Whole Foods' net falls, but tops estimates


POSTED: Thursday, February 19, 2009

PORTLAND, Ore. » Whole Foods Market Inc. reported yesterday a 29 percent drop in fiscal first-quarter profit, mainly due to legal costs, but the results beat Wall Street expectations and the organic grocer's revised outlook also topped projections.

The Austin, Texas-based company said its profit after paying preferred dividends slipped to $27.8 million, or 20 cents a share, compared with $39.1 million, or 28 cents a share, last year. The latest quarter included $11 million, or 5 cents a share, in legal costs related to its acquisition of grocer Wild Oats which has run into trouble with the Federal Trade Commission.

Sales edged up to $2.47 billion from $2.46 billion a year earlier. However, sales at stores open at least a year, a key indicator of a retailer's health, slipped 4 percent. Excluding the effects of the stronger dollar, Whole Foods' same-store sales fell 3.4 percent.

The company's profit beat analysts' average estimate of 15 cents a share, according to a Thomson Reuters poll, while sales were slightly shy of Wall Street's $2.49 billion forecast.

Whole Foods, which opened its first Hawaii store at Kahala Mall in September 2008, plans to open three more in the isles over the next two years - at Maui Mall, Ward Centers, and Kailua.

But the chain nationwide has been battered by the recession as cost-conscious shoppers move away from high-end grocers and trade down from pricey organics. The value of the company's shares have fallen nearly 75 percent in the past 52 weeks. But management said the company's decision this summer to cut costs and capital spending and make changes in its stores has helped it manage through the difficult economy.

“;We are demonstrating we can operationally adjust to lower sales volumes and believe that this flexibility, combined with our improved balance sheet, will enable us to emerge stronger and better-positioned over the long term,”; Whole Foods Chief Executive John Mackey said.

The grocery chain said it saw the biggest challenges in regions with high foreclosure and unemployment numbers, but management is optimistic about sales in some other markets given the economic pressures. Whole Foods has increased its lower-priced offerings in stores, private-label product lines, coupons and other value-related marketing to draw shoppers.

“;While it is obviously still too early to say our sales are stabilizing, we are encouraged by these trends,”; Mackey said.

The biggest changes though, were operational. Whole Foods recently got $413 million in additional capital through a private equity investment. Cost-cutting measures - including eliminating 306 positions, slowing new store growth and managing leases and suspending its cash dividend - have improved the company's cash position.

Whole Foods has $273 million in cash and cash equivalents on hand.

Piper Jaffray analyst Nicole Miller Regan said in a research note that in the long term she expects Whole Foods' investments in its infrastructure to generate earnings growth. But she maintained a “;neutral”; rating given macroeconomic challenges, the impact of slow same-store sales and the company's growth plans in the United Kingdom.

Whole Foods did recognize the continued pressure of the economy as it lowered its earnings guidance for 2009, its second reduction in full-year expectations.

Whole Foods had said it would not offer same-store sales forecasts given the uncertainty in the economy. But in terms of profit, it now expects to earn 71 to 76 cents a share for the year, including legal costs, below its prior estimated range of 95 cents to $1 a share. Sales are projected at $8.3 billion, driven by the opening of 15 new stores.

The outlook is still well above the 66-cents-a-share profit and $8.19 billion worth of sales that analysts have forecast, on average.