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    Whole Foods' Strong Q3 Not Enough for Street; Shares Drop 7.8 Percent

    AUSTIN, Texas -- Shares of natural and organic foods retailer Whole Foods Market dropped 7.8 percent in after-hours trading after the chain reported sales that were below analysts' estimates. Yet many grocers would kill to fail so wonderfully as Whole Foods did for the quarter.

    AUSTIN, Texas - Shares of natural and organic foods retailer Whole Foods Market dropped 7.8 percent in after-hours trading after the chain reported sales that were below analysts' estimates. Yet many grocers would kill to fail so wonderfully as Whole Foods did for the quarter.

    Indeed, a look at Whole Foods' numbers for the 12-week quarter ended July 2 is yet another example of why expectations of the company are held so high. The retailer's sales increased 18 percent to $1.3 billion, driven by 14 percent average square footage growth, and 9.9 percent comparable store sales growth.

    Net income increased 33 percent to $53.9 million, earnings per share increased 27 percent to 37 cents, and operating cash flow per share was 86 cents. Economic Value Added (EVA) improved $11 million to $20.6 million, the chain said.

    These results included approximately $1.4 million in non-cash share-based compensation expense and approximately $3.7 million in pre-tax credits for insurance proceeds and other adjustments related to Hurricane Katrina.

    "We are very pleased to report 9.9 percent comparable store sales growth for the quarter given our tough 15.2 percent comparison in the prior year," said John Mackey, chairman, c.e.o., and co-founder of Whole Foods, in a statement released after the stock market's close. "This translates to a 25.1 percent 2-year comp in the third quarter, the highest we have produced this year. We continue to expect comparable store sales growth for the full year of 10 percent to 12 percent which will mark our third year of double-digit comp sales growth."

    For the 40-week period ended July 2, sales increased 20 percent to $4.3 billion, driven by 14 percent average square footage growth and comparable store sales growth of 11.7 percent. Net income increased 29 percent to $164 million, earnings per share increased 21 percent to $1.13, and operating cash flow per share was $2.35. Economic Value Added (EVA) improved $28.5 million to $56.1 million.

    These results include approximately $4.5 million in non-cash share-based compensation expense and approximately $7.2 million in pre-tax credits for insurance proceeds and other adjustments related to Hurricane Katrina.

    During the quarter, Whole Foods produced $125 million in cash flow from operations, received $41 million in proceeds from the exercise of stock options, and paid approximately $21 million to shareholders in cash dividends. Year to date, it produced $342 million in cash flow from operations, received $209 million in proceeds from the exercise of stock options and paid approximately $337 million to shareholders in cash dividends.

    Capital expenditures in the quarter were $74 million, of which $45 million was for new stores, and $29 million was for remodels and other expenses. Capital expenditures year to date have totaled $198 million of which $111 million was for new stores and $86 million was for remodels and other expenses. The company's total cash and investments were approximately $397 million at the end of the quarter, and total long-term debt consisting primarily of zero coupon convertible debentures was approximately $9 million.

    In the third quarter, Whole Foods opened one new store in Greenville, S.C. and closed a 2,600-square-foot Fresh & Wild store in the U.K. In the fourth quarter, the Company plans to open four stores averaging 58,000-square-feet, one of which is a relocation. Three of these stores are expected to open at the end of the quarter.

    The retailer signed eight new store leases during the quarter, each averaging 55,000-square-feet in Dublin, CA; Oxnard, CA; Los Angeles, CA; Denver, CO; Connecticut; Florida; Schaumburg, IL; and New Jersey. In addition, it has signed a lease to expand its store in Boulder, Colo. from 39,000-square-feet to 74,000-square-feet.

    For fiscal year 2006, Whole Foods expects sales growth in the range of 18 percent to 21 percent, comparable store sales growth of 10 percent to 12 percent, and weighted average square footage growth in line with its 14 percent historical average. Capital expenditures for the year are now expected to be in the range of $310 million to $330 million.

    Whole Foods' long term goal is to reach $12 billion in sales in 2010.

    Whole Foods currently operates 183 stores in the United States, Canada, and the United Kingdom, and had sales of $4.7 billion in fiscal year 2005.

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