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BOULDER, Colo. -- Increased operating efficiencies drove higher Q2 profits for natural and organic foods retailer Wild Oats Markets, Inc., but new competition from both organic and mainstream food retailers took their toll on the company's same-store sales for the quarter.
Wild Oats' Q2 net sales were $296.6 million, up 4.2 percent compared with $284.6 million last year. Total square footage under management grew 2.8 percent, as the retailer ended the quarter with 2.60 million square feet. First-half 2006 net sales were $594.9 million, a 5.7 percent increase, compared to last year's $562.7 million.
Comparable store sales were up 1.3 percent for the quarter, compared with 5.4 percent in Q2 2005, the reduction attributed to the short-term impact of new competition and a shift in timing for major promotional activity. Comparable store sales for the first half were up 2.7 percent compared to 2.5 percent last year. As a result of year-to-date sales performance, Wild Oats reduced its full-year 2006 same-store sales guidance to be in the 3 percent to 4 percent range, from its previously stated 4 percent to 5 percent range.
Improved margins and leveraged expenses helped drive improvements in profitability; Q2 net income was $4.9 million, or 16 cents per share, compared with $0.9 million, or 3 cents per share last year. Net income for the first half of 2006 was $7.8 million, or 26 cents per share, compared with a net loss of $0.2 million, or 1 cent per share during the same period last year. Due to the continued growth in net income for Q2, the retailer increased guidance for its full-year 2006 EPS to be in the 38 cents to 43 cents per share range, up from the range of 34 cents to 40 cents stated previously.
"We are very pleased with our continued growth in profitability, and we believe our work in recent years to add more efficiency to our operations and to drive profitable growth is producing strong results," said Perry D. Odak, president and c.e.o. of Wild Oats. "While our same-store sales growth is not where it needs to be because of the short-term impact of new competition in several of our markets, we are working diligently to build on solid comparable store sales performance in markets unaffected by competition. The new stores we've opened over the last year have continued to outperform sales expectations. And, as these new stores make up a larger percentage of our overall store base and we lap this competitive activity, we anticipate comparable store sales will improve over the long-term."
Wild Oats saw Q2 gross profit of $89.7 million, an 8.6 percent increase compared with $82.6 million in 2005. The improvement in gross margin relative to last year's second quarter can be attributed to continued strength in higher margin product categories, improvements in supply chain efficiencies, as well as having fewer new stores open in this year's second quarter relative to 2005. Wild Oats generated gross profit of $181.1 million, or 30.4 percent of sales, in the first half of 2006, an 11.2 percent increase, compared with last year's $162.8 million, or 28.9 percent of sales. The company expects gross margin for the full year 2006 to be 30 percent.
"Even with our top-line growing slightly slower than planned, we are confident that the progress we've made to improve gross margins, reduce costs, and implement other efficiencies will continue to drive bottom-line improvements," said Odak. "We are pleased with the increasing number of new stores in our pipeline and our achievements in opening stores stronger than ever, proving our ability to excel with a smaller footprint in densely populated urban areas. We remain focused on growing the Wild Oats brand in the leading markets for natural and organic foods."
During the second quarter, Wild Oats opened one Wild Oats Natural Marketplace in Tampa, Fla., which became the most successful grand opening in the company's history. The store continues to exceed management expectations in terms of average weekly sales. So far in the third quarter, the company opened a new Capers Community Market in Vancouver, B.C., Canada, and the grand opening and subsequent weeks' sales have far exceeded management's expectations. This is the first new Capers store to open in more than 11 years and occupies the ground floor of an upscale condominium development.
So far in 2006, the company has opened three new stores and plans to open up to an additional six new Henry's stores in Southern California and Phoenix, and one new Wild Oats store in Naples, Fla. before the end of the year. Additionally, it closed one smaller, older store in Colorado in July, bringing the total number of stores closed this year to three.
Currently Wild Oats has 20 leases or letters of intent signed for new stores. Of the stores slated to open beyond 2006, 10 are under the Wild Oats brand and three are under the Henry's brand, with two being relocations of older Henry's stores, and two being relocations of older, smaller Wild Oats stores. The company also completed the major remodeling of a San Diego area Henry's store in July, and plans to complete the major remodeling of a total of three stores this year, two of which include expansions.
Wild Oats also re-opened its community store on in Princeton, which had been closed since July 21 after a water pipe valve burst causing flooding in the store's basement.
Wild Oats operates 113 natural foods stores in 24 states and British Columbia, Canada. The Company's markets include: Wild Oats Natural Marketplace, Henry's Farmers Markets, Sun Harvest, and Capers Community Markets. It had $1.1 billion in annual sales last year.