MARGIN GAINS SPARK EARNINGS JUMP FOR WILD OATS

BOULDER, Colo. - Sales of vitamins and supplements helped Wild Oats Markets to post healthy sales and profits during its fiscal first quarter.The retailer, based here, used promotions in its holistic health department to draw more shoppers to stores during the quarter, which ended April 1. Those customers made purchases in other departments, driving sales and higher profits, said Perry Odak, chief

BOULDER, Colo. - Sales of vitamins and supplements helped Wild Oats Markets to post healthy sales and profits during its fiscal first quarter.

The retailer, based here, used promotions in its holistic health department to draw more shoppers to stores during the quarter, which ended April 1. Those customers made purchases in other departments, driving sales and higher profits, said Perry Odak, chief executive officer, in a conference call with analysts. A favorable comparison against new store openings in the prior period also drove better margins.

Promoting vitamins and supplements, Odak said, was an effective tactic but not without risk.

"We have always been worried if you promoted [vitamins and supplements], people would load up and not reload for months, which would cause sales to fall off in the following months," Odak explained. "What we have found is that that doesn't happen. It actually helps bring other traffic to the store, and when we run that promotion, we don't have to be as heavily promotionally oriented in the rest of the store."

He said the company would use similar promotions in the future as Wild Oats attempts to balance sales growth and margin expansion. Holistic health products comprise about 18% of overall sales at Wild Oats, he said.

While gross margins increased 1.76%, or to 30.6% of sales, Odak predicted that rate would be difficult to maintain as more competitors enter the natural and organic foods field and the company deals with a busier pace of store openings for the remainder of the fiscal year. Margins for the year, he said, would be around the company's previous estimate of 30%.

New stores in the Wild Oats chain tend to depress overall margins because they have less leverage and put a greater emphasis on promotions to draw awareness, Odak said. The company recorded just one new opening in the first quarter against four in the first quarter a year ago, accounting for nearly half the gross-margin improvement.

But new stores also improve overall comparable-store sales when they join the base, Odak explained, saying he expects the addition of newer stores - particularly a recently opened location in Tampa, Fla., and a new prototype set to open early in 2007 in Boulder - to help raise comps to a level "in line with the average in the industry." Wild Oats reported comps of 4.1% during the first quarter.

Odak predicted that competition from additional channels of trade entering the natural and organic market, and associated promotions, would hurt margins in the short run, "but will help our stores in the long run," by introducing more consumers to the natural food market.

Odak called the company's two most recent store openings - a Henry's Farmers Market in Carlsbad, Calif., and a second in Tampa - "the best in the company's history for their respective formats." Wild Oats is preparing to open a new store in Vancouver, British Columbia, under the Capers name in an urban mixed-use project. "We expect to develop more stores in these types of mixed-use developments," he said.

Wild Oats signed 15 leases or letters of intent to open new stores in 2006 and 2007, and could accelerate the store-opening pace through the acquisition of retail properties for sale by Albertsons or Winn-Dixie Stores, Odak said. The company closed two stores during the first quarter, and still has "between 15 and 20" locations that need to be closed or relocated, Odak said.

Odak said Wild Oats has had a "soft opening" offering its private-label products for sale over Amazon.com. He said he was in discussion with Peapod.com about expanding its offerings beyond the Chicago area.

Quarterly sales of $298.4 million increased by 7.3%. Net earnings of $2.9 million, or 10 cents per share, improved from a loss of $1.2 million, or 4 cents per share, in the same period a year ago. Analysts expected earnings this quarter of 4 cents, according to Reuters.

Adjusted EBITDA increased 38.8% to $13.6 million, or 4.6% of sales, due to more profitable sales and better expense leverage due to higher sales, Bob Dimond, chief financial officer, said.

1ST-QUARTER RESULTS

Qtr Ended: 4/1/06; 4/2/05

Sales: $298.4 million; $278.1 million

Change: +7.3%

Comp-store: +4.1%

Net Income (Loss): $2.9 million; ($1.2 million)

Change: N/A

Inc/Share: 10 cents; (4 cents)