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

Executives

Cindy McCann - Global V.P., Investor Relations

John Mackey - Co-Chief Executive Officer

Walter Robb - Co-Chief Executive Officer

A.C. Gallo – President, CEO

Glenda Flanagan - EVP and CFO

Jim Sud - EVP, Growth and Business Development

Analysts

Ed Aaron - RBC Capital Markets

Charles Graham – Deutsche Bank

John Heinbockel - Guggenheim Securities

Ed Kelly – Credit Suisse

Karen Short - BMO Capital Markets

Scott Mushkin – Jefferies

Sean Naughton – Piper Jaffray

Stephen Grambling - Goldman Sachs

Whole Foods Market, Inc. (WFM) F4Q 2011 Earnings Call November 2, 2011 5:00 PM ET

Operator

Good day ladies and gentlemen. All site are now online in a listen-only mode. Please note there will be a question-and-answer session later on in the call. (Operator Instructions). I want to turn the program over to our moderator for today, Cindy McCann. Please go ahead.

Cindy McCann

Good afternoon, and thank you for joining us for the Whole Foods Market fourth 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.

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’ve read our press release so we’ll use this time to focus on highlights from the quarter year.

I will now turn the call over to John Mackey.

John Mackey

Thank you, Cindy. Good afternoon everybody. We are very proud to end what has already been a great year on such a high note. For fourth quarter, we produced 8.7% comparable store sales growth, average weekly sale per store of $630,000 translating to $863 in sales per square foot, 8.7% store contribution in our seasonally softest quarter of the year, 5% operating margin, and our tenth consecutive quarter of year-over-year operating margin improvement, 7.9% EBITDA margin, a 26% increase from diluted earnings per share to $0.42, and 36% NOPAT ROIC for all stores.

Our solid executive, capital discipline and increasing stock price generated over $1 billion of cash during the year, through a combination of $755 million in cash flow from operations, and $297 million in proceeds from team member stock option exercises.

We invested $365 million in new and existing stores, paid off the remaining $490 million of our term loan, returned $53 million in quarterly dividends to our shareholders, and increased our total cash and investments during the year by $154 million to $799 million.

Today we announced a 40% increase in our quarterly dividend to $0.14 per share, and a $200 million share repurchase program. We are well positioned to internally fund our accelerated new store growth, maintain a healthy cash balance, increase our dividend, and seek additional value creation for our shareholders through selective share repurchases.

Turning to sales, we’re excited to be reporting 8.7% comparable store sales growth, our seventh consecutive quarter of comps of 7.8% or higher. We believe our efforts around value and differentiation continue to be a significant contributor to our momentum, helping drive a 5% increase in our transaction counts during the quarter.

Our basket size increased 4%, once again driven entirely by a higher average price per item, as we selectively pass through product cost increases and as customers traded up. As we have been reporting throughout the year, on a year-over-year basis, our customers had shifted their buying toward branded and organic products, higher priced tiers, and to several discretionary categories.

We also continue to see strong increases in $50-plus size baskets. As demonstrated by our healthy sales and gross margin, we have successfully balanced rising product cost and maintained our relative value positioning. We are hopeful, however, that as many are forecasting, inflation peaked in Q4 and will moderate in Q1.

In the face of increasingly tougher comparisons, we are pleased that we maintained a 17% two-year ID for Q4, and for the first five weeks of the first quarter. We are not aware of any public food retailer putting up these kinds of numbers.

We attribute much of our market share gains to our well executed value efforts, which have positively impacted our price image, while continuing to raise the bar in areas that matter to our customer, particularly our quality standards in health and wellness.

To update you on one of our wellness initiatives, we have now opened four in-store wellness clubs in Chicago, Oakland, New York City, and [inaudible] Massachusetts. Our wellness club offerings include nutritional courses, culinary classes, supper clubs, coaching and support, a wellness assessment tool, and access to benefits from a growing local network of community businesses. Members also receive a 10% discount on thousands of designated healthy foods when they shop in our stores with wellness clubs. We are learning and evolving with each club we open, and have one more pilot scheduled in Princeton, New Jersey in January.

