet. But we do have one actually opened and I think next one opens early September and we should have mall opened before November is out. But the cost of opening them were very tremendously between the different locations some are more expensive on a construction basis. But remember these are only couple of 1000 square feet. So, it's not a major capital investment in any case. But it's too early in premature to give out that data, but rest assured is a prototypes. Once you make the decision to move forward and more aggressively we can provide some basic economics, but it's pretty mature to do that at this point.

Glenda Flanagan

Beyond the numbers we actually have a link to the new Wellness Club website and I think the Devon store individual stores are going to have websites as well.

Walter Robb

Thank you for the (inaudible) quarter Karen, we appreciate it.

Operator

Next we go to Mark Miller from William Blair. Please go ahead.

Mark Miller - William Blair

Good afternoon. The company’s had a great improvement in the new store sales over the last two years. This quarter, though, the non-comp store sales came down a little bit, and so I'm wondering. Is that due to the timing of openings in the quarter or the mix of locations? Then for the fiscal fourth quarter it looks like your guidance has it back up again a little bit.

John Mackey

Mark, we are wrestling through some papers here to be accurate, but one thing we are pleased about new opening smaller stores. And one thing we see is our sales per square foot are up substantially as well as our profits for new stores is much higher than we have seen in the past. So, we are little bit less concerned about lower sales and we are focusing on the net profits that we are generating out of the new stores plus the sales per square foot are much higher than historically we have seen over the last few years. So, we actually than we opened a good crop of stores in 2011. And that’s one of the reasons our earnings were so strong that new stores are acting less of a drag on overall earnings as been having some previous years. And the new stores are doing very well for us, so we think really all the news on new stores is pretty good.

Walter Robb

I think that the strategy we have been talking was about the right size store for the right community. This will start to really bear some fruit for us now as these stores open stronger at the right size or right amount of capital is a nice little addition to the earnings next quarter.

Mark Miller - William Blair

I think you had talked about the cost to build coming down, feeling like you could be in the 250 range, maybe a little lower. I guess as you've gotten more visibility on the stores you are opening into fiscal ‘12, how do you feel about that range?

John Mackey

We are going to continue to report, we think it's important metric to report our cost to build on a per square foot basis, but it's important to understand that can vary from quarter-to-quarter and year-to-year, because there are so many things that can influence that, like we are opening stores in expensive city like New York, where we basically you have to use unionized labor, you just can’t even get the store open without it. You are going to have a higher cost to build and if you are doing something in the Mid West or the south to the Southwest. So, I think it's important to just realize that we are really focused on this, but from quarter-to-quarter even year-to-year they might see some variances and that doesn’t necessarily you got to look through the noise and look at the long-term trend. So, we think we are going to produce good numbers on the long-term trend that we do want to manage expectations little bit, there could be some variance from quarter-to-quarter or year-to-year.

Walter Robb

I don’t want to hedge that answer too much, because I mean I think we are going to continue to make progress in this area, we have said that quarter-to-quarter last couple of years we all are going to continue to make progress. Like John said, it may bounce around a little bit but ultimately absolutely I think that’s a reasonable number and but it bounce around a little bit, but depending on store size and the complexity of the projects. But rolling in the middle innings of that effort to improve our capital efficiency on these stores and we are going to make more progress.

Mark Miller - William Blair

That make sense, thanks. Then my last question is as the average ticket increase is accelerating, does that make it easier for you to leverage your store operating expenses, or do those begin to rise at a faster pace as well?

John Mackey

The answer is yes, it does make it easier to leverage them. Something like rent is largely fixed so that gets leveraged. Your depreciation certainly, in the short run gets leveraged and when cost of replacement will rub that over the long-term buts it's a lagging indicator and I also might indicate that wages tend to be a lag as well. So, a little bit of inflation initially is probably good for retailer and the median term it's neutral because it starts to catch up long-term it's bad, because it's once inflation area expectations get built in, you don’t a stable environment anymore and you go in and negotiate rents or your wages were constantly influx and the certainty is there effects both your employees and your customers. But in the short run it feels good and in a short point having a drink that was pretty good the first one, but more drinks you get diminishing more terms.

Operator

Next we will go to Scott Mushkin from Jefferies. Please go ahead.

Scott Mushkin - Jefferies

Hey guys. Thanks for taking my question. So I was wondering if you can give us I know you're trying to drive growth into markets not necessarily on the coast but open up new opportunities. I was wondering if you can give us any insights specifically on that Omaha, Nebraska store, maybe some learnings there and what you think the opportunity is to really get into some greenfield markets.

