Whole Foods Market's CEO Presents at Deutsche Bank dbAccess Consumer, Retail, Gaming and Lodging Conference (Transcript)

Whole Foods Market, Inc. (WFM) Deutsche Bank dbAccess Consumer, Retail, Gaming and Lodging Conference Call March 5, 2013 1:05 PM ET

Executives

Walter Robb – Co-CEO

Cindy McCann – VP, IR

Analysts

Shane Higgins – Deutsche Bank

Shane Higgins – Deutsche Bank

I guess we’ll get started. Good afternoon and welcome. I’m Shane Higgins. I’m the Senior Food and Retail Analyst here, at Deutsche. And it’s my pleasure to welcome Whole Foods’ Co-CEO, Walter Robb, and Global VP of Investor Relations, Cindy McCann.

Now, as many of you may know, Whole Foods was founded in Austin, Texas, back in 1980, by Co-CEO, John Mackey. Now, today, the company has over 340 stores in three countries, and they’re generating approximately just north of $12 billion in annual sales. And we continue to believe that the company’s long-term growth prospects remain very compelling, particularly given the rising demand for healthy eating.

And so the way we’ll do is I’ll – Walter and I would start kind of a conversation. We’ll talk. And then we’ll probably open it up for general questions in about 20 or 25 minutes or so.

So, Walter, your comps have averaged an impressive 8% over the last 10 years or so. And just taking a step back and looking at the bigger picture, what’s been happening over the last decade you believe that’s really driven increased interest in natural and organic foods and where do you see those trends heading over the next five or ten years?

Walter Robb

Yeah. I see those trends only getting bigger. I think that the opportunity for fresh and healthy foods, however you’re keeping it in the bottles, is huge. I think it’s broad, I think it’s wide, I think it’s deep, and I think it’s growing.

So the question is these – I think it’s a lot of things. It’s the boomer – it’s the growth of the boomer. It’s the rise of the millennials now who many folks say will constitute over 25% of the purchases in the next five years. It’s the research. It’s the health – indications with the health. It’s all these things added up. It’s food safety concerns where people now realize there is a reason to be concerned about what’s in their food.

So it’s the obesity crisis in America and the cost associated with the healthcare system, a $3-trillion spend, which is clearly not sustainable. And people look at the alternatives for that is to take more responsibility for their diet. I think it’s all these things working in favor of this thing saying this is a positive direction for society and for individuals.

Shane Higgins – Deutsche Bank

That’s great. That’s great. Now, just switching gears real quick to recent sales trends. Your IDs came in at plus 7...

Walter Robb

It’s a pretty quick switch.

Shane Higgins – Deutsche Bank

Yeah. Yeah, it was. We’ll come back on the broader themes as well. And I just wanted to – I know I’ve been getting this question a lot from investors, and I just wanted to address this. ID sales came in at plus 7.1, very strong. It was a slight decal on a two-year. It was 15.3 from 16.7. Now, average ticket was up a healthy 2%, and traffic was up 5% which is a very healthy 11% on a two-year stack.

Now, on the call, you did mention that there was – some of the moderation may have been attributable to a decline in consumer sentiment in the macro environment and while Hurricane Sandy really didn’t have too much of an impact.

Now, what do you think has impacted the consumer confidence really in recent months? How much of the recent uncertainty around the election, the fiscal cliff and all that has really, you think, played into your consumer?

Walter Robb

Yeah. Well, first of all, let me just say one of the real bright signs from the quarter, in particular – and I thought it was a pretty good quarter – was the fact that our core customer is right there and they’re continuing to build baskets. So you look at the $50 basket, it continued to increase. And our share of market for 35 and under continued to increase. So there is lots of really positive growth signs there.

I mean, I think, if you look at the December and back half of December and January – because we announced as of February 10th, so we’re talking about everything within that timeframe – you think you have the fiscal cliff, which I don’t think really got real for people until you got into December because I think their thoughts on what else was going to happen.

You have the tax rates going up. You have the payroll tax discussion. You have the sequester that was looming. So you just had the sort of backdrop of sort of uncertainty that I think people say, “Hey, everybody is talking about, I better talk about it, I better think about it.”

And so I think it was more kind of a questioning as opposed to a conviction because what we’ve seen over the last three years is that people adjust. Once they know what it is, they adjust and they make their choices and that’s why I say that I think the desire for fresh healthy foods and desire for healthier lifestyle, it’s here to stay.

