Whole Foods to Shrink Store Count, Cuts Outlook

09 Feb 2017 --- Whole Foods Market Inc. said it would close nine of its stores and lowered its financial projections for the year, moves made as the natural-foods company struggles with increased competition and slowing sales growth.

The Austin-based retailer's list of closures includes locations in Davis, Calif., and Augusta, Ga., a company spokeswoman confirmed on Wednesday. Whole Foods said it would take a $30 million charge in the second quarter related to the closings.

Whole Foods Market reported that total sales increased 1.9% to a record $4.9 billion, but comparable store sales decreased 2.4%.

During Q1, the Company produced $284 million in cash flow from operations, invested $245 million in capital expenditures, and returned $43 million in quarterly dividends to shareholders. The Company ended the quarter with $1.1 billion of total debt and $1.2 billion of total available capital.

“In this increasingly competitive marketplace, we are committed to taking every step necessary to improve comps and deliver higher returns for our shareholders,” said John Mackey, co-founder and chief executive officer of Whole Foods Market. “To this end, we are refining our growth strategy, refocusing our efforts on best serving our core customers, and moving faster to fully implement category management. Evolving our purchasing operating model while developing data-rich, customer-centric category management capabilities is critical to our go-forward merchandising, pricing, marketing and affinity strategies."

In the first quarter, the Company opened 13 stores, including two relocations. So far in the second quarter, the Company has opened three stores, including one relocation, and expects to open three additional stores, including one relocation. The Company also closed one commissary kitchen and will be closing nine stores and the Company’s last two remaining commissary kitchens during the quarter. The Company recently terminated two leases and signed four new leases and currently has 93 stores in development.

The Company is updating its outlook primarily to reflect lower expected sales growth and new costs associated with accelerating the implementation of category management. In the first quarter, the Company incurred a charge of approximately $47 million, or $0.09 per diluted share, related to Mr. Robb’s separation agreement as well as store and facility closures. In the second quarter, the Company expects to incur an additional charge related to these closures of approximately $30 million, or $0.06 per diluted share. The Company’s outlook excludes these charges and potential share repurchases.

The Company has updated its sales outlook primarily to reflect year-to-date sales trends and lost sales related to the store closures. While the Company remains hopeful that comps improve as sales-building initiatives gain traction and comparisons get easier, the competitive landscape continues to be very dynamic, two-year comps have continued to moderate, and it is uncertain how long the deflationary environment will continue.

The Company plans to reduce its cost structure this fiscal year but expects these savings to be more than offset by investments in marketing, value and technology, as well as higher occupancy, depreciation and other costs. In addition, the Company is estimating additional costs of approximately $14 million, or $0.03 per diluted share, related to its recent decision to accelerate the implementation of category management, the majority of which it expects to incur in the fourth quarter. Therefore, the Company now expects a decline in operating margin of up to approximately 85 basis points for the year, with greater declines of up to 115 basis points in the second and fourth quarters due in part to the negative Easter shift and higher year-over-year marketing expense in the second quarter, and costs associated with category management in the fourth quarter. The Company also notes a LIFO credit of $9 million in the fourth quarter last year as compared to charges of $2 million in the first and second quarters and a credit of $2 million in the third quarter.