WHOLE FOODS EYES U.K. SITES

AUSTIN, Texas -- Whole Foods Market here said last week it is close to announcing its first large-scale site in central London as the company reported double-digit growth in sales and earnings for its fiscal year ended Sept. 26.A.C. Gallo, co-president of the company, said in a conference call discussing year-end results that Whole Foods is "working on a number of locations" in London and hopes to

AUSTIN, Texas -- Whole Foods Market here said last week it is close to announcing its first large-scale site in central London as the company reported double-digit growth in sales and earnings for its fiscal year ended Sept. 26.

A.C. Gallo, co-president of the company, said in a conference call discussing year-end results that Whole Foods is "working on a number of locations" in London and hopes to announce its first large store in central London soon.

Whole Foods acquired seven London-based Fresh & Wild stores earlier this year -- small natural-food stores covering only 5,000 to 7,000 square feet -- that will serve as its base in the United Kingdom.

Gallo said the Fresh & Wild stores are performing well, "and sales are very robust. We're encouraged by the viability for large Whole Foods stores there in the future. We've had several of our key executives working with the people there to develop leadership teams, so they'll be ready for when we open our first large store."

In terms of financial results, fiscal 2004 was a strong year, according to John Mackey, chairman and chief executive officer.

"In a year that has been challenging for most food retailers," Mackey said, "Whole Foods [showed] strength across all regions, all departments and all age classes of stores."

He said 84% of Whole Foods' stores set weekly sales records, with sales per gross square foot climbing nearly 10% to $786, compared with $716 a year ago. "Even stores over eight years old produced double-digit comps," he noted.

The 12 stores that opened during the fiscal year were the company's best yet, Mackey pointed out, "producing average weekly sales of $575,000."

Sales for the year increased 22.8%, to $3.9 billion, and comps rose 14.9% -- a record level, Mackey said. Net income jumped 32.2%, to $137.1 million. For the 12-week fourth quarter, sales were up 23.5%, to $927.3 million; comps climbed 14%, while net income increased 26.9%, to $30.2 million.

Gross margins of 34.7% were consistent with previous quarters, Mackey said, adding he doesn't expect margins to vary much over time. "We run our business to achieve long-term shareholder value. We want to stay within the same margin range consistently," he explained.

"With comps approaching 15%, we could be greedy and take a higher gross margin, but that's not our business model. If the gross goes up, we'll cut prices. Our pricing strategy continues to be market-driven. Our consistently robust sales, comps and gross margins would seem to indicate we are striking the right balance."

The strength of fiscal 2004 will result in difficult comparisons for fiscal 2005, Mackey pointed out. However, he said Whole Foods still expects sales to grow 15% to 20%, and comp sales to grow 8% to 10%.

"But we really don't know what comps will be. No one does," Mackey told analysts. "The investment community builds models and wants guidance, so we hypothesize. We don't know what the future holds, and we don't take these projections nearly as seriously as others do. We're not trying to run the business that way. We simply try to give customers a good experience, and make sure our team members feel fulfilled in their work. By doing that, the sales and earnings growth follow."

Analysts offered different perspectives on Whole Foods' guidance.

Robert T. Campagnino, an analyst with Prudential Equity Group, New York, said he is optimistic, noting that he anticipates sales growth of 20.6% to $4.7 billion in 2005 -- a projection slightly above the company's guidance of 15% to 20% growth.

He also acknowledged he had been projecting comp-store growth of 7% in 2005 -- below the company's guidance of 8% to 10% growth. However, Campagnino said he expects Whole Foods to face particularly difficult comparisons in the second quarter, when it goes against a comp of 17.1% in last year's second quarter, which was boosted in large part by a pickup in Southern California during the strike-lockout there.

Campagnino said he is sticking with his forecast on gross margin of 34.9% "[because Whole Foods] has plenty of leverage given industry-leading comps, plenty of flexibility given an increasingly diverse private-label program, and the ability to pass through extraordinary shifts to a customer base that is not particularly cost-sensitive."

Steve Chick, an analyst with JPMorgan, New York, was more skeptical about Whole Foods' projections.

He said company guidance of 8% to 10% increases in comp-store sales "looks robust, given year-over-year comparisons, and seems extraordinary." Further, "the math behind the chain's 15% to 20% total sales growth guidance for fiscal 2005 is loose, based on targeted square-footage growth of 15%, new-store productivity assumptions, and 8% to 10% comp guidance."

Although the development pipeline looks healthy, with 53 signed leases, "management needs to execute by accelerating its rollout of physical openings from its first-quarter guidance, which includes only three new stores," Chick added.

Mackey said the company will invest $300 million to $320 million in capital expenditures next year to open 15 to 18 new stores, including three relocations. Whole Foods will enter one new market next year -- Greenville, S.C. -- Walter Robb, co-president, said. "We're expanding in major metropolitan markets, adding density and moving into more remote areas."

Of 53 stores in the development pipeline, 21 are in new markets, Robb noted, and 22 will compete directly with Wild Oats.

Private-label lines at Whole Foods have achieved a 15% penetration, with a goal of 20%, Lee Valkenaar, executive vice president, retail support, said. He said the company launched a line of Whole Body private-label products in September into departments that did not previously have private label. "During the last week of the quarter, we had 1,000 [private-label] products in movement," he said.

In response to a question, Mackey said Whole Foods doesn't necessarily use private label to build margins. "Our 365 line is targeted to build our value image, not to improve gross margin," he explained.

4TH-QUARTER RESULTS

Qtr Ended: 9/26/04; 9/28/03

Sales: $927.3 million; $750.7 million

Change: +23.5%

Comp-store: +14.0%

Net Income: $30.2 million; $23.8 million

Change: +26.9%

Inc/Share: 46 cents; 38 cents

52 Weeks: 2004; 2003

Sales: $3.9 billion; $3.1 billion

Change: +22.8%

Comp-store: +14.9%

Net Income: $137.1 million; $103.7 million

Change: +32.2%

Inc/Share: $2.09; $1.66