While still very early, we are pleased with the initial results we are seeing. We hope customers will continue to embrace the concept, and that we can expand our offering to more customers in the future.

Turning to new store growth. During the quarter, we opened three new stores in Marietta, Georgia, Mississauga, Canada, Washington D.C. and relocated two stores in Wellesley in Massachusetts, and now for Arlington, Ohio, resulting in a total of 18 new stores for the year.

Our new store results showed strong year-over-year improvements in both operating performance and NOPAT return on invested capital in the fourth quarter. Compared to last year’s class of new stores, this year’s class was 11% smaller in size averaging 40,000 square feet and produced average width sales per store of $565,000, translating to 23% higher sales per square foot of $747. These new stores produced over 400 basis points higher store contribution and 325 basis points higher NOPAT ROIC as a percentage of sales versus last year’s class.

We encourage you to visit the Beyond the Numbers section of our investor relations webpage, for more information about our wellness clubs, videos from our newest stores and more.

Since our third quarter earnings release, we have signed nine new leases averaging 32,000 square feet in size in Phoenix and Tucson, Arizona, Davis, California, Littleton, Colorado, Tallahassee, Florida, Tulsa, Oklahoma, Addison and Katy Texas, and London, England. We have signed 32 new leases over the last 12 months and are on track to open between 24 and 27 new stores in fiscal 2012, and 28 to 32 new stores in fiscal 2013.

From a cash and infrastructure perspective, we remain well positioned to internally fund and execute this acceleration in our new store growth. Given our Q4 results, when in line with our expectations, we are just five weeks into fiscal year 2012. We are maintaining our outlook, which reflects consistent comparable store sales growth, a record number of new store openings, EBITDA of close to $1 billion, and significant operating margin improvement. We do not expect a meaningful impact on our earnings growth from our acceleration of new store openings, as we estimate new stores will account for only 5% of our total sales.

As I mentioned earlier, fiscal 2011 has been a great year. Our sales top $10 billion, and total sales growth is now accelerating. We improved operating margin 55 basis points to 5.4%, and substantially exceeded our initial EPS guidance of $1.59 to $1.64 growing EPS 35% year-over-year to $1.93.

We opened 18 new stores that are off to an excellent start and signed 32 new leases, including two in Canada and three in the U.K. We created close to 6,000 new jobs and team member moral if very high.

While our relative value positioning remains a top priority, we continue to raise the bar with our five-step animal welfare rating, and eco-scale rating systems in addition to launching our Whole Kids Foundation and Wellness Clubs.

Our pleasurable store experience, outstanding service, high-quality standards, and differentiated product mix have been the primary drivers of our growth and success. We are committed to maintaining our unique positioning in these areas, and now have the benefit of our more visible value efforts to gain additional customers.

We also are in the early innings of becoming a more efficient retailer, and have a lot of improvement opportunities ahead of us that should help drive higher levels of operating performance and returns on invested capital over time.

We consider 1,000 stores to be a reasonable indication of our market opportunity in the United States. People are increasingly embracing healthier lifestyles, as life-threatening diseases are on the rise, and healthcare cost are high and going higher.

As America’s healthiest grocery store, we’re uniquely positioned to benefit from this major demographic evolution. We are not yet saturated in any major metro area, and our flexibility on new store size has opened up additional market opportunities.

In addition, through acquisitions and our own store development, we have learned that select secondary markets are ready and waiting for Whole Foods Market to come to town. Looking beyond the United States, we believe Canada and the United Kingdom hold great promise as well. We’ll now take your questions. Please limit your questions to one at a time so everyone has an opportunity to participate.

Question-and-Answer Session

Operator

(Operator instructions). It looks like our first comes from the side of Ed Aaron, from RBC Capital Markets. Please go ahead.

