Event Details

2nd Quarter Earnings Script

May 10, 2017 04:01 PM CST

Cindy McCann

Good afternoon and thank you for joining us.  On today’s call are John Mackey, Chief Executive Officer; 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.  Also, joining the scripted portion of our call is Gaby Sulzburger, our new Chair of the Board.
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 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, scripted remarks and investor presentation are available on our website.  I will now turn the call over to John Mackey.  

John Mackey

Thank you, Cindy. 

Good afternoon everyone and thank you for joining today’s call as we provide an update on the change underway at Whole Foods Market. We also have some significant new initiatives that we expect will substantially enhance value for all of our shareholders. 

Our Board of Directors and leadership team have a long history of listening and responding to feedback from shareholders and believe today’s actions, which include adding a fresh perspective and greater sense of urgency, clearly demonstrate our continued commitment to seek opportunities to enhance value for all of our shareholders. We also recognize the importance of providing greater visibility and transparency into the shareholder returns we expect to achieve over the next one to three years, as we further transform our business in this rapidly changing retail environment.   

As we enter the next phase of our evolution, we have significantly strengthened our team, including five outstanding new directors and a terrific new Chief Financial Officer, Keith Manbeck. Gaby Sulzberger, our new Chair, is joining us today and will have more to add.

We understand that we need to do much more – and faster. Our competitors are not standing still. We need to ensure our Company remains a leader in this fast growing sector.

The initiatives and operational improvements we are undertaking will drive sales, EBITDA and EPS growth – and shareholder value. Our business is strong with record revenue of $15.7 billion, and over $1 billion in operating cash flow in 2016.

I will give more color on the quarter a little later in my comments, but here are the highlights. Sales increased 1% to a record $3.7 billion and we continued to see stability in our comps. While there is noise in the quarter due to the Easter shift, we saw some early signs of our sales initiatives gaining traction as evidenced in the 75 basis point sequential improvement in traffic trends from Q1.  In a challenging sales environment, we maintained our expense discipline, delivering 8.5% adjusted EBITDA margin, $0.37 in adjusted earnings per share and $340 million in operating cash flow. 

I want to reinforce just how committed we are to the initiatives we are announcing – and to delivering the results. We understand that significant change is required at an accelerated pace. Through our proactive initiatives, we will continue to improve the business and create value for all of our stakeholders. 

Whole Foods Market – America’s Healthiest Grocery Store

Before I get into the details of our new plan, I just want to remind you that our investor presentation is available on our website.  I’d like to spend a moment on page 2 looking at our business and values – what really makes Whole Foods Market the company we are today.

What sets us apart is our customer-centric approach and relentless commitment to our core values. No other grocery store matches the promise Whole Foods Market stakeholders have come to expect from us – the industry leading food standards – the differentiated offerings – and the outstanding customer experience.

Our customer base continues to grow, with 30 million different customers visiting Whole Foods stores last year. We have low turnover amongst our team members, something quite unusual in our industry. We are very proud for the last 20 consecutive years to have been named one of FORTUNE’s “100 best companies to work for”.

This is a tough environment for everyone in retail, and particularly challenging for those in the food industry. But we are the premier brand in the one area seeing growth – natural and organic foods.  We deliver the highest sales per gross square foot and the highest EBITDA margin of any public grocer.

Demonstrated Progress on Strategic Plan

Turning to page 3… The value proposition inherent in Whole Foods Market is powerful.  Our announcements today build on a strong foundation and on our strategic plan.

Among our key accomplishments, we have:

Reduced costs
Fully implemented a unified point-of-sale system
Piloted our affinity program 
Expanded our always on marketing and media plan
Accelerated the implementation of category management
Grown our online presence and driven increased digital sales
Launched our innovative value format - 365 - to broaden our customer base 
And prudently rationalized our store base

Our Accelerated Path to Delivering Shareholder Value

Page 4 - As I said, while we have experienced challenges, we know there are opportunities for improvement throughout our organization. We have identified immediate actions to drive change and ensure our Company remains positioned for success. 

First, we have put forth clearly defined financial targets. We expect to return to positive comp and earnings growth by FYE 2018.  By 2020, revenue is expected to grow to more than $18 billion. We expect to achieve comparable store sales growth of greater than 2%; SG&A as a percentage of sales of less than 27%; EBITDA margin of over 9.5%; and operating cash flow of more than $1.2 billion. 

