Good afternoon and thank you for joining us. On today’s call are John Mackey and Walter Robb, Co-Chief Executive Officers; A.C. Gallo, President; Glenda Flanagan, Executive Vice President and Chief Financial Officer; Jim Sud, Executive Vice President of Growth & Development;David Lannon and Ken Meyer, Executive Vice Presidents of Operations, and Jason Buechel, Executive Vice President and Chief Information Officer.
As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in our company’s most recently filed Form 10-K. In addition, our remarks today include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release. Please note our press release and scripted remarks are available on our website. I will now turn the call over to John Mackey.
Thank you, Cindy. Good afternoon everyone.
In Q4, sales increased 2% to a record $3.5 billion. We opened five new stores, including two 365 stores. We continued to make selective investments on key items to narrow pricing gaps while offering strong weekly deals, which were supported by the continuation of our enhanced ad campaign. We also successfully launched our new affinity Rewards program in the Dallas/Fort Worth metro area. In a heightened competitive and promotional environment, we have remained focused on our initiatives to build sales over the long term and are seeing encouraging signs of customers responding, as reflected in our third consecutive quarter of improving items per basket. As our value, personalization and marketing efforts gain traction and new sales-building initiatives roll out throughout the year, we expect our traffic trends to improve as well. In a challenging operating environment, we maintained our expense disciplines, delivering 8% EBITDA margin, $0.28 in earnings per share, and $352 million in operating cash flow.
As highlighted in our press release, we have made measurable progress this year on our 9-point plan to position Whole Foods Market for continued success in an increasingly competitive marketplace. This includes one of our most important initiatives, which is to reduce expenses by a $300 million run rate by the end of FY17. We are pleased to report that as of year end, we were more than 50% of the way toward our goal. The biggest reductions to date have been achieved through various labor saving measures, including evolving our marketing and HR functions from a store to metro model; reducing buying positions as we transform our purchasing operations; and combining certain store teams, such as meat and seafood, in lower-volume stores. Many of these efforts allow us to focus our store labor investments where they are most needed, ensuring product availability, maintaining high standards, and serving our customers. In addition to labor and benefit savings, we significantly reduced our supplies and packaging expense through a more consolidated purchasing program across regions.
Another major accomplishment was the launch of our new value format, 365 by Whole Foods Market. We are using the learnings from our first three stores to shape and evolve our next round of 365 openings, and we are excited about the opportunities this streamlined operating model presents for our existing and future Whole Foods Market stores as well.
We are also pleased to share that our unified point-of-sale system, including EMV technology, is now up and running across all of our U.S. stores. This was a significant undertaking involving the conversion of more than 6,200 checkout lanes. This system provides the foundation to enhance our promotional capabilities, including more dynamic and personalized offers through our mobile app and Rewards programs.
As we evolve our business model, our commitment to our Core Values, mission and culture has never been stronger, and we appreciate our team members for continuing to deliver a world-class shopping experience to our customers. In a year that presented many ongoing headwinds for food retailers, including deflation, increased competition from existing as well as new business models, and lackluster consumer demand, we produced industry-leading sales per gross square foot of $915 and a healthy 13% return on invested capital. While sales were lighter than forecast, we achieved many of the fiscal year targets we provided in Q4 last year, including $1.52 in earnings per share excluding buybacks and an 8.6% EBITDA margin. We produced more than $1.1 billion of operating cash flow and invested $716 million of capital primarily in new and existing stores and technology initiatives, resulting in $400 million of free cash flow. And, in keeping with our capital allocation strategy, we returned more than $1.1 billion to our shareholders through dividends and share repurchases.
Turning to our outlook for fiscal year 2017, we expect sales growth of 2.5% to 4.5% and earnings per share, excluding potential future buybacks, of $1.42 or greater. Our priorities include:
- Progressing to an “always on” unified marketing and media plan, using insights from our customer data and analytics to improve the relevancy, effectiveness and efficiency of our value and marketing investments;
- Intensifying our personalization efforts, including the roll out of our optimized Rewards program to all U.S. stores;
- Taking a more strategic approach to our assortments, pricing and promotions, including the continued development of category management tools, processes and capabilities to better inform our investments;
- Evolving our purchasing structure to a hybrid model, with global teams leading our category management efforts and regional teams focused on local products;
- Leveraging our new culinary team’s leadership and expertise to offer a full spectrum of highest quality ready-made meal solutions, in-store or delivered to your door, including a pilot for curated meal kits; and
- Offering our customers more convenience through expanded online delivery to more cities and additional zip codes in existing markets.
So far in Q1, we have relocated our Center City Philadelphia store, which had the second highest opening sales week in our company’s history, and opened our first store in El Paso, Texas, which garnered significant media attention across Mexico and is doing twice its projected sales volume. Our new stores, on average, continue to be profitable in year one, and we have many other exciting openings this year, including Bryant Park in New York City in January and Lakeview, Chicago this spring. At the same time, we believe it is prudent in this challenging retail environment to continue to moderate our lease signings, ending square footage growth, and capital expenditures as a percent of sales.
We have seen stability in comps over the last two quarters and an improvement in trends quarter to date for both traffic and basket size. We are encouraged that our value and marketing efforts appear to be gaining traction with customers and believe we will see momentum as our sales-building initiatives are rolled out throughout the year. The competitive landscape is very dynamic, however, and it is uncertain how long the deflationary environment will continue. The high end of our -2% to flat comp range reflects a -2.5% two-year comp, slightly better than Q4’s -2.8%, while the low end reflects the possibility that two-year trends could get marginally worse before they get better, as we have seen quarter to date.
As we have stated, our strategy is to adjust our operating model to a lower margin and lower cost structure. Every major conversation we have about investments in pricing, technology and marketing is accompanied by a conversation about lowering our cost structure through enhanced technology tools, labor restructuring and work process changes. Last November, we announced our goal to reduce our cost structure by a $300 million run rate by the end of FY17. We expect to reach our goal but expect these savings to be more than offset by our investments to drive traffic and sales, as well as higher occupancy, depreciation and other costs. Therefore, we expect a decline in operating margin of up to 60 basis points for the year, with greater declines in the first half primarily related to higher year-over-year preopening expense in the first quarter and marketing expense in the first and second quarters. Please see our press release for more detailed guidance.
In closing, food retailing is evolving at an incredibly fast pace, and consumers have many more options for how and where they buy their food than ever before. At the same time, the market opportunity is expanding as the consciousness about fresh, healthy foods continues to awaken. Our company mission, commitment to transparency, and culture of innovation are more relevant and timely than ever, and where our company is today is just a shadow of where we think we will be in the future.
We sell the highest quality food in the world; our standards lead the industry; and no one delivers the dynamic and compelling in-store experience that we do. We continue to see strong customer reception to our brand in new and existing markets, as evidenced by recent openings. Our stores are highly profitable, with only seven out of 456 stores at year end not producing positive EBITDA before rent.
We will keep innovating and creating opportunities for people to connect and find a sense of community – in our stores and in the digital world. Promotions and price investments are an integral part of our conversation, but we are not participating in a race to the bottom. Our strategy revolves around leading a race to the top in terms of a differentiated customer experience: continuing to raise the bar on our quality standards and selection, providing new levels of transparency and accountability, and leveraging technology to deliver an improved shopping experience. We believe we have the right strategies in place to position the company to produce strong results and returns for our shareholders over the long term.
In a separate release today, we announced some coming structural and leadership changes. I want to take this opportunity to acknowledge and appreciate Walter and Glenda for their many years of partnership and service to the company. The significance of their countless contributions cannot be overstated, and we are grateful that both will continue to be involved in shaping our future.