Ed Aaron – RBC Capital Markets

Great, thank you. You have a lot of pricing go through in the quarter, and as you look back, were there any areas that maybe surprised you better or worse in terms of consumer reaction to that and so did that cause you to make any adjustments as you went along from your pricing strategy?

Walter Robb

Ed, that came through a little bit mumbled. Do you think you could repeat that again? Sorry, this is Walter. It just came through a little mumbled.

Ed Aaron – RBC Capital Markets

Sorry about that. So, there was a step-up in the pricing in the quarter, I think, with the higher inflation, and I was just wondering as you look back, were there any areas that maybe surprised you better or worse in terms of demand of elasticity that you saw, so did that cause you to make any adjustments in your new pricing as you went along in the quarter?

A. C. Gallo

Hi, Ed, this is A.C. There weren’t any surprises. I think that we saw a continuing trend in some of our cost increases. We’ve been seeing it in meat, we’ve sort of moderated in produce a little bit, some package goods, which we had contracts on and held a price on for most of the year. As the contract expired, we had to take some price increases there. I don’t think we saw any surprises. We definitely are very sensitive to where customers start to react to certain pricing, and we have noticed that in a few areas, particularly in meat and in dairy. We’ve realized that we have to be really careful, probably have come up against as far as we’d want to push those at this point, hoping that inflation of those areas really moderates because we don’t feel like we really want to push those very much farther.

Walter Robb

This is Walter. Just to add on to what he said, it does feel like inflation has peaked, looks like probably mid-way through the quarter and is moderating here, and I would expect that to continue. So it’s taking some of the pressure off of that, although make no mistake about it, there still is inflation present, but it has moderated some and given us a little bit more flexibility. We continue, we are going to commit to delivering the margin range that we said, between 34 and 35 and we’ve been pretty consistent on that. We are doing that by balancing the right investments, the strategic investments, and working the buy side as aggressively as we can to continue to blend out to deliver the sales growth.

Ed Aaron – RBC Capital Markets

Thanks everyone.

Operator

Next, we’ll go to the side of Charles Graham from Deutsche Bank. Please go ahead

Charles Graham – Deutsche Bank

Thanks, good afternoon. Just a follow-up on that last quarter, the GPM was a little bit softer than I think most of us would have anticipated, given a little bumping up on some of these higher priced points. Any sense for what the impact that was to the quarter in terms of your inability to pass on those price increases?

Walter Robb

Chuck, actually, the gross margin was up 11 basis points year over year. It was down sequential, but it seems like people forget what was going on this summer in terms of the middle of the summer where we had that drama in Washington. We had an economy where most economists were predicting going in a recession, and we saw that come back up towards the end of the quarter. But you know, I think this was not a summer to expand your margins; this was a summer to continue the sales momentum and continue to deliver visible value and those sorts of efforts. So, I’m very pleased. I think we made good strategic investments, I think we continue to find that right balance appropriate for these three months that was necessary to continue the growth.

Operator

Next we’ll take a question from the side of John Heinbockel, from Guggenheim Securities. Please go ahead.

John Heinbockel - Guggenheim Securities

Thanks, guys. Two things. Number one, if in fact inflation moderates next year, which seems very likely, do you think the elasticity is there in the economy such that items per basket will go up much, or do you think it will stay sort of flat, as it is right now?

Walter Robb

We don’t really know, John.

John Heinbockel - Guggenheim Securities

What have you modeled, when you think about your account next year? Do you have items per basket getting better?

Walter Robb

I think 60/40 is kind of what we usually average, and I think we are projecting a similar ratio next year.

John Heinbockel - Guggenheim Securities

Okay.

Walter Robb

Some of it is affected by – John, we are continuing to gain new customers. We have got a little more sophisticated track of that working with Nelson, and when you bring in new customers, that does moderate your items in the basket because those customers tend to be a few less items. And the transaction count has swung back towards the 5% mark, which is very healthy and encouraging. But it is a little hard to see too far down the road in terms of how all of these things will play out, but I think historical numbers are probably a good guide.

John Heinbockel-Guggenheim Securities

Okay, then secondly, from a strategic standpoint, how well do you guys index with the 65 and older crowd, when you look right on this point here where we are going to see an explosion in that demographic over the next ten or twelve years? How well do you index, and how much of an opportunity is it to do more business with the older customer?

Walter Robb

John, it’s interesting, we do very well with the boomers and we do very well with the millennials. The X-generation, we haven’t penetrated as much with. Fortunately for us, they are the smallest of the three cohorts. I think the boomers continue to come our way because they are increasingly concerned about their health and longevity. When you are young, in a certain sense, you can take your health for granted, as you get older, you start having to pay a lot more attention to it, and that drives people to our stores. We are very encouraged by the millennials. They identify with us because of our values and philosophy, and they are also, in a lot of ways, the children of the boomers. So a lot of them grew up eating whole foods. It used to be every new customer we got was kind of a convert from more mainstream markets, now we are getting customers who are second-generation customers, and that trend should continue as well. So, both the boomer trend and the millennial trend are working our way.

John Heinbockel - Guggenheim Securities

Aren’t the boomers a lot more value conscious than they had been or not really?

Walter Robb

I think everybody is more value conscious, so that is a factor. But the thing people don’t understand is how much less money people spend on food than we used to spend. Everybody talks about the cost of food, and that’s always in the media, but American’s now, collectively, only spend 8% of their income, whereas 100 years ago, it was closer to 50%. It was 15%, 40 years ago. So we are spending less and less as a percentage of our disposable income on food. Finally, Whole Foods has done great work on improving our value image with our customers. We are far more competitive than we were a couple of years ago, so that’s working in our behalf as well.

John Heinbockel - Guggenheim Securities

Okay, thanks.

Operator

Our next question comes from Ed Kelly from Credit Suisse, please go ahead.

Ed Kelly – Credit Suisse

Hi, good afternoon. If I look at your store openings you are going into, it looks like about 19 new markets I guess over the next couple of years, and that’s been about 4-5 over the last couple of years. Could you help us understand the profile of those markets, and how your approach maybe has changed, particularly as it relates to the smaller markets? Thank you.

Glenda Flanagan

That’s 19 new markets for the 62 leases that we have signed.

Walter Robb

Yeah, that’s not all next year, that’s across the three years of growth.

Ed Kelly – Credit Suisse

Okay.

Walter Robb

Yeah, so one of the things that we are excited about is that gives us an additional vehicle for growth, is going into these smaller markets. And based on our experience with the Wild Oats acquisition which gave us access to these markets, and based on our ability to improve sales and our experience with those markets, it’s given us confidence to pursue those smaller markets. And again, give us some additional vehicle for growth. While the sales per square foot may be at or slightly below some of those bigger markets, the economic case for the smaller markets is really compelling because the rent is significantly less and the capital spend is less as well because we are building smaller storage.

John Mackey

Yeah, let me give you an example of a smaller market we just entered into a couple of weeks ago. This store is off to an incredibly strong smart, which is, I just toured it yesterday because it was fresh on my mind. I was in Oklahoma City yesterday, and toured our store for a couple of hours. And it’s a 35,000 square foot store, and the store is doing amazingly high volume. Sales per square foot are phenomenal, and the interesting thing about going into some of these slightly smaller markets is that in some sense, there is less competition. There’s less differentiation in the market place. So Whole Foods stands out more than it does in some of the other larger markets.

We are so excited because as we’ve entered into these, what we think are secondary markets, our stores have performed at very high levels, both in – rents are lower, labor costs are lower, and yet we’ve performed at very high levels, so the stores are very profitable for us. I really do think this is going to be a strong vehicle of growth for us over the next several years, and I’m not sure how far it can go, but obviously if we are going to our 1,000 store goal, the secondary and tertiary markets are going to be very important. The returns on invested capital are extraordinarily high in these markets because of the lower rents the lower general direct store expenses. So, we’ll just have to prove it over time, but we’re pretty excited.