Walter Robb

I’ll go first I think John might add or Jim. We talked about Omaha the big learning there for us is that looking ahead to how many stores can market support and I think in Omaha for example, we centrally located whereas if we did it again we might have two or even three stores in that market. So, the learning has been, okay, now that we have got little more flexibility on store size we can take a little broader approach to the market and that opens up more opportunities for us.

Jim Sud

No, that was good.

John Mackey

I’ll add something to it. The fascinating thing about Omaha was the store did not starting to come slow for us, it's been a very strong copper since it really opened up and now it's a very good performer for us overall. So, the interesting thing about some of the secondary markets is they start a little slower but sometimes we don’t have a robust competition in some of those markets. And those stores can produce very strong returns for us. So, we are actually very excited and now that we are going to be varying our size of stores considerably depending on the market gives us lot more flexibility. We were actually really excited about what we would think of a secondary market opportunities. We are seeing some very good returns of capital on a lot of those stores, Omaha being a good example of that, Birmingham, Alabama is another good example.

Scott Mushkin - Jefferies

So if I were to look at the return on invested capital in that particular store, even though it started slow, is it above the average?

John Mackey

Don’t know that off top of our head.

Walter Robb

We currently don’t have that book right here.

Scott Mushkin - Jefferies

Okay. The second question is I think, if I look to your guidance, margin guidance is 5.7 to 5.8%. I think that if that's not the top of what you guys have ever done, it's pretty darn close. So I think I actually almost ask this every call at this stage. But maybe you can just if you have a sense, where your thoughts are as far as you talked a little bit about efficiency and trying to get this cost to build down, but how about on the operating level? Where do you think you are on gaining efficiencies at the store and kind of driving that to a higher level?

Glenda Flanagan

We made great progress this year and last year over the last few years in gaining efficiencies in the stores, it's something that we focused on across the company on a regular basis. We don’t think it was there yet that we will ever get there really because as long as we continue to see sales growth that we have seen over our history we should continue to see expense leverage.

John Mackey

Scott, one thing to realize is that and there were two drags that brought down those store operating margins. We got it to our historical high and the two things happened, one we acquired Wild Oats although we have to go through a lengthy process to make that acquisition. And that acted as a drag because those stores have far or less favorable operating metrics when first acquired them. Now we brought those stores way up as we promised that we would. We are seeing in fact, on average we doubled the sales of the Wild Oats stores since we acquired them four years ago. So, that should give you an indication of how much we have increased the productivity of those stores. Secondly, we saw the economy collapsed and our sales collapsed quite along with it. That down our operating metrics, but our comps have been strong now for a couple of years and Wild Oats has been well integrated. SO, in some ways we are returning or have returned to near the top of the range. But I don’t think we necessarily will stop there. I think we will continue to assuming our same-store sales continue to increase. We expect to see Wild Oats continue to improve, we are opening again new stores or having higher productivity numbers than they used to in the past. And we are continuing to with the strong same sales growth we expect our operating margins to continue to improve. So, we are hopeful we can do better than we have done historically in the past, although we are not promising that, we are certainly shooting for that internally.

Walter Robb

I will affirm that Scott, really if you like the great recession was the great teacher and I think really shot out to the regional presence and their teams, I think they have done an outstanding job delivering consistency and leverage and greater efficiency. And at this point now we have a couple of year track record of being and I think more consistently even more historically in terms of doing that on incremental gains. So, I would affirm that’s our goal to make progress from this point forward.

Scott Mushkin - Jefferies

Is there any particular lever you would look to that stands out as an opportunity versus others? Then I'll give the floor up. I thank you for answering my questions.

Walter Robb

Sales is the big item, you got to have the sales. So, you got to get that mix try to continue to have transaction count and growth in sales. So, that gives you the room to move.

John Mackey

We are doing lot of things. Sales is very important we are constantly trying to evolve our labor mix what we call smart service. So, you put servicing where something to customer values, but we are in areas where the customer value at less. You don’t necessarily have the same degree of service. So, we are evolving that in a lot of stores. Since we are having more discipline in our capital investments. You will see depreciation as we are leveraging that and that’s a lower percentage and it's historically been, giving a lot of our new stores. So, labor and sales continue to go up. I also might add that we are seeing favorable rents at this point. A lot of the new stores we signed have had very more favorable rent than we had 4, 5 years ago. So, that’s something going to pay off in the long-term in terms of some store operating metrics.

Walter Robb

And on the gross margin line the better inventory management we continue to reduce incrementally days on hand, we are working aggressively on strength and that’s come down a lot. And we are still early to middle innings on our distribution side. We started as a retail company, we started our focusing on building the great stores and a great store experience. We just backed in to the distribution and supported that because we have stores everywhere and we are there is a lot for us to gain. We have got a good handle on that now on the perishable side where we have our own our distribution network pretty well built out for ourselves. We have an outstanding contract with Unifi on the dry side of things which promises incremental benefits to Whole Foods as we grow. So, there is gains in all those areas for us to continue to work on this as e move forward.

John Mackey

I’m going to underscore what Walter said, it's kind of like Whole Foods competitive advantage for most of our history has been and store experience, service levels, differentiated product mix, etcetera. That’s how we have become so successful and that’s what’s driven our growth. But what we are getting much better right now is we are getting better at being more efficient. We are becoming a more efficient retailer. And as Walter said we are kind of in the early innings on that. I think that’s Whole Foods market assuming we don’t therefore, dilute our service levels or the store experience for our customer. We have got a lot of efficiency gains ahead of us and I think that’s going to help drive direct store expenses down as a percentage and increase the operating margins. So, that’s I think the good news is that we still got a long way to go before we are generating Walmart type efficiencies in our company. We will probably never generate Walmart type efficiencies but we still got a lot of progress and improvement we can realize over the next several years that will benefit our shareholders.

Walter Robb

And I think this team would like to give a special shout out to Bart Beilman, our VP of Distribution and Global VP of Distribution and his team here at Austin has done a phenomenal job over the last couple of year's helping us to begin to realize those things. And going to just making the point again to around this cost to build as we are doing a better job designing the stores now, a lot rationalizing the choices we are in designing them and building them for less. The cost of build additionally the cost per square foot, you start watching this cost to actually build the stores coming down, it's come down from 15 million and so 10 million range now. It's huge progress and when you put capital upfront to get a nice store experience you return it's going to continue to grow. If we have more progress we can make in that area as well. So, that’s a long winded answer, but hopefully you got to feel for our enthusiasm for that topic.

Operator

Next we go the side of Ed Aaron from RBC Capital Markets. Please go ahead.

Ed Aaron - RBC Capital Markets

Thanks for taking the question. When I look at your recent comp trends, they're not only very good but they're remarkably consistent relative to history. They've basically been within 100 basis points span for like six quarters. I was just wondering. When you think about the business, what do think explains that? Is it just a function of a bigger store base or do you think there is maybe kind of somewhat of a behavioral change happening from your consumer?

John Mackey

(Inaudible). Seriously it's kind of puzzling to us Ed, we had these long-term comp trends that just been there sort of consistent. And other than aberration of the great recession, we seem to be back on track for that. And we are comping the comp (inaudible). And I think it's just kind of the normalized state of things for Whole Foods as long as we continue to improve customer experience and evolve our concept and create more value for customers in these numbers. SO, I don’t think it's automatic, I think we have to work to do, but I think our business model is just basically produces these kind of results the way we manage our business.

Walter Robb

So, I’m going to give you a complementary view to John’s point, which is I think that I don't want for us to take a bunch of credit for ourselves, but I think that a lot of serious focus on going back and looking at the store experience the store design and I think that is translated into a new rep of stores that are feeling nearly good to the customer. I think our work on valuable, and not just value but visible value. One day sales, we are getting huge returns on those work efforts, people appreciate that and they feel like we are accessible in part of their lives. And I think this focus on healthy eating, it's a big idea for this new generation of time and we are there, we are leading it and at a time when healthcare cost have been higher people are realizing that this is a way they can move forward in healthy lifestyle. And I think all of these things are combined to gives us a nice fit. What feels like on this and the whole new generation of momentum that’s what we are doing.

John Mackey

I will pile on to that as well, if you consider the (inaudible) also had in the marketplace, it can kind of you the marketplace is evolving and the conventional supermarket chains who are try to be offerings to all people continue to sort of gradually new share. And the alternative formats are continuing to gain share. So, it's the evolution of the marketplace, we are just extremely well positioned. We are America’s healthiest grocery store and we are uniquely positioned to gain benefit from the sea change that’s undergoing in peoples conception of healthy living and healthy lifestyle. And wanting to eat natural and organic foods and to live longer and avoid crippling diseases. I think Whole Foods is positioned perfectly for what I think have been and will continue to be major demographic evolution.

Operator

And we will go ahead and take our last question from the side of Stephen Grambling from Goldman Sachs. Please go ahead.

Stephen Grambling - Goldman Sachs

Thank you for taking my question. Just to follow-up on some of the comments from earlier, you referenced that you’ve been checking pricing at conventional. Now, as you see better supply chain efficiencies, you're nurturing the farmers and suppliers within it, do you feel like your gap with them is narrowing even further as they pass through inflation? Are your costs of goods actually rising at a slower rate do you think?

