Whole Foods profit jumps; outlook weighs on shares

PORTLAND, Ore. - Whole Foods Market Inc. appears to be adjusting to its new economic reality.

The natural and organic grocer, known for its high-end products and similarly high prices, says lower prices are bringing shoppers back in its doors, driving a surge in fourth-quarter profit.

Whole Foods said Wednesday that shoppers bought more items in its stores, but continued pressure to compete on price and uncertain economy made some investors nervous about its outlook for the year.

Whole Foods, based in Austin, Texas, was hard hit by the recession as consumers cut spending and turned to lower-priced stores. The company made several strategic changes — cutting costs, tightening inventory, securing a major investor, increasing its store brands and promoting other lower-priced options. It also created a new system to track competitors' prices and help it adjust its own.

Those changes, along with lower food commodity prices on some foods that improved profit margins, were a boon to the grocer.

"We believe our sales have stabilized and officially turned the corner," Whole Foods CEO John Mackey said.

Whole Foods reported that it earned $28.7 million, or 20 cents per share for the fourth quarter. The results includes a 1 cent per share benefit tied to how the company accounts for inventory.

That's up from $1.5 million, or 1 cent per share, for the same quarter last year, which included 15 cents per share impact for several one-time items.

Revenue grew more than 2 percent to $1.8 billion.

Whole Foods management said they were happy with the results, which came in just above Wall Street expectations.

Analysts polled by Thomson Reuters expected the company to earn 18 cents per share on revenue of $1.8 billion. Analyst expectations typically exclude one-time items.

Sales also appear to be reversing their trend after slogging through a difficult year.

The company's sales at stores open at least a year were down 0.9 percent for the quarter, compared a year earlier. But after five quarters of year-over-year declines, the company has seen that key figure jump 1.6 percent in the first five weeks of the current quarter.

This is considered a key metric for retailers because it measures sales at established stores and strips away the effects of new stores.

Whole Foods said it expects sales for 2010 to grow 5 to 8 percent. But given the need to remain focused on pricing and uncertainty of the economy, the company estimated it would earn $1.05 to $1.10 per share for the year, more modest than analyst expectations of $1.11.

"We're staying at the ready to do what we have to do to continue our sales momentum," said Walter Robb, co-president and chief operating officer.

The company said it would make strategic price adjustments as it needs to. And it has learned its lesson from the recession, saying it will take a conservative approach to its balance sheet moving forward. Whole Foods leaders say the company never wants to be in the position it was a year ago with too much debt, not enough cash and declining sales.

But the modest outlook, along with news that its recent investor Leonard Green & Partners is expected to convert $425 million of its preferred stock this month, increasing the number of common shares outstanding by about 29.7 million, left some investors jittery.

Shares of Whole Foods plunged $2.58, or nearly 8 percent, to $29.50 in after-hours trading.

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