Walter Robb

This is Walter. To give you another example, we opened a new store in Folsom, which is about 20 miles outside of Sacramento, one of the areas of the country that was fairly hard hit by the housing. And just talking today with [inaudible] president earlier, and I think the thing that Jim is talking about here is this ability to go in new markets and smaller markets and different markets, and that is how we have brought down our real estate approach, and we are having lots of good success with some of these different sizes and different communities.

Ed Kelly – Credit Suisse

Great, and just as a follow-up, your store size is coming down a bit. I guess some of this is as you are going into these smaller markets. So your unit growth is going up, and I guess at some point, your [inaudible] growth is actually accelerating right now, but at some point, you’ll need to open up more units, I guess, to sustain square-footage growth, so what is the level of unit growth that you are comfortable with, that you think you could execute on? Is there a ceiling to that, or can that continue to grow?

Walter Robb

I think the ceiling can continue to grow incrementally. What we’ve set are pretty clear numbers for the next couple of years, which is 24-27 this year, and 20-32 next year. And we are on target to hit those, no question about it. So, I think that is a number we think about, and talk a lot about internally with our leadership team about what is a sustainable rate of growth for us to do and be able to continue to deliver an excellent store. I think as we continue to gain some momentum I think that number could incrementally move up because we have twelve operating regions, we have the ability to certainly do up to fifty a year if we wanted to. I think it’s a matter of finding the right balance and being able to open them in a way that we want to.

Ed Kelly – Credit Suisse

Okay, thank you.

Operator

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

Karen Short – BMO Capital Markets

Hey, thanks for taking my question. I’m just curious, I know you’ve been talking about development cost per store, and you’ve obviously been working on that a little bit, in terms of bringing that number down. But obviously you’ve given us your fiscal ‘10 numbers in your third quarter release, and you gave us an update for ’11. Can you – is there anything you can point to, specifically that showed the improvement? And I guess along those lines, the lower development cost per store is obviously going to drive higher ROIC. I’m just wondering if you have a longer-term goal on where you think your ROIC can be? You kind of gave a blended ROIC number a couple quarters ago, so I’m wondering what your thoughts are on that.

Walter Robb

Hey, Karen, Walter here. We talked about 15% as a best-in-class sort of standard. It obviously depends on lots of other activities and what’s happening. But we did hit 11%, this year, it’s about 120 basis points up over last year. We had a couple of quarters over the 12, so I would say the goal is just continue incremental improvement on this and we are making that. We have made tremendous strides this last year, and we expect to make some more. It becomes a little more complex when you shift up the sizes of the stores and the different types of projects, but I think we can continue to make some incremental progress there.

Karen Short – BMO Capital Markets

Okay, that’s helpful. Then, I’m just curious, we had a chance to visit your new store in DC and [inaudible] and you guys had some fairly innovative things in that store. Most noticeably, kind of the order kiosks for prepared foods. I’m just wondering if that is something that you look to roll out more broadly, and just wondering how you kind of see that inducing your prepared food sales, because it seemed to – I haven’t really seen that in any other stores. So just kind of wondering on if there are initiatives that you could roll out to the rest of the rest of the store base?

A. C. Gallo

That was very exciting. That order system, it was the first time we had ever done anything like that. It was really the regional initiative and that’s where a lot of our innovation comes from. Regions, they were trying to figure out how were they going to deal there with the incredible lunch time business that they were going to have because they are right there at GW University and with the medical center right there. They knew they were going to get just bombed at lunch time, so they came up with that idea, and it’s worked really, really well. There is no plan to roll something like that out, because I think it really has to go into the right store, but certainly, a lot of the other regional presidents have studied it, and when we have a store that has a similar situation we will definitely do that again. Something like that. One of the exciting things about the way we do stores and the fact that the stores are designed by the regions themselves is that they are always coming up with these great ideas like that, and each store I go into. I’m real excited by what we see; the new things they’ve tried, and then we see those – when they actually get approved we see them slowly filter to other stores.