People are going to continue to choose that and I think that this is just a temporary reset at people kind of set to what the new realities are going to be, but honestly I don’t know that you can – the folks could do it any worse than they’ve done it down there in DC in terms of managing through or leading through these questions. There just seems to be a lack of leadership across the Board to get some things resolved. You could not do that in business.

You got to get some people in the room, knock them together, come up with something, go out the other side and we just seem to be having a hard time getting that done right now and I think that’s where people are saying okay, what am I dealing with and I think our businesses in general have been continuing to invest and doing reasonably well. I think the customers – the consumer in particular is adjusting to all those things.

Shane Higgins – Deutsche Bank

Yes, it seem like overall your trends particularly more loyal customers as you alluded to have been very strong and you guys did talk about – you’ve seen trading up even for an entire priced years, more organics, what’s – are you guys seeing the bifurcation? I know a lot of people talk about seeing a bifurcated consumer.

I know you guys do a lot of your business with the most loyal customers, that customer seems to not be too impacted by what’s happening from Washington and all the uncertainty, but is it may the newer customer or may the customer who is a bit more value focused? Where do you see opportunity there kind of derive some additional business, because your loyal customer seems to be very loyal?

Walter Robb

They do, I’ll tell you we certainly don’t take that for granted and we have lots of things that work and continue to build on that loyalty and grow that loyalty because we learn during the downturn that that’s your bread and butter, you better make sure you are taking care of business there, so I think probably on this, if there is slight moderation is probably the more aspirational shopper or maybe the more value driven shopper who isn’t coming in quite as often that maybe cut out a chip or two, somewhere like that, the little more price sensitive. I don’t think we’re really – we’re not – we don’t operate at all into the marketplace, we defiantly serve the middle to the upper end of the marketplace. So, not as familiar with that customer and that’s completely price driven, that’s not really our customer. But I think it’s probably more just the moderation of the chips in that sort of middle category.

Shane Higgins – Deutsche Bank

And just when consumers really kind of think about that, what do you really want the consumer, what do you want top of mind when someone says Whole Foods, how do you position yourself, how do you guys differentiate yourselves, because I get that question a lot to simply say, well, I could go to trader Joes for example, and they have some great, great things and more organic. I mean Whole Foods obviously offers a much different experience, but when you guys, when someone says or when a consumer thinks about Whole Foods, how do you guys want them to perceive your brand in your company?

Walter Robb

I want them to perceive as a leader which I think that we are, and we have the highest quality standards in the supermarket industry, and not even close. So, I think people perceive this as leaders, people setting the bar on quality, they are experienced of coming into store is different than just going to the supermarket, those are the things. And I want them to experience our focus as part of that, I mean the experience of talking with the team members. So, a fresh and healthy foods excited team members differentiated sort of shopping experience those sorts of things I think set us apart.

Shane Higgins – Deutsche Bank

Great, great. I just want to just change gears and looking at your gross margins, and again, I’ve been getting – I get some questions about this after your quarter.

Walter Robb

Sure.

Shane Higgins – Deutsche Bank

Gross margins are very strong, have been very strong in recent quarters, you guys did signal that you’ll be cycling some tougher compares in the second and third quarter and across for the Europe probably down a little bit. And you know, what if anything is really changed over the last like six months in terms of when you guys are looking at on for the full year 2013. Has something change in competitive environment and I know, you guys also had been very much more focused on your relative pricing value position and that something that’s very important. So how should investors think about your commentary about gross margins coming down a little bit later this year in the context of the competition any new strategy for pricing?

Walter Robb

So glad you asked that question because it’s one that is top of mind for lot of the investors and but nothing has changed. I mean, hopefully. I hope you’re looking at the long term story for this company, the size of the price, the fact that we’re accelerating square footage growth some evidence of our confidence, our continuing investment that we think there is a lot of run way ahead of Whole Foods and at a very sustainable rate.

But what we said and what we’ve been saying for the last six to eight quarters. I personally have said it on the conference calls is that we are giving ourselves some room and to make appropriate price and that’s a competitive price investments and that way we’re – last year we hit extraordinary gross margin results 363.36 and we simply said I don’t expect us to hit those same types of numbers.

Look, we’re not going to throw gross margin away and we’re certainly maybe there’s some upside in what we’re saying but we are simply saying that don’t expect us to hit those sorts of numbers, don’t model those numbers going forward because we want to give ourselves the room to continue to build comps and build sales.

