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    Tough Times Gut Whole Foods' Profits, Comps in Q4

    The natural/organic grocer has been hit hard by a consumer base turned more frugal, as well as continued impact of costs from its acquisition of Wild Oats Markets.

    The bloom appears off the organic rose at Whole Foods Market, with profits steeply sagging, and comps performance among its weakest ever, for the fourth quarter.

    The chain, reporting its financial performance as usual after the stock market's close, said profits plunged to $1.5 million in the quarter ended Sept. 28, 2008, compared to $33.9 million in the same quarter last year.

    The chain said the dismal profits performance was due to costs related to its acquisition of Wild Oats Markets Inc.

    The Austin, Texas-based grocer also picked the moment to reveal an agreement for $425 million of additional equity from the sale of Series A Preferred Stock to Green Equity Investors V, LP, an affiliate of Leonard Green & Partners, LP. The amount equates to an ownership interest, assuming conversion of the preferred stock to common stock, of approximately 17 percent at this time.

    "This equity infusion, combined with our strong cash flow from operations, gives us the financial flexibility to manage through these difficult economic times," John Mackey, c.e.o. of Whole Foods, said in a conference call with analysts.

    Mackey was up front about the quarter's abundant evidence that his company is "not immune to the country's economic issues," and that its susceptibility continues.

    "U.S. retail sales declined in September, the third consecutive monthly decline and the first such consecutive three-month decline in more than a decade," Mackey said. "We believe our core customers remain committed to Whole Foods; however, the unrelenting negative economic news appears to be shifting buying behavior to making fewer trips and to making more value conscious decisions. For comparable stores, our transaction count declined approximately 1.5 percent and average basket size increased approximately two percent in the quarter.

    "While some regions still performed relatively well, with idents in the low-to-mid single digits, idents in every region decelerated from Q3," he continued. "Cannibalization continues to negatively impact our comps, although to a lesser degree than in Q3. And, as you would expect, markets that have seen the sharpest real estate downturns, such as Southern California, Las Vegas, Phoenix and Florida, have seen the greatest negative impact."

    Mackey claimed that Whole Foods' attempts to counter the widespread perception that it is overpriced are producing results. "We have worked hard to increase the value choices within our grocery and Whole Body departments without sacrificing our standards," he said. "We believe our efforts have been successful since these departments are continuing to produce positive comps. While we saw a decline in average transactions in grocery, our average basket size was up, which we believe is a reflection that customers are making fewer trips but stocking up with more on each trip."

    For the quarter, sales increased 13 percent to $1.79 billion from $1.74 billion.

    Comparable store sales inched up 0.4 percent versus an 8.2 percent increase in the prior year. Identical store sales, excluding eight relocated stores and two major expansions, decreased 0.5 percent versus a 6.0 percent increase in the prior year. The Wild Oats stores entered the comparable and identical store sales base in the fifty-third full week following the August 28, 2007 merger date and were included in results for the last four weeks of the quarter.

    During the quarter, the company produced approximately $59 million in cash flow from operations and invested $130 million in capital expenditures, of which approximately $75 million related to new stores and approximately $8 million related to Wild Oats stores.

    Whole Foods closed two Wild Oats stores during the quarter in connection with opening new Whole Foods Market stores. To date, 45 Wild Oats stores have been re-branded, it said. In the fourth quarter, it opened eight stores, closed one Fresh & Wild store in Bristol, England, and closed one Whole Foods Market store and two Wild Oats stores in connection with the opening of new Whole Foods Market stores.

    The company ended the quarter with 275 stores totaling 9.9 million square feet. It recently signed three new store leases averaging 38,200 square feet in size in San Francisco, Marietta, Ga. and North Raleigh, N.C., all scheduled to open after fiscal year 2010.

    While Whole Foods chose not to give comparable store sales growth guidance for fiscal 2009, the company forecast total sales in the range of $8.3 billion driven by the opening of 15 new stores, seven of which are relocations.

    The company has opened four stores year to date. Of its 11 currently tendered stores, six are expected to open in fiscal year 2009, with five scheduled to open in fiscal year 2010. One additional store is expected to open in the first quarter this year; four stores are expected to open in the second quarter, and six are expected to open in the second half of the fiscal year. Capital expenditures are expected in the range of $400 million to $450 million for the fiscal year.

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