Q2 2014 Earnings Call Transcript

Transcript Call Date 05/06/2014

Returning now; to our updated outlook for fiscal year 2014 and our longer-term strategic view of the business. We were overly optimistic in our ability to compare against the record-breaking results we have produced for the last few years, particularly in light of the rapidly changing competitive landscape and our ongoing strategy around value. We are resetting expectations for this year and, for the first time, laying out our strategic vision for the next several years. This is not guidance, but rather a framework around how we intend to manage our business over the intermediate term.

We are very confident in our future growth potential. We are upping our game, evolving, differentiating, innovating and improving our value while cutting our costs. With an average of over 21,000 items per store, we are uniquely positioned as the leading creator and curator of the highest quality and widest selection of natural and organic products. We are also more than just a grocery store. We are a restaurant and premier brand, with sales of $2.5 billion in prepared foods and bakery and $1.7 billion in exclusive brands in the last year.

As digital technology is transforming lives in the retail landscape, we are investing in technology to meet and connect with our customers where they are, whether physically, digitally or both. We have several pilot projects in process including click-and-collect, direct delivery, payment at food venues using Square, a mobile app, affinity program and expanded access to our E-store from just the holidays to year around. We aim to create seamless and unique experiences that add choices, convenience and flexibility to support our customers' busy lifestyles.

As we continue our value strategy, to broaden our appeal and drive sales growth over the longer term, we expect our gross margin to return our historical range of 34% to 35% over the next several years. We have successfully reduced operating expenses by 175 basis points over the last five years and we'll be working to further improve our cost structure to offset the impact of these value and tech investments. We expect to produce year-over-year improvement in operating margin in 2015 and beyond. We believe we will continue gaining share as the demand for fresh, healthy foods outpaces rising competition creating millions and millions of new customers for us.

To put it into perspective, we expect to increase our sales by $11 billion approaching $25 billion over the next five years. It took us 34 years to cross the $11 billion mark. We are moving aggressively to take advantage of this tremendous growth opportunity. And with 56 new leases signed over the last 12 months, we now have a record 114 stores in our development pipeline. We expect to end the year approaching 400 stores and cross the 500 store mark in 2017. Over the longer-term, we see demand for 1,200 Whole Foods Market stores in the United States alone.

We'll now take questions. Our call will end at 4.45 Central Time today to allow more time for questions. Please limit yourself to one question at a time so that everyone has an opportunity to participate. Thank you.

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