We think that’s the right long term strategy for Whole Foods to do that and that’s the sort of thinking on it. So if you look at the gross margin sequentially there’s still I mean, this quarter they will be up from last quarter but year-over-year we can’t hit the peaks, we don’t think we’ll hit the peaks at Q2 and Q3 and don’t want you to think about it that way.

Shane Higgins – Deutsche Bank

And just – when we talk about your relative pricing, your value position, can you just force in and maybe how you guys measure that in frequency because I know you guys have made a lot of progress on that coming out of recession. Will that be something I’m sure it will be a topic of conversation going forward and how often you guys measuring that and can you just give us a little bit – ?

Walter Robb

One of the thing that we realized during the downturn 2007 is we didn’t have the analytics that we needed to really understand our business beyond the sort of intuitive. So we have this great team in Houston now lead by Chris Taylor who essentially – we’re – one of the things he is doing is the, we got a data base now at every competitive when they open what the effect is, what the return is all that sort of stuff. We also have a lot more analytics on our customers, and what their pattern are. All these things are very helpful as we navigate going forward.

But particularly to your question we are measuring every month about 800 items across 13 marketplaces I think now and 60 or 70 competitors. And we’re looking at it not what they say but what they actually do in terms on the shelf and that create a comp/shop index it’s got perishables and non perishables – we are very competitive center of the store.

We always – in the last couple of years but the quality difference to show up most on the perimeter in terms of produce and meat and seafood stuff like. So we are measuring it every month and across those items and this year I think we will expand the items count to 1,000. That covers all the common items plus a little bit and we’re tailoring the comp/shop particularly now on a regional basis.

So for here in Boston for example with that coming this year is a very fine competitor. We’re tailoring the pricing index too to particular set of competitors that you have in a marketplace as well as getting the broad-based look across the country.

So we got a lot more discipline around that than we had a few years ago.

Shane Higgins – Deutsche Bank

And how you guys – and then of course, you guys have obviously showed up on your prices. And how are you measuring our customers perceive your value because I know sometimes there is a bit of a lag. And maybe you guys are doing some things and not communicating that.

Walter Robb

Yeah, this is a battle we’re always going to fight because when you’re selling a higher quality product, it’s the price value, their value quality conversation, what’s it worth to you, it’s worth different things to different people. So we’re going to be working at that for some time.

If we’re selling you a New York steak that’s $14 because its grass fed or whatever and you’re buying one at Charles for $9, we have to explain $5 a pound difference. And that’s a conversation that some people don’t even want to have and some people are willing to have. So there is that thing going on all the time there. And I got off on the steak and forgot your rest...

Shane Higgins – Deutsche Bank

No, I was just saying, actually what’s interesting is that the price and value mean different things to different consumers. And actually I was thinking so I know you guys do a lot of effort around educating consumers too. So there is – your core customer already gets it.

And so I guess, it’s that customer who’s a little bit more marginal, who’s trying to figure out does it makes sense to pay $4 or $5 more per pound for the grass fed beef for example. And I know as people and you guys do very well and we’re educated communities. As people get more educated about what’s going into their mouths, what they’re eating. That’s an opportunity for you guys to really communicate that value message more effectively.

Walter Robb

It really is an opportunity, things like the horse meat thing that just happened, right, is another example that you’re not watching. You don’t know what could be happening, right. So I mean, there is more of that stuff out there, that’s going to come out. Hamburger from seven different countries. I mean, there is stuff like this across the food supply and not that I wanted to happen or anybody to get sick.

But I’m telling you as you look into this thing more of this stuff is going to surface. And it’s going to be about accountability and transparency and that’s where our standards, I think set us in a good place in terms of the evolving marketplace.

But yes, we have a big opportunity to continue to communicate and educate not everybody, it’s not we’re not halting stop people. We’re not serving all the market place we recognize that. But on the same time our customers are continuing to broaden, our peers continue to broaden and we know that because we know – have information now that we’re across generations with their customers and that’s really good tailwind for Whole Foods.

Because I think Whole Foods is become now into a generation of people who grow up on it 32 years old and that’s something that moves beyond wealth demographic, moves to an education demographic, moves to a values demographic. It’s been very helpful for Whole Foods.