Karen Short - BMO Capital Markets

Okay, that’s helpful. And just one last question. Can you give us a quick update on private label as a percent of sales in non-perishables and any initiative you can highlight kind of going forward? I know you said branded is stronger, but just come comment on private label. Thanks.

Walter Robb

This is Walter. That actually – that actually pulled level this quarter and we saw private label growth pull, you know the rate of growth is similar to the branded growth and I think that reflects a couple things. One, we up the SKU from 2,200 to 2,600 and we did some very nice visible repacking in categories like household cleaning and some others. These sales were really jumping. So I think it’s – you know, to an extent that it’s a proxy for the economy and how people are feeling, you may remember during the downturn, it jumped up to three times faster than branded.

What’s interesting at this time it’s full level. I think some of that is because of the efforts of the team here to put that momentum there, but I think it does reflect that people turn to private label when they’re looking for value. And so I think we’ve got a nice balance going on right now.

Karen Short - BMO Capital Markets

Great. That’s helpful. Thanks.

Operator

Next we’ll go to Scott Mushkin from Jefferies. Please go ahead.

Scott Mushkin – Jefferies

Okay, Walter, I wanted to follow up on Karen’s little bit. Did you – maybe I missed it in the company’s reporting, but did you give us the cost per square foot to build and kind of what the thoughts are for next year?

Walter Robb

Yeah, I think in the press release we show it – it’s 2010 there was $261 cost per square foot, $248 in fiscal year ’11. You know, Scott, we’re really hesitant to give guidance in this area just because, as you see from the footnote we have in the press release and I’ll just quote it, “cost will vary depending on the size of the store, the geographical location, degree of work performed by the landlord, complexity of site development, issues. To a significant degree, they all depend on how the project is structured, including cost for elements that often increase or decrease rent. These acquisitions costs, shell, garage costs, landlord allowances.” The bottom line is, every deal is complex and unique and in any one year, you could have some more expensive deals.

It also varies along geographically. We know that the coastal regions, East Coast, West Coast, are going to have more expensive development costs than the Southwest or the Midwest. So it kind of depends on which stores get opened up.

We just paid for the investment community to read too much into it. I do want to reiterate that the company is very dedicated. Our management is very dedicated to taking unnecessary costs out of our development process and we think we’re doing a pretty good job of doing so. Stores are less glitzy and we’re getting – we’re cutting out things that we don’t believe really add value to our customers. And ideally, all things being equal, we’d like to see that trend line go down, adjusted for inflation, but we don’t want to guide for it because, as I mentioned, it’s so complex and we don’t want the market – the investment community to think we’re not doing a good job if costs go up because we opened some expensive stores in the U.K. on a per-square-foot basis, which is what we’re going to end up doing in 2012.

We think the really big thing people should focus on is the return on invested capital. The ROICs is really important and some projects will cost more money on a per-square-foot basis, bu they might have superior ROIC.

A great example of that, when we opened our – re-located our Lincoln Park store, very expensive project, didn’t look good on a cost-per-square-foot to develop it. But the store’s been an amazing performer and it’s outperformed our expectations.

So anyway, that’s kind of the long way of that we’re going to report this number but we’re not going to guide for it.

Scott Mushkin – Jefferies

That’s perfect. And I just had a follow up. I mean, one of the things that, gosh, way back when when you guys went to bigger stores, I guess, and kind of starting in 2002 or ’03 or whenever it was, part of the reason you did that is that the stores you were opening were just opening up so strong because the economy was a heck of a lot better back then. As you look out in the next two to three years, I mean, if we turn this economy, I mean, do you think we’re going to have that kind of problem again where these stores that you’re opening, they’re a lot smaller, they could end up being too small?

