Whole Foods FY 3Q16 Earnings Call Notes

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Whole Foods Market (WFM) Walter Robb on Q3 2016 Results

Value continues to negatively impact comps and GM

“While our value strategy is continuing to negatively impact comps and gross margin, we are seeing a broad-based lift in items per basket and are encouraged with improving traffic trends in certain key departments, particularly produce.”

Greater than expected health care costs resulted in SG&A deleverage

“greater-than-expected healthcare costs and lower-than-forecast sales resulted in SG&A deleverage. Our catastrophic claims and costs for certain new prescription medicines were above forecast and, while we are working to reverse these trends, these higher costs are expected to continue in the short-term.”

Expecting EPS of 23c for 4Q

“If comps are in line with the negative 2.4% we have reported quarter to-date and healthcare cost continue – the trends continue, we would expect sales growth of approximately 2% and diluted earnings per share of $0.23 to $0.24 for the quarter.”

Strategy is to adjust our operating model to a lower margin model

“our strategy is to adjust our operating model to a lower margin and lower cost structure. Every major conversation we’ve had about investments in pricing, technology and marketing is accompanied by a conversation about lowering our cost structure through enhanced technology tools, labor restructuring, and work process changes.”

David Lannon – Executive Vice President, Operations

Customers have accepted 365 design as a new brand

“customers have really accepted kind of this new design. It’s a fresh look. It’s a fresh feel. They’re kind of accepting it as a brand new brand. And just lots of kind of – even though it’s a value brand, it’s still a really fun place to shop.”

John P. Mackey – Co-Chief Executive Officer, Co-Founder and Director

Happy about our initial start with 365

Yeah, thanks Walter. I think we’ll have a lot more to say about 365 when we get into our Q4 call in November. We’re very happy with the initial start of the first couple of stores. We’re very happy with the way it came out. We think we’ve created a very successful new business model, which we’re going to expand rapidly. And we’ll have more information about that next quarter.

It’s not a secret that there are a lot of competitors out there

” competition, I mean it’s not a big secret, is it? There’s a lot more competitors in the marketplace and there’s a lot of new formats in the marketplace, from home meal replacement to meal kits, fast casual restaurant growth. More entrants in the natural and organic food space. The mainstreaming of natural organic, which has been well reported. These are all factors.”

People aren’t driving as far to get to WFM

“Whole Foods Market being the leader, having very high sales per square foot. We probably feel the brunt of it, as there’s a bit of a regression to the mean as we lose customers from a convenience standpoint. People don’t drive as far as they used to drive, because there’s good enough alternatives in many cases close by to them. So people may not be driving as frequently as far as they used to, because they can stop by a Kroger or an HEB or a Wegmans to get products that they can use to only be able to get Whole Foods. Now there’s some overlap in our product base and other competitors. So, I think there’s no sense in denying it. Competition is bigger and we’re responding to it as we think an intelligent measured way. And we still remain very bullish about our future prospects.”

We keep opening stores

“I mean, one thing’s probably continues to be underreported is we keep opening a lot of great stores. Just yesterday, we opened up two flagship stores that are just kicking butt. They’re just amazing stores. They’re awesome stores that are doing huge sales and they’re going to be very profitable for us.”

A.C. Gallo – President & Chief Operating Officer

Overall slight deflation in costs

“Hi. A.C. here. Absolutely. I’d say overall, we were pretty flat to slight deflation in costs this quarter. And where we saw the most deflation in terms of our retail prices were in produce. As we mentioned, that’s where our biggest investments have been. In meat, we saw a little bit of deflation as well. A little bit of deflation in beef costs and a little deflation in our actual retail prices mainly due to an expanded promotion strategy that we were doing. Those are the two biggest areas. I’d say we’ve definitely seen also a little deflation in our bulk products, things like almonds and other prices like that really dropped off the cliff and we’ve lowered our prices pretty significantly in a couple of major commodities there, too.