But, still we’re going to be in this conversation about communicating, quality value for the rest of our enduring life we’re going in that conversation because that’s the conversation. And so specifically on value I mean, you see us using the – we have a pretty good base of customers that have signed voluntarily on through the web that we’re communicating with on regular basis. We’re probably one of the leading practitioners of social, Facebook, Twitter interest. We use that actively and aggressively to deliver promotions and offers and we have a lot of things in the work right now to be able to do even more of that sort of thing. But...

Now, it be interesting to follow the progress there, I think pretty exciting. And in terms of you know, core customer. I think about you mentioned the Balanoiu have been very loyal customers and I think the Boomers. How is your – how would you define your customer then. I know you segment them different ways. Is it really a younger customer coming or is it like the Baby Boomers are being more proactive about their health there, how should we be thinking about that?

Walter Robb

Yeah. While as Chris is here, but certainly we have great if you want to use the generational framework we have great penetration in the Boomers. We were built Boomers, we are Boomers and I think the Boomer you got – you basically have worth a 1 million people retiring everyday or something. Now you’ve got people who are coming into that time and they’re alive or their health really matters. And that’s just a statistical fact and the alternative around your healthcare if you don’t take care of yourself it’s pretty bad and it’s pretty expensive.

So I think a lot of people who have realized that this is the time to shift around diet and less diet and that all the noise in the world around is basically saying 20 folks in that direction too. I think what I have seen with the millennium generation that we have a lot of team members obviously at millennium is that they’re coming to Whole Foods it’s a lot because of that but because they also like the way the company the decisions it makes, the values of the stands for the change it’s trying to creating the world. And increasingly are looking for companies that they can line up with in a way that feels right to them.

And I think our value work that we’ve been doing over the last couple of years makes it accessible to them at the same time. Otherwise I don’t think that 35 under demographic would be growing with it we just like it is. So maybe the challenge we have is in the extra generation between the generation it tends to be a little more cenacle about all these things. But the millennium generation has been a real nice broadening of the customer base for Whole Foods.

Shane Higgins – Deutsche Bank

Okay, great.

Walter Robb

And there’s sons and daughters of boomers so they know who we are, we don’t have this challenge that we had in the first 20 years. Who are you again or what do you sell or is that real and these conversations are much more about – I remember when we release the standard on sea food.

It was on earth day last year and what was amazing was the reaction we got from the younger customers about thank you for setting this –no more red sea foods. We’re not selling that we stopped selling red sea food which is not sustainably fish. The reaction over social and Facebook to the company’s decision to do that was really telling to me about how that’s a big part of their motivation.

Shane Higgins – Deutsche Bank

Yes. And so I guess that also ties within your efforts on social media and this is -these are your future, these – as these generation comes up, so hopefully there will be more loyalty going forward and you will have these customers.

Walter Robb

Well, Accenture told us recently that they thought that the will be 30% of retail sales by 2020, so figure third. They are growing an influence in terms of their shopping dollars in the market place. That being said the boomers are here to stay and I think they are living longer and they got the disposal income to invest in themselves and I think they will continue to do that so.

Shane Higgins – Deutsche Bank

Okay. Right now just looking back at financials, so your gross is going to be relatively flattish this year. You guys are looking for operating margin improvement maybe 20 or 30 basis points. And so how should – I know you guys obviously leveraging some new direct-store expanses, how should we think about the opportunities on the expense side and leverage side over – this year and going forward?

Walter Robb

Very good question, yeah. That’s right. We did sort of 64 operating margin last year and we sort of guided the 66, 67. So what we have been saying last couple of years as we would expected just try to make steady incremental progress on the fundamentals right up and down the P&L, and on the balance sheet too by the way which we have. But I mean first of all you have to believe that we can grow sales, right. Sale is what drives dollars and you have to believe in our competitive position and things that we are seeing to continue to deliver dollars there.

The expense this when I hope is not a question anymore because we have been 8,10,11,12 quarters of consistent leverage on the sales even in slower comp times. So I think we can make the case that we got the disciplined in place now around the DSEs, that’s been pretty consistent behavior. And I think we have made the adjustment there. The G&A little less so because we have been making some selective investment particularly in technology which is I told from this morning.

We’d hope maybe in the next start breaking that up for you, so you could have some visibility into that. I think that’s a very important – for sure have been a very important juncture here with companies where you’ve got to make some decisions about your systems, but also your customer facing system, and you should have – you guys should have a right to say, what are you doing, what’s the return on those, how are you thinking about it. So, I don’t expect to see as much leverage in that line as you might like to see just on a normal basis, because for the reason.