We are accelerating the roll out of our affinity program to all U.S. stores by the end of this year.  Through providing more personalized and relevant communications, our pilot programs have successfully driven increased trips and bigger baskets from participants.  We are very excited about the incremental sales potential from our core customers adding just one additional item per trip.

As we announced last quarter, we are in the process of restructuring our purchasing program and accelerating the implementation of category management. Through our initial pilots we know that having the right assortment and pricing leads to lower costs, lower prices and higher sales. We expect to complete the purchasing restructure by calendar year-end 2017 and the category management initiatives by fiscal year-end 2018. 

In the fourth quarter of 2015, we announced a $300 million cost savings plan.  Through Q2, we have already delivered $270 million and are on track to deliver the full amount ahead of schedule.  More importantly, we are announcing today an additional $300 million of cost savings, which we expect to achieve by fiscal year-end 2020, with approximately $100 million to be realized over the course of next year.
Our financial strength allows us to significantly increase our commitment to returning capital to shareholders.  Today we are announcing a 29% increase in the dividend and increasing our share repurchase authorization to $1.25 billion with the intention to opportunistically utilize this authorization over the next 18 months. These new capital returns are in addition to the over $3 billion already returned to shareholders since 2012. 

With all of this great work underway, we are building out our team to support these efforts. We are refreshing our Board with five outstanding new directors, which Gaby will highlight in a few minutes. This group brings investor perspective, demonstrated shareholder value creation and long track records of success in retail transformation, operations and finance. 

We are also welcoming Keith Manbeck, former Senior Vice President of Finance, Strategy and Business Transformation at Kohl’s Corporation, as our new CFO. 

The Board of Directors will continue its comprehensive review of all opportunities to create shareholder value.

Pages 5-9

Pages 5 through 7 provide further detail on how we will grow revenue from $15.7 billion to more than $18 billion.  Our 2020 outlook reflects steady sales growth and an improved cost structure, which will deliver strong EBITDA and operating cash flow.  Key sales drivers include refocusing on our core customers, disciplined organic growth along with our affinity, marketing and category management initiatives. 

We will be disciplined when adding new stores, aggressive in our relocation strategy and look to leverage our Whole Foods Market 365 store concept, where appropriate. 

Across pages 8 and 9, you will see further details around our initiatives and affinity program.

Delivering Additional $300M in Cost Savings by FYE 2020

Let’s now move to page 10 and our commitment to deliver an additional $300 million of cost savings. 

We are taking a number of steps to reach these incremental savings, including having hired a top-tier consulting firm to assist with the implementation of this program. In terms of a timeline, we expect approximately $100 million in savings in year one and $300 million in total by 2020, driving EBITDA margin expansion. 

Increased Commitment to Return Capital to Shareholders

Whole Foods Market has a strong track record of returning substantial capital to shareholders, as shown on page 11. Since 2012, we have returned more than $3 billion to our investors. As already discussed, today we’ve announced that we are going even further. 

With that, I would now like to hand the call over to Gaby Sulzberger, the new Chair of the Whole Foods Market Board of Directors, to discuss the experienced leaders who have been added to the Company’s Board. 

Gaby Sulzberger
Thank you, John, and good afternoon everyone.

Whole Foods Markets’ evolution naturally extends to the Board of Directors. It is on us to ensure we have the right mix of skills and experience necessary to support the Company’s leadership team and business strategy. 

Since I took the role of Chair of the Nominating & Governance Committee last December, we embarked on an aggressive search for the very best people to add to our Board. We recognized that significant and urgent change was required. And we listened to shareholder perspectives regarding Board and governance issues. 

Adding Experienced Value Creators to Board Led by New Chair

On page 12, you will see why I am so excited about our five new directors. 

Today, we are pleased to announce the appointment of Ken Hicks, Joe Mansueto, Sharon McCollam, Scott Powers and Ron Shaich to the Whole Foods Market Board of Directors. These new directors are value creators and recognized leaders in their respective areas of expertise. They have transformed, led, sold and driven businesses and have created substantial shareholder value.

Ken Hicks brings an impressive record of successful leadership at Foot Locker and other companies in the retail sector.  As the former Chairman, President and CEO of Foot Locker, he is credited with developing and executing a highly successful turnaround plan.
Joe Mansueto is the Founder and Executive Chairman of Morningstar. Joe grew Morningstar from a start-up to a global organization that is one of the most recognized and trusted names in the investment industry. 

Sharon McCollam is the former CFO of Best Buy and Williams-Sonoma and has more than two decades of experience as a senior leader in the retail industry. 