Walter Robb

From what I see that from reading their numbers and so forth. I mean we are not trying to outpace the gap we are trying to price the market and do our own things in terms of value and differentiation and so I think the comments we made earlier just we have more ability to do that more flexibility to do that because of the gains we are making on the supply side and those things that we talked about earlier. But yes we are tracking that, we are tracking internally, our inflation every month 8000 plus items we are tracking every month all the major competitors on a major basket 6, 800 items and we are watching that. And so our ability to stay competitive to be competitive and stay competitive is just gets stronger from here. Does that answer your question?

Stephen Grambling - Goldman Sachs

Yes, I think that does. I guess a follow-up to that would be just maybe it's been asked a little bit before is just kind of in terms of innings or however you want to make the metaphor, what's the runway on the supply side, in the supply chain, going forward?

John Mackey

It's huge Steve, I mean Whole Foods is we are continuing to gain economies of scale. I mean there is tremendous, just on the distribution side we are talking to bar who heads up our distribution efforts just yesterday about this (inaudible). We have the distribution in place right now (inaudible) distribution centers. So, there is tremendous leverage that we can realize through distribution alone. And as our purchasing continues to increase on the buy side there is tremendous probably the biggest at least when our gross margins are stronger is even though we have been more competitive on our pricing, we have been able to pass through on the buy side a lot of the savings or scale is giving us and that’s resulted in better prices for our customers as well as higher gross margins for our investors. Again we think we are in the early innings of that as we continue to grow and to accelerate our growth. We think there is going to be continued scale that we are going to gain and we are going to probably do the same thing. We are going to hopefully realize some of that a little bit higher gross margins and the rest we are going to pass under our customers on more competitive prices. Right now Whole Foods is kind of in an increase return cycle which continue as long as we are able to continue our growth.

Walter Robb

I just want to add to that. We want to make sure back to the (inaudible) of your question, I don’t think there is a gap between Whole Foods, like for like where the competitors were competitive that’s the way it is. I’m watching those numbers every 30 days and even more frequent with that. So, I don’t think there is a gap we just have, we are in a very good competitive position right now. I like to position I think we got the information to back that up. So, also we want to thank you for spending additional time writing about our company, I appreciate that.

Operator

It looks like we do have time for one more question, it will come from the side of Bob Summers from Susquehanna. Please go ahead.

Bob Summers - Susquehanna

Good afternoon guys. Just one quick thing, just digging into the basket a little bit. I think you talked about it being driven by higher price per item but then right after that, you talked about trading up, which is something I think we haven't heard about for a while. So I guess two things. One, just how much of that was driven by inflation? Then what was the impact from trading up? Then as you're starting to see that, any thoughts on where it could go? Because it feels like, again, this is something we haven't really heard constructive comments on in a while.

Walter Robb

We are up to 3% basket. We said inflation somewhere in the 75 to 2 range so 100 basis point from the other but we didn’t really break it out and that’s kind of rough thing, but it's really through the uptick went from, it's resulted both the inflation but also we have studied this behavior we see branded product actually outpacing (inaudible) branded product actually outpacing private label growth which is you remember during the downturn that thing up 3 to 1 on the growth rate was kind of a proxy per value. We see the branded products growing nicely right. We see people making incremental trade ups from 3 to $4, 4 to $5, 5 to $6. We are seeing that in several areas like [my trade] of private label shampoo for a branded shampoo or a cheese and we are seeing that in several areas across. And we also seen n we are doing the (inaudible) we are breaking our basket 10, 20, 30, 40, 50 and we saw obviously as we mention in the scrip the greatest growth in the $50 plus basket that grew dollars and units. But we didn’t see any degradation in the other baskets either. So, it's a new time with a new set of things happening here that we haven’t seen before and the basket is definitely a result of both of those.

Bob Summers - Susquehanna

Then correct me if I'm wrong, but I think that the way, like your private label pricing philosophy, as you get that shift into brand, not only is it going to be an aid comp but it should also be gross margin enhancing. Is that right?

Walter Robb

I can just take you back to our overall guidance on gross margin and it all blends into where we think, we think we can continue to maintain historical range with margins that we have been even though it's getting tougher to do with a little bit more incremental inflation and we think we have also dialed up our tools and ability to do that. So, we are just going to take you back to the overall blend where we think we can be going forward. And right now that’s what we are affirming.

Okay, great. So thank you all for listening in. We appreciate it. Join us in November for our fourth quarter earnings when John will be in the chair. A transcript of the scripted portion of this call along with recording of the call is available now on our website at www.wholefoodsmarket.com. Talk to you all next quarter.

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