WHOLE FOODS CHOOSING UNIT GROWTH OVER STRONG PROFITS FOR NEAR TERM

NEW YORK -- Whole Foods Market, Austin, Texas, will sacrifice strong earnings for the near term in pursuit of rapid unit growth, according to John Mackey, chairman and chief executive officer.Mackey told an investors conference here that the 41-store natural food retailer's goal of opening 100 units by the end of the decade will continue to blunt earnings growth. Sales continue to be strong but earnings

NEW YORK -- Whole Foods Market, Austin, Texas, will sacrifice strong earnings for the near term in pursuit of rapid unit growth, according to John Mackey, chairman and chief executive officer.

Mackey told an investors conference here that the 41-store natural food retailer's goal of opening 100 units by the end of the decade will continue to blunt earnings growth. Sales continue to be strong but earnings remain far below the chain's potential, according to analysts.

"Whole Foods can produce very rapid [unit] growth or it can produce very rapid earnings growth and we're choosing [unit] growth for the time being," Mackey said at the Consumer & Special Situations Conference, sponsored by San Francisco-based Robertson Stephens & Co. "I think our earnings are going to lag a little bit behind until the [unit] growth slows down."

For the most recent third quarter, earnings were down 54.5% to $1 million but sales were up 23.1% to $119.9 million.

Mackey briefly discussed a plan for improving the company's performance. The plan includes staying on the look-out for future acquisition possibilities, boosting gross margins by strengthening private-label programs and national purchasing initiatives, and increasing operating efficiencies and sales per square foot.

Moreover, Whole Foods executives are banking on their expanded store format and the growth of the natural foods industry to boost earnings.

While Whole Foods stores currently average 21,000 square feet, new stores will run in the 30,000- to 40,000-square-foot range with

"intensified" perishables sections, Mackey said.

Store growth by the company mirrors the growth in the natural foods industry, which has seen roughly 12% sales increases annually since 1989. Mackey estimated that total industry sales last year were $7.5 billion.

Nevertheless, only about 60 of the 5,000 natural food stores throughout the country are larger than 10,000 square feet, Mackey said. Most of those units are operated by the chain's three major natural foods competitors: Fresh Fields, Rockville, Md.; Wild Oats Markets, Boulder, Colo., and Alfalfa's Market, also in Boulder.

"The large supermarket format is by far the most growing [format in the natural foods industry]. It's the section of the industry that is fueling the industry to growth. This is where the future of the industry lies and Whole Foods is the dominant player in that category," said Mackey.

Ed Weller, managing director of Robertson Stephens, said if it weren't for Whole Foods' borrowing, it would probably earn 90 cents per share for the year. For the first three quarters of this year, the company has earned 42 cents a share.

One factor directly affecting the company's bottom line is the turnaround time for new stores, Mackey said. New stores do not enter into profitability until their second year. At that point, comparable-store sales peak at an average of 26% and although comps decline in the following years, they still average 12% in the fifth year.

Moreover, the company is facing a variety of earnings challenges, according to Glenda Flanagan, chief financial officer. They include the cannibalization of existing stores in the Dallas market when two new stores were added, union picketing and road construction in front of a store in St. Paul, Minn., and higher interest expenses.

"Virtually without exception -- and [the situation in] Dallas being the exception -- the stores in the comp base are producing a higher percentage of sales and profits than they did in the prior year and I believe that's a very key statistic," Flanagan said.

"We ought to end the year with just over $490 million in sales, which is about a 28% annual growth rate for the last five years."