Scott Powers brings an important long-term shareholder perspective to the Board. He was the President and CEO of State Street Global Advisors and brings decades of experience engaging with the investing community.

Ron Shaich is the Co-Founder, Chairman and CEO of Panera Bread Company. The results during Ron’s tenure were impressive with Panera delivering total shareholder return of more than 5,000%.

World Class Board with Diverse Skill Sets to Drive Value

Turning to page 13…

As part of the refreshment process, five existing directors will retire from our Board. On behalf of the entire board, I want to thank the departing directors for their many contributions to Whole Foods Market over the years. It is a testament to their service as directors that they chose to step down and make way for the new directors joining the board. Each and every one of the departing directors has our deepest gratitude and admiration.  

With these changes, the Whole Foods Market Board of Directors will be comprised of 12 directors, 10 of whom are independent and six of whom were added in the last seven months. The new Board includes nine directors who are current or former CEOs or CFOs and four female directors.

In connection with today’s announcement, I am assuming the responsibility of Chair of the Board and we are announcing the appointment of Mary Ellen Coe from Google as our new Chair of the Nominating & Governance Committee. Mary Ellen joined the Board at the end of last year and has been incredibly helpful with the refreshment process. 

Finally, I want to reassure investors that the Board is firmly on the side of shareholder value.  Our directors – including our new members – are value creators, dealmakers and experienced leaders. We will act with a focus on shareholder value.

We wanted to comment on some recent speculation in today’s news.  We first became aware of Jana’s recent share acquisition when they made their 13D filing on April 10.  Prior to that day, we had never been contacted by Jana.  After an initial meeting, we asked to interview their candidates and they agreed.  Under a confidentiality understanding, we discussed with Jana the substantial changes that the Whole Foods Board was about to announce, including the outstanding new directors that our Nominating Committee had identified with the assistance of an independent search firm and who had agreed to join the Board.  As part of those discussions we identified two of Jana’s nominees that we were prepared to add to the Board, in return for a customary 18-month standstill or cooperation agreement to enable the Board to focus on the tasks at hand.  Jana indicated that they were pleasantly surprised by the changes, but they currently didn’t want to “tie their hands” with an agreement.   Both sides suggested that we would continue the dialogue.   We are disappointed that our confidential discussions have been provided by Jana to the press.  Nonetheless, what is most important is that Whole Foods Market has refreshed the Board with absolutely outstanding, independent Directors who have track records as value creators and who are focused on delivering substantial value for Whole Foods Market shareholders.  We look forward to constructive dialogue with all of our shareholders, including Jana.  We will not be covering these matters further on this call.

And with that, I will turn the call back over to John.

John Mackey
Welcoming New CFO, Keith Manbeck

Thank you, Gaby. 

Page 14 shows why we are so excited to welcome Keith Manbeck as our new CFO. As I mentioned, Keith’s time at Kohl’s was marked by the significant role he played in the company’s transformation initiatives, including e-commerce. 

Additionally, he has extensive operational experience in retail from his time at Nike, where he delivered more than $1.7 billion of revenue growth in the Direct to Consumer business in just three years. 

Most importantly, he is an independent thinker, believes in our core values and is eager to support our company culture. Keith’s record retail growth is impressive and he is an incredibly valuable addition to our team.

Financial Results

Looking further at our financial results and updated outlook, while the operating environment remains challenging, we continue to produce healthy EBITDA margin and free cash flow.  Our updated fiscal year outlook reflects additional costs of approximately $0.03 per share related to our accelerated rollout of Affinity as well as the engagement of a consulting firm related to our cost reduction efforts.

Roadmap to Shareholder Value Creation

Turning back to our accelerated path to delivering shareholder value and to page 18…

To recap, we have a clear timetable to deliver strong results – and the right initiatives to get there. 

Our Promise to Shareholders

Moving to page 19, as we finish today’s presentation, I want to leave our shareholders with an important promise from all of us at Whole Foods Market. 

We have covered a lot of ground today so I just want to underscore that this Board and leadership team is laser-focused on doing all that we can to maximize value for all of our shareholders. We will continue to execute on our plan to evolve our Company for the future, while ensuring that we retain our business strengths and differentiated culture. As we make progress on these initiatives, we will provide transparency and regular updates. 

Our best-in-class Board will provide valuable oversight and deliver accountability, as we aggressively seek and incorporate feedback to ensure that we are always acting in the best interest of our shareholders.