Walter Robb

I do not – I feel so good about – I think we all feel so good about where we are right now with our new, or broader-based approach to this. I think we’re getting the right sized store for the right community and that includes, you know, putting some stretch in there, but not so much stretch that we’re paying for square footage that’s not producing.

If you look at the returns on these, on these classes of stores now, Scott, they’re really terrific. And so even if we do get to that where you describe it, that would be a nice problem to have. But it’s not going to happen right away, but I just think we’re doing a whole lot better job at sizing these stores and also, Jim might talk about this a little bit, but sizing markets so that we think ahead about how many stores a particular market can have. So you might say the elasticity of a market is built in through the numbers of stores that we have in the market rather than just any individual store. So Des Moines being a good example, that where we choose to go in with two rather than one right off the bat so we’ve got a lot more elasticity there than we would have if we would have typically just gone in with one big store.

Jim Sud

We’re still going to open some big stores. The changes are good they’ll be relocations of smaller stores that are really performing at extremely high levels. And that just lowered the risk for investors. And – so as Walter said, it’s the right sized store for the right market, that’s going to mean some big stores occasionally, but if we’re going into a lot of secondary markets as we’ve already mentioned, that’s going to – most of those stores in secondary markets are going to be in that sweet spot, you know, 30, 35, 40,000 square feet.

Scott Mushkin – Jefferies

Thanks for the color. And then if I can just sneak one last one here. Walter it sounded like there’s a decent amount of sales volitility in the quarter because maybe what was going on in the broader markets. Did I read your answer right and – or your thought right there? Thank you, guys.

Walter Robb

Yes, you did because you saw us report out with the first three weeks when we did last quarter’s call and you can calculate the remainder to the final results. So what’s apparent, the story within the story, which is that we did see some slowing in the middle of the quarter and then finished – picked up the momentum, which continues into this quarter now. And I think that’s because it’s, you know, we’re in the fall now, it feels different than it did this summer, but you remember this summer, the middle of the summer, I can remember in July the storylines that were out there were – had everybody sort of questioning that when you have a broad sort of macro thing like that, then that – and everybody felt that.

But you know, the momentum is back, we’re moving in the right direction and – but yes, you did read my comments right.

Operator

And it looks like our next question comes from the line of Sean Naughton from Piper Jaffray. Please go ahead.

Sean Naughton – Piper Jaffray

Hi. Thanks for taking my question. You talked about being in the early innings of becoming a more efficient retailer or grocery store. Can you talk about some of the low-hanging fruit that you’re tackling right now, and could we see – continue to see store-level margins improve at similar rates that we have over the past few years? And then just secondly, I just wanted to clarify on your guidance, you mentioned a share repurchase program. What is your thought process on share repurchase for next year? Thanks.

John Mackey

You know, in terms of store operations, I think it’s not so much – I don’t look at it as low-hanging fruit, I figure we probably grabbed most of that. It’s really just – it’s just really incremental improvement. I think what we’ve shown over the last few years, and I – and we will continue to do it, is that as store volumes go up, we’re very good at leveraging the expenses. And I think we’ll continue to do that.

I also think that we’ve become a lot more disciplined with our capital and so that the money we spend either on new stores or no existing store remodels, we’re doing it, you know, very carefully and I think that, you know, overtime, we’re seeing our depreciation costs come down at the store and leveraging other expenses. So I think it will be an incremental approach and I think we can continue to grow our operating margin.

Walter Robb

This is Walter. The only tag on on his comment would be on the distribution side. I think we are in early innings in terms of our ability to leverage our distribution. We’re fully – we’re built out to supply ourselves for 1,000 stores and we only have 300-and-some-odd. So there’s a lot more gain we can pick on on that side of the business, I think.

