WHOLE FOODS: EARNINGS LAGGING SALES GROWTH

AUSTIN, Texas -- Whole Foods Market here believes its best years lie ahead of it, though earnings growth could trail sales growth while a spate of new stores matures, John Mackey, chairman, president and chief executive officer, told industry analysts last week."We believe the best is yet to come as the Whole Foods Market brand continues to strengthen and as we open bigger and better new stores at

AUSTIN, Texas -- Whole Foods Market here believes its best years lie ahead of it, though earnings growth could trail sales growth while a spate of new stores matures, John Mackey, chairman, president and chief executive officer, told industry analysts last week.

"We believe the best is yet to come as the Whole Foods Market brand continues to strengthen and as we open bigger and better new stores at an accelerated rate in the years ahead," he said.

"For fiscal 2005, we are facing difficult comparisons due to the above-average results we have produced so far this year," he said. "In addition, our diluted earnings-per-share growth could be lower than our sales growth due to an expected acceleration in square-footage growth, which would result in higher pre-opening expense and could have some negative impact on store contribution as new stores generally have lower gross margins and higher direct store expenses than more mature stores."

Investors sent the company's stock, one of the top performers in the industry lately, tumbling nearly 6% on the day after the earnings announcement as net income fell short of analysts' projections.

Mackey said the company is projecting sales and earnings growth of 15% to 20% next year, in line with the company's long-term goals. "However, we are entering a rapid-growth phase, and it will be apparent to the investment community that we will continue to be profitable, but not as profitable as we will be as those stores mature," he pointed out.

He said Whole Foods expects to open 13 new stores this year -- including nine already open -- to bring its total to 164 and to increase square footage 15% annually for the next decade. New stores, which are running 50,000 to 60,000 square feet, are averaging $595,000 in weekly sales, he noted.

"We believe our strong results are due in part to the growing equity of the Whole Foods Market brand and demonstrate the tremendous growth opportunities that lie ahead for our company," Mackey said.

Sales for the 12-week third quarter rose 22.5% to $917.4 million, and comparable-store sales rose 14.1%, while net income jumped 14.7% to $32.9 million. For the 40-week, year-to-date period, sales were up 22.5% to $2.9 billion, comps rose 15.2%, and net income increased 33.8% to $106.9 million -- more than the company earned in all of the previous fiscal year, Mackey pointed out.

"It's hard for our management team not to be euphoric" about comp increases of 14% (without the influence of the strike in Southern California that boosted second-quarter comps above 17%), Mackey said.

However, it's becoming harder to quantify the impact of the post-strike environment on business, he added. "We haven't seen any real erosion in our Southern California sales, but the strike impact is just a small part of our overall performance, and we'd like to stop talking about it," he said.

Mackey said the company has boosted its earnings guidance for the current year to the high end of $2.03 to $2.10 per share -- an increase of 15 cents per share over the guidance it offered a year ago, he noted -- "and we are still expecting a year of solid growth in fiscal 2005, with sales and earnings growth of 15% to 20%, despite the difficulty of comparing it to one of the best years in our company's history."

With regard to Fresh & Wild, the London-based store group Whole Foods acquired earlier this year, Mackey said, "There's been some skepticism that we can find large store sites in London, but that skepticism will prove to be incorrect. We hope to announce within the next two quarters our plans to build large stores in the United Kingdom market."

In response to a question, Mackey said Whole Foods does not track inflation. "If the cost of goods goes up, we will likely pass it on to customers, depending on market condition," he explained.

3RD-QUARTER RESULTS

Qtr Ended: 7/4/04; 7/6/03

Sales: $917.4 million; $749.0 million

Change: +22.5%

Comp-store: +14.1%

Net Income: $32.9 million; $28.7 million

Change: +14.7%

Inc/Share: 50 cents; 45 cents

40 Weeks: 2004; 2003

Sales: $2.9 billion; $2.4 billion

Change: +22.5%

Comp-store: +15.2%

Net Income: $107.0 million; $79.9 million

Change: +33.8%

Inc/Share: $1.64; $1.28