So, but you also see us working cost to good and shrink, a lot of the improvement, last year we really picked up some good stuff on the buy side of the business, on the distribution side of the business. And so in many ways we’re lot younger than some of these other companies that you looked at, because we started out by building stores first and we’re kind of backing into systems to support that, if you will we kind of went store first and systems back.

So, our distribution network for example is in place to serve a thousand stores. We don’t have any more investments to make. We got capacity there that can grow into. Our arrangement with UNFI is a – it continues to improve on a basis point as we grow business, our cost come down incrementally.

And we’ve got some fine systems in place that allows to find some gains there. So, you see us working aggressively on cost to goods and also to shrink control. I think, we has been part of this success with the gross margin last couple of years as the offset to the price investment.

Shane Higgins – Deutsche Bank

Okay, great. And what about like on the labor side. I mean, are there any major -obviously, you’ve got the affordable Care Act kicking in. Do you see any headwinds, and how you guys kind of thinking about managing those expenses. Obviously, you guys are very motivated, team members are very loyal, you want to compensate your associates well. How are you guys balancing these different demands, and how are you guys mitigating the cost increases from the healthcare cost and the new legislation?

Walter Robb

Yeah. Well, first of all healthcare cost are baked into 2013 numbers, what you have is already got that in there. I mean medical complexion about a couple of years really hasn’t been much of a factor and we’ve also have done two things. One, we have a – we do a board every two years our team members to select the plan. We put the dollars on the pie and they select and they also – we have the mechanism there to be able to adjust based on the run rate of the plan. We’ve had some very good success.

And so we have some ability to control those. We also have our efforts in immersion and preventive care that we offer our team members, we can – they’ve got, there is an increasing discount program based on their metrics, which we pay for biometrics screening for them every year. If they get, they can go 22%, 25%, 27%, 30% discount. We also offer week on emergence for our safest team members where we pay for them to go, selective only by the (inaudible) our partner. And so we have those things which were slowly building a culture of wellness, a self responsibility the Whole Foods, which we thinks access a balance to these things that drop there in the world.

That being said, I mean, 2014 the rules are not written. We’re adding more coverage’s. There is some stuff to navigate there. We haven’t released 2014 numbers. I mean, I think its manageable, but it is going to have businesses, we’re going to have beyond just the Affordable Care Act, even if you look at what’s happening in the marketplace with the health care spend in the formation of the ACOs. And you’re going to see businesses started find out ways I think to narrow coverage’s or give the team members more choices to get more bank to the bucks.

So I think the healthcare market place is fundamentally and changing, as we speak. And it’s not just because of the Obamacare because of the economic push I think.

Shane Higgins – Deutsche Bank

Okay.

Walter Robb

So but we’re good for ‘13 and I think we’re – we’ll have more to say about ‘14, I think we’re okay.

Shane Higgins – Deutsche Bank

Okay. Great.

Walter Robb

One thing about Whole Foods is we already do this. So we need mandate. We’ve been covering our folks with sort of 75% our folks are full time. We’ve already been provided the healthcare coverage for them. So it’s not a big change in some respects for us it is for some other companies.

Shane Higgins – Deutsche Bank

Okay. Okay. Great. And now just looking at your development and clearly you guys have a nice runway for growth over the next several years. You opened 10 stores in the quarter, which I believe was a record for you guys.

Walter Robb

10 stores and also one in three countries.

Shane Higgins – Deutsche Bank

Three countries. Right.

Walter Robb

So I never said Whole Food. It’s a joke.

Shane Higgins – Deutsche Bank

RRIC has been strong and obviously that’s a metric we are all very – we are watching very closely. You know what’s really been driving the improvement in new stores returns that you guys have been seeing. I mean – and if you could speak to that a little bit and kind of where you see that maybe going over the next year or two?

Walter Robb

Again, as I have said to some of you this morning, I give the investment community a lot of credit for this because one of the persistent themes a few years ago was you guys are not generating the returns I think that are appropriate for a company. And I think you were right. I think it was that feedback, along with the experience of the recession, where we had to go back and cut our store growth back and really look at every part of our business. And then what came out of that was, I think, a more mature philosophy of saying the right size store, the right amount of capital and that has led to in the right market and that has led to, I think, a more, what you will call, a seasoned real estate formula, which has put us on a path to – you know we have taken our return on invested capital from sort of 6 or 7 up to sort of 13, 14.

I would like us to see, assuming there is no big capital thing, somewhere around 15 is probably a pretty good standard and I think it is a more responsible standard of capital management. So I think that’s been the biggest thing, as just realizing we needed to build the stores for less money. We needed to make sure we were spending the right amount of money in a particular market where it had certain sales potential. And then second, we just needed to manage capital better. We needed to more thoughtful about how we use – capital is not free, we were sort of acting like, it was free, it’s not free. It’s got a cost to it. And switching to the EVA model, that’s help us to do that, but I think just really focusing on it feel thing about that what’s the measure you get.

And we just started talking about and the dialogue with the regional precedence. We started putting a metric to measure their performance around that. We started having their performance be relevant in their approvals for real estate. It became part of the conversation as how you managing capital and that’s all I think the improvement there I saw.

Shane Higgins – Deutsche Bank

Great. I mean, you guys – I think you’ve talk about this before, but you guys really haven’t saturated in any of your markets. So, really comes up that new store growth has impacted IDE sales really at all?

Cindy McCann

How do I tell you this? I mean, I think we look out and see a world of opportunity right now, wider, deeper than ever before. There’s simply no market were in that it’s closer to saturation, even Boston more arguably we are and we’ve been here for long time. We just bought the Johnnie’s Foodmasters. We start rolling those out and we have new stores going and there is just – I mean, we’re 346 stores but not that big, relative to the size of this country.

And – so we can easily see the roadmap to a 1,000 stores, that’s triple the number of stores we have right now without even breaking a sweat. The question is how fast you want to do it. But we have 85 leases already signed in the banks to our growth for the next three years is in place. So we’re in a good place and I just – I think it’s a range of markets. It’s a range of opportunities, flagships to the midsize markets. It’s all there for us to do. It’s just a matter can we do it and do it sustainable.

Shane Higgins – Deutsche Bank

Yes. Now you guys have – I think you’ve signed 48 leases in the last 12 months or so.

Walter Robb

Right.

Shane Higgins – Deutsche Bank

You guys think you could actually open 50 stores a year at that point?

Walter Robb

Yes. I do, I mean, this next year we said 35 to 38 and so that 40 is just around the corner there. We have 12 operating regions that they all did four, here we closely at 50. So clearly we can do it. The question is this rate that we’re on right now that we’ve given you for this year and next year is what we’ve all collectively agree is a sustainable run rate, but we’re knocking on the door of 40 by the end of next year. And so, I do think it’s possible. I do think it’s possible, yeah.

Shane Higgins – Deutsche Bank

I guess, I’ll open up the floor to questions. At this point if anyone’s got any?

Question-and-Answer Session

Unidentified Analyst

Hi. Is there a historical relationship between price investment – mode of price investment and graphic or comp? And in terms of both, how long it takes but also the magnitude. It’s seems like with all the social stuff, you have some new channels and may be get the message out more quickly and efficiently. Just wondering how you think about the...

Walter Robb

Yeah.

Unidentified Analyst

Conversion?

Walter Robb

You’re right. Well, it’s a little bit inexact because there is a lag period on price investments that – generally our experience is there’s a lag of six months to 12 months, depending on the situation and market, the competitor, that sort of thing. So your question is really what’s the correlation or what’s the lag. The lag, yeah.

Ultimately, what you do is you’re measuring your comps with sales and we’re measuring it not just by the company, we’re measuring obviously by individual stores and by metros and by regions and that’s where we’re correlating the investments versus the returns and the performance.

The numbers we give you are across the board, right. So we didn’t think they were working. We wouldn’t keep on doing it. I mean comp rate for this company is 8% historically. And I don’t see any reason why that wouldn’t be a – in the long term, I’m not saying anything about where comps are right now, just wouldn’t be a very reasonable run rate for Whole Foods to stay at that rate.

And so the thing would be to balance the price investments that are necessary to make sure that we’re continuing to achieve that sort of a run rate.

Unidentified Analyst

Thank you. From a late person’s perspective, it seems there is a real wide space to capitalize directly on an awareness campaign that’s incarnate all across the country, how should I think about the opportunities...

Walter Robb

An awareness of...

Unidentified Analyst

Healthy eating, healthy life style, it’s just about everywhere. How should I think about the opportunities you’ve outlined with your current footprint against generating returns on possibly a lower margin type of concept of broader phase as that awareness grows?