And Glenda is going to…

Glenda Flanagan

Oh, the share repurchase, yes. We’re very excited about the $200 million share repurchase authorization. We love the fact that the Board of Directors has demonstrated this confidence in the management team, and our cash flow, and our ability to execute and to continue to execute. And – we’ve talked about this for the last several quarters and we may use it opportunistically. We may use it to lessen the impact of stock option exercises. We’re starting to really see a significant amount of cash flow from stock option exercises as our stock prices increased over the past year, and that likely will continue the cash flow will continue in 2012.

Walter Robb

So we’re not going to tell you exactly what we’re going to do, but we’ve got the money and spend it when we strategically think it’s in the best interest of our shareholders.

Sean Naughton – Piper Jaffray

Fair enough. Thank you.

Glenda Flanagan

We’ll use it as another tool in the tool kit.

Water Robb

Another tool in the tool kit. We’re producing a lot of cash and this is a tool we want in our tool kit and we’re happy that our Board feels the same way.

Sean Naughton – Piper Jaffray

Great, thanks. Thanks a lot.

Operator

And it looks like we just have time for one more question. It comes from the side of Stephen Grambling from Goldman Sachs. Please go ahead.

Stephen Grambling - Goldman Sachs

Hi, thanks for taking me questions. Speaking of tools in the tool kit, I’m wondering if you could maybe give us a little insight into the recent promotion that you ran through LivingSocial; the kind of timing of that, any learnings from the redemptions and what you expect in 2012? Thanks.

Walter Robb

Yeah, this is Walter. It was a heck of a ride. We took over the Internet for the day it seemed like. It was a real exciting time and – the redemption rate of those things was – it was as high as 80 a second. The average was 30 a second and it sold out in 10 hours. So it was – those of you that may not know, it was a $20 million offer ,coupon for – a $20 coupon for $10. But it wasn’t overly material in terms of the dollars, but – and through the end of the quarter we’ve only redeemed less than $5 million of the offer, but the traffic was incredible, the exposure. We used the platform to expose our new Whole Kids Foundation and that was very successful. LivingSocial was a nice partner, they did a good job executing on their end and we got a lot of learnings and information about how this whole platform works. And we probably will be doing some other things along those lines now that we’ve got a better idea how it works. It works and it works very quickly. It was kind of a fun ride to do and a successful one, I would say.

We can’t tell you what the deal was though, sorry.

Stephen Grambling - Goldman Sachs

Okay, thanks. I guess a follow up would be, you had mentioned in prior releases about kind of being in the mid innings of your shrink improvements. I’m just wondering kind of where that stands and you know, what the potential opportunity is going forward?

John Mackey

You know, it’s an ongoing thing. I agree that we’re still in the mid-innings. I think that we’re learning all the time. You know, the – one of the things that’s really interesting about it is that we’re finding that as we – as we’ve developed our distribution centers and move the perishables all under our control in our different distribution centers, that we have much better control over what – over our shrink because the stores can really get just the right amount of product that they need. And this has really helped us out tremendously, helped us out with the hurricane, when Hurricane Irene came through. It just helped us out tremendously with the snow storm that hit the Northeast. We were able really to manage the produce in the stores, even take product away when a problem hits like that. So it was really being able to get a much better grip on that and we’re putting in new tools that really help the stores really understand what they’re selling and when they’re selling it and things like that.

So I think we’ve come a long way in the last couple of years and – but I’m excited that we have a lot more that I think we can accomplish here.

Stephen Grambling - Goldman Sachs

Great. Thank you. Best of luck.

John Mackey

Okay. I want to thank everybody for listening in. Please visit Whole Foods Market for everything you need to enjoy great meals over the holidays, and join us in February for our first quarter earnings call. A transcript of the script portion of this call, along with a recording of the call is available on our website at www.wholefoodsmarket.com. I hope everybody has a great holiday. Talk to you next quarter. Bye.

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 CEO Discusses F4Q 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts