AUSTIN, Texas — “Wow!”
That was the reaction of one analyst, Scott Mushkin of Jefferies, upon reviewing second-quarter figures from Whole Foods Market  last week. The natural and organic grocer, which has been known to post eye-popping sales figures, combined that with profits that exceeded most expectations, achieved as a result of increased sales leverage, better cost and shrink controls, and a growing base of smaller, more productive stores.
“After covering this company for the past decade, we never thought we would see an operating margin at the 7.1% level,” Mushkin wrote in a research note last week. Net earnings of $117.7 million, or 64 cents per share, exceeded consensus estimates of 59 cents. Earnings were up by 31% while net sales of $2.7 billion increased 14% on a 9.5% increase in comparable-store sales.
John Mackey , Whole Foods co-founder and co-chief executive officer, called the quarter, which ended March 29, “the best results in our company’s 32-year history.” Whole Foods subsequently improved its outlook for the fiscal year and is now expecting sales growth in the range of 14.8% to 15.6%, up from 13.5%-15%.
Mackey said a more sophisticated approach to cost control intersected with strong sales trends and declining inflation to boost profits. Gross profit totaled 36.4% of sales, up by 70 basis points as compared to the same period last year.
“Our robust sales and outstanding execution, along with moderating inflation, helped generate exceptional margin performance for the quarter,” he said in a conference call. “We have better tools and access to better data, which are resulting in a much higher level of sophistication in purchasing, inventory management, particularly shrink control, as well as pricing management and optimization.”
Stores used smaller displays of produce and new tracking methods to reduce shrink, said David Lannon, executive vice president of operations. Higher sales also contributed to less waste.
“About half the company now is scanning in shrink, so there’s a huge focus at the regional level on shrink reduction,” Lannon said. “We’re also working on techniques to display our products with less products — still abundantly, but with less loss in general. And then store ops, which is our in-house program to really evaluate our purchases, is top of mind for all of our retailers in all of the stores.”
“Clearly the Whole Foods brand continues to attract new shoppers while its store managers have delivered merchandising and operational leverage,” Andrew Wolf, an analyst at BB&T Capital Markets, Richmond, Va., said in a research note.
Smaller, more productive new stores are also helping to improve financial performance at Whole Foods. The new class of stores, averaging 38,000 square feet, is 14% smaller than the year-ago class but showing a 23% improvement in sales per-square-foot and a 3.4% increase in margin contribution, Wolf noted. Whole Foods plans to open between 22 and 26 new stores this year.