Walter Robb

Well, you can argue what’s the best way to take advantage of an opportunity, I would argue that the way that we’re doing it in terms of growing our former stores more quickly and in more markets is the right way of course to do. I mean focus is really important in retail, in the competitive marketplace, and we start getting into places where we’re just about price we’d be getting away from our mission as a company and what we know how to do really well.

The opportunity is there, we get opportunities all day long to do this and do that and all over the world. But I guess what we’ve chosen to do is just say to you we think the best way for Whole Foods to grow is to grow, is to start stepping up the growth, we probably know how to do range of size, right. So, 25,000, or we have the 70 or 80,000 per feet, we think we can just keep accelerating square footage growth, and that’s the best way for us to look, to deliver against the opportunity.

So, maybe I’ll just leave it there. I just don’t think we have done some work around, we have modeled some stores that are lower label, lower margin to put in certain urban markets, or I think there is some potential there. And you will see us do some experiments around that, just to see what that looks like. But right now there is so much opportunity with what we are already doing and that’s – so when you have that in front of you, why wouldn’t you just press on and do that is sort of the thinking.

Unidentified Analyst

Getting back to gross margin as an opportunity, could you talk about that in a little more detail for example how does that pertain to the prepared food section that is so important to you versus packaged or versus fresh on the parameter, does it mean bringing more value in for the same price thereby perhaps taking a lower margin or are you simply talking about the price part of the equation?

Walter Robb

I’ll try to answer your question, to make sure I understand that. First of all you would say prepared piece is so important to us, I don’t want you to extrapolate any percentage of store sales there because we don’t provide those and I wouldn’t – it’s invisible part of our business, I wouldn’t say we are dependent on that part of our business, so just to put that in perspective but what do you mean these investments are a combination of lower pricing or competitive pricing as well as promotions and promotions of different sorts, so for example in prepared foods, what you would see is you will see a, you see some new under $10 options, soup and sandwich, these sorts of combinations, they should be more visible to you as we make some of those sorts of adjustments.

And those adjustments were made – some of those adjustments were made on a regional basis in quick casual right now if you are watching the restaurant world, you are seeing a lot more choices emerge in the sort of $10 vendor. We need to be able to be responsible with that and give customers those choices. So that’s what you would see along with the fact that I think our salad bars are second to none.

If you compare our salad bar, you are going to see things on it that you just can’t find anywhere else and so there is less of a price sensitivity there they would say in some of the pre tax options. But the other thing is that promos, you are going to see us, I’d say historically we were sort of around 12% in promotions. I think you can see us moving towards 14%, 15% in promotions, and we are able to track that pretty well. And now we are going to use those more aggressively, whether it’s a one day sale or three day sale. The early bird special turns out to be a great thing. People want to come and you want to give them the whole fish for five bucks or something between 9 and 11, they’ll come in buy it, and you get it out on social media and that’s very effective.

And so, I think it’s a combination of both the price points as well the promotional and there won’t be disproportionate for us, it will be an approach like that across the whole store where it’s needed and selectively done. Does that answer your question?

And we’ll take one more.

Unidentified Analyst

Whose is your toughest competitor and what kind of price differentials do you believe are reasonable to maintain versus that toughest competitor?

Walter Robb

You know the toughest competitor, I was the toughest competitor the best competitor we have across a number of countries is Trader Joe’s. They are actually larger than Whole Foods and if you know you guys kind of give him the past. They don’t have public, right and they have more stores than we do although they are smaller, so we compete with them in more markets across the country than anyone else. But at this point we know each other pretty well, we take, they take and we’re pretty much and like Adams we are committed to matching them. We are matching them like Adams for like Adams. So we are not going to give them any ground on that or like Adams.

On a regional basis just taking I know you take something like a Veg Manchurian, in this part of the world they are very good. And I don’t think you can go much more than a 10% gap and do sustainable. And when you get into perishables there is real quality differences, so then it gets new in terms of the conservation but beyond that – for like item I think you got to be pretty close, getting pretty close.

Unidentified Analyst

And your legacy place store?

Walter Robb

What’s that?

Unidentified Analyst

I said a little about half way between the –

Walter Robb

So we’re going to be scrapping your new business.

Unidentified Analyst

Okay. Good.

Walter Robb

Yeah. It’s going to be a good one to watch – good one to watch.

Shane Higgins – Deutsche Bank

All right. Great. Well, thanks a lot Walter. We really appreciate it. Thank you.