Yesterday, my Foolish colleague Alyce Lomax took us through some of the highlights from Whole Foods Market's
In the end, however, Alyce concluded that when Wall Street is dumping heavy, it may be just the right time for investors to be buying. Alyce adds, "It seems those who can see past the current pessimism have a golden opportunity to invest in a great business for the long term."
Mackey offered several reasons why Whole Foods Market is stronger today than it was yesterday, and why it will be even stronger tomorrow. But the primary factor that makes the other reasons -- such as increased buying power and private-label growth -- possible is new store expansion. In this edition of Fool on Call, using the company's quarterly earnings conference call, we will examine Whole Foods Market and the importance of its new-store growth strategy.
New stores will drive growth
In the call, management described fiscal 2007 as a "transition year" as the company reverts back to historical levels of comparable same-store sales growth. Basically, what Mackey is saying here is that it is impossible for its grocery units to continue on with high-octane, double-digit comps growth, and that it is inevitable that comps will come back down to reality.
So, while existing stores that have been open for more than a year return to Earth, new store openings will be relied upon more than ever to fuel top-line growth. Mackey asserted, "New stores will fuel our growth for many years to come." He adds, "New stores are producing strong sales from day one, and the majority of them are profitable soon after opening."
Two key points made here: There are ample new-store growth opportunities, and those new stores hit the ground running. The latter is particularly important, as a typical grocer entering a new market must take time to woo customers to the new site, creating a drag on profits. Good thing for Whole Foods Market that it is not your typical grocer; in most cases, the name is already very well known before it even opens the new site. The company can thank the "expanding market for natural and organic foods," as well as "increased media and PR attention," for its new-markets success.
Whole Foods has 88 stores in the development pipeline, which in total represents 76% of the company's existing square footage. Of these 88 new units, 21 of them will open in new markets, and the remaining 67 will be used to fill out existing markets. There is no need to worry about the potential ill effects of cannibalization, as Mackey states, "None of our current markets are saturated." In fact, he believes the markets allow for a "dense concentration of stores." That the majority of markets "are still underserved" suggests there is plenty room for growth in both new and existing markets.
When you consider that it still has fewer than 200 units in operation, the growth story here is really in its infancy. Whole Foods Market plans to open more new stores in FY 2007 than in any other 12-month period in its history, increasing its square footage by roughly 16% year over year. Some of the new sites that customers can expect to see next year include a massive site in London that will be the company's largest store, a fourth location in New York City, and a couple in Los Angeles, as well as many others.
Again, the good news is that these new units do not take long to become profitable. Mackey states that on average, sales from new stores exceed company projections and are profitable within the first year of operation, adding, "Many are profitable from day one." New stores don't come without cost, however. Management is projecting preopening and relocation costs in FY 2007 to be in a "range of $68 million to $74 million." The opening of 18 to 20 new sites during the year, including $7 million related to the opening of the London location, represents the bulk of these expenses.
An important agreement that grants Whole Foods the flexibility to take on these added expenses is the new seven-year contract with United Natural Foods
The acceleration of new store openings will be a boon to the company in two other ways. First, as the company increases in size, it also increases its ability to leverage its "global buying power." Every retailer, whether it's Best Buy
The second benefit from new store openings is that they naturally increase the company's distribution capability to sell more of its private-label products. Currently, private-label sales represent 8% of the company's total retail sales, but Mackey expects this number to increase "to a much higher percentage" over time.
Seeing the big picture
Much of Mackey's opening remarks were centered on new-store development, because expansion is key to driving so many other growth levers for the company. Recognizing the big picture that includes ample opportunities in both new and existing domestic markets, as well as international ones, is critical when making a determination as to whether to make a long-term commitment to this company.
Alyce Lomax believes Whole Foods Market may represent a "golden" opportunity for investors, and after my investigation of its new-store development opportunities, I completely agree.
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Fool contributor Jeremy MacNealy has a player rating of 96.84 and is ranked 391 out of 12,340 participants in Motley Fool CAPS . He has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy .