Description
Filed with the SEC from Aug 23 to Aug 29:
Whole Foods Market (WFM)
Private-equity outfit Leonard Green & Partners decreased its holdings in the upscale supermarket chain to 11,117,027 shares (6.0%) after it sold 1,793,970 shares from July 27 through Aug. 20 in a range of $91.94 to $95.10.
BUSINESS OVERVIEW
General
Whole Foods Market is the world’s leading retailer of natural and organic foods and America’s first national “Certified Organic” grocer. Unless otherwise specified, references to “Whole Foods Market,” “Company,” or “We” in this Report include the Company and its consolidated, wholly owned subsidiaries. The Company was formed in 1980 and is based in Austin, Texas. We completed our initial public offering in January 1992, and our common stock trades on the NASDAQ Global Select Market under the symbol “WFM.” Our Company mission is to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available. Since the purity of our food and the health of our bodies are directly related to the purity and health of our environment, our core mission is devoted to the promotion of organically grown foods, healthy eating, and the sustainability of our entire ecosystem. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance over the last 31 years.
We have one operating segment, natural and organic foods supermarkets. We are the largest retailer of natural and organic foods in the U.S. and the 10 th largest food retailer overall based on 2010 sales rankings from Progressive Grocer . As of September 25, 2011, we operated 311 stores in the United States, Canada, and the United Kingdom. Our stores average 38,000 square feet in size and 10 years in age, and are supported by our Austin headquarters, regional offices, distribution centers, bakehouse facilities, commissary kitchens, seafood-processing facilities, meat and produce procurement centers, and a specialty coffee, tea procurement and roasting operation.
Industry Overview
According to Nielsen TDLinx and Progressive Grocer , the U.S. grocery industry, which includes conventional supermarkets, supercenters, limited-assortment and natural/gourmet-positione d supermarkets, had approximately $563 billion in sales in 2010, a 1% increase over the prior year. Within this broader category, natural product sales through retail channels were approximately $65 billion, a 7% increase over the prior year, according to Natural Foods Merchandiser , a leading trade publication for the natural foods industry. We believe the growth in sales of natural and organic foods is being driven by numerous factors, including:
• heightened awareness of the role that healthy eating plays in long-term wellness;
• a better-educated and wealthier populace whose median age is increasing each year;
• increasing consumer concern over the purity and safety of food; and
• environmental concerns.
Our Core Values
We believe that much of our success to date is because we remain a uniquely mission-driven company. Our core values succinctly express the purpose of our business, which is not only to make profits but to create value for all of our major stakeholders, each of which is linked interdependently. By maintaining our core values, regardless of how large we become, we are able to preserve what has always been special about our Company.
Value Programs
We continue to evaluate and strengthen our value offerings, providing a clear range of choices in every category, and we believe our focus in this area has played a key role in driving our sales growth. In addition to supporting our 365 Everyday Value brand, we have lowered prices on thousands of known value items, extended value choices to our perishables departments, promoted our regional “Madness Sales,” and focused on stronger customer education. We also have continued our national The Whole Deal campaign, launched in fiscal year 2008, which includes our printed value guide available in all U.S. stores.
Health Starts Here ®
We are offering an increasing selection of Health Starts Here products in our stores. Health Starts Here is a mindful approach to healthy eating rooted in four simple ways to build better meals — Whole Food, Plant-Strong TM , Healthy Fats, and Nutrient Dense. Products such as frozen items, breads and prepared foods that meet these guidelines carry our “Health Starts Here” logo. In addition, all of our stores feature signage on the Aggregate Nutrient Density Index (“ANDI ® ”), a proprietary scoring system that ranks foods based on nutrient density (vitamins, minerals, phytochemicals and antioxidants) per calorie.
Whole Trade ® Guarantee
Whole Trade products sourced from developing countries meet our high quality standards, provide more money to producers, ensure better wages and working conditions for workers, and utilize sound environmental practices. Demand for our Whole Trade Guarantee products continues to grow. We currently offer over 1,500 items, with sales increasing 28% year over year to approximately $146.3 million in fiscal year 2011. Whole Foods Market donates 1% of sales of exclusive Whole Trade products to the Whole Planet Foundation ® to help alleviate world poverty.
Locally Grown
We are committed to buying from local producers whose products meet our high quality standards, particularly those who are dedicated to environmentally friendly, sustainable agriculture. Whole Foods Market currently purchases produce from over 2,000 different farms through various suppliers. In fiscal year 2007, we established a budget of up to $10 million to promote local food production, and as of September 25, 2011, we had disbursed more than $5.5 million in loans to 97 local producers company-wide.
Animal Welfare
We are dedicated to promoting animal welfare on farms and ranches that raise animals for meat production, helping to create alternatives to the “factory farm” methods of raising livestock. We have encouraged innovative animal production practices to improve the quality and safety of the meat and poultry sold in our stores while also supporting humane living conditions for the animals. Work on our “animal compassionate” standards started in 2003, and additional standards development and implementation of a 5-Step TM Animal Welfare Rating system transitioned to the Global Animal Partnership foundation in 2008. Global Animal Partnership’s 5-Step Animal Welfare Rating standards have been developed for beef cattle, pigs and broiler chickens and are in the works for other species as well. As of February 2011, our meat departments in all U.S. stores reflect these certifications.
Seafood Sustainability
In September 2010, we completed the launch of a color-coded, science-based seafood sustainability ratings program developed by partnering organizations, Blue Ocean Institute and Monterey Bay Aquarium. The program provides customers with the information they need to make informed decisions about their seafood purchases by rating non-Marine Stewardship Council (“MSC”) certified wild-caught seafood based on key criteria for sustainable fisheries with solid, transparent ranking methods. With our promise to phase out all “red-rated” species by Earth Day 2012, we have deepened our commitment to having fully sustainable seafood departments. This new seafood ratings program builds upon our ongoing partnership with the MSC and complements Whole Foods Market’s existing farmed seafood standards, which remain the highest in the industry. Farmed seafood at Whole Foods Market carries the “Responsibly Farmed” logo to indicate that it meets these high standards.
Eco-Scale TM
Currently, there are no government regulations requiring full disclosure of ingredients on cleaning products, so in April 2011, we introduced our Eco-Scale™ Rating System — an industry-first set of tiered, green household standards — to help customers make more informed choices for their homes and the planet. Under our new Eco-Scale Rating System, all household cleaning products in our stores will list full ingredients on their packaging. This comprehensive, color-coded rating system will allow shoppers to easily identify a product’s environmental impact and safety based on a red-orange-yellow-green color scale. We are committed to working with our vendors to evaluate and independently audit every product in our cleaning category, and all products in our stores will be required to meet our baseline orange standard by Earth Day, April 2012.
Seasonality
The Company’s average weekly sales and gross profit are typically highest in the second and third fiscal quarters and lowest in the fourth fiscal quarter. Average weekly sales and gross profit are typically lower in the first fiscal quarter due to the product mix of holiday sales, and in the fourth fiscal quarter due to the seasonally slower sales during the summer months.
Growth Strategy
We are a Fortune 500 company, ranking number 273 on the 2011 list. Our sales have grown rapidly due to historically strong identical store sales growth, acquisitions and new store openings from approximately $92.5 million in fiscal year 1991, excluding the effect of pooling-of-interests transactions completed since 1991, to approximately $10.11 billion in fiscal year 2011, a 20-year compounded annual growth rate of approximately 26%.
Purchasing and Distribution
The majority of our purchasing, particularly in dry grocery, occurs at the regional and national levels, enabling us to negotiate better volume discounts with major vendors and distributors while allowing our store buyers to focus on local products and the unique product mix necessary to keep the neighborhood market feel in our stores. We are increasingly focusing more of our purchasing on producer-direct and manufacturer-direct programs, and we remain committed to buying from local producers that meet our high quality standards.
We own two produce procurement centers which facilitate the procurement and distribution of the majority of the produce we sell. We also operate four seafood processing and distribution facilities, a specialty coffee and tea procurement and roasting operation, and 10 regional distribution centers that focus primarily on perishables distribution to our stores across the U.S., Canada and the United Kingdom. In addition, we have five regional commissary kitchens and seven bakehouse facilities, all of which distribute products to our stores. Other products are typically procured through a combination of specialty wholesalers and direct distributors.
United Natural Foods, Inc. (“UNFI”) is our single largest third-party supplier, accounting for approximately 31% of our total purchases in fiscal year 2011. In June 2010, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products through 2020. Beginning in fiscal year 2011, UNFI also became our primary non-perishables distributor in two additional regions, allowing us to focus our internal distribution efforts in our regions around key perishables departments.
Store Operations
We strive to promote a strong company culture featuring a team approach to store operations that we believe is distinctly more empowering of team members than that of the traditional supermarket. Our domestic Whole Foods Market stores each employ between approximately 45 and 665 team members who generally comprise 10 self-managed teams per store, each led by a team leader. Each team within a store is responsible for a different product offering or aspect of store operations such as prepared foods, grocery, or customer service, among others. We also promote a decentralized approach to store operations in which many decisions are made by teams at the individual store level. In this structure, an effective store team leader is critical to the success of the store. The store team leader works closely with one or more associate store team leaders, as well as with all of the department team leaders, to operate the store as efficiently and profitably as possible.
Team members are involved at all levels of our business. We strive to create a company-wide consciousness of “shared fate” by uniting the interests of team members as closely as possible with those of our shareholders. One way we reinforce this concept is through our Gainsharing program. Under Gainsharing, as part of our annual planning process, each team receives a labor budget expressed as a percentage of their team’s sales, with leverage built into the budgets on an overall company basis. When teams come in under budget due either to higher sales or lower labor costs, a portion of the surplus is divided among the team members and paid out every four weeks, and a portion is set aside in a savings pool. When teams are over budget (or in a labor deficit position), no Gainsharing money is paid out. Instead, the overage is taken out of the team’s savings pool or, in the absence of savings, paid back using future surpluses. The savings pool is paid out annually after the end of the fiscal year to all teams with a positive balance. Rewarding our team members for increases in labor productivity, something they can control, gives them a direct stake in the success of our business. We also encourage stock ownership among team members through our broad-based team member stock option plan, stock purchase plan and 401(k) plan.
Team Members
As of September 25, 2011, we had approximately 64,200 team members, including approximately 48,200 full-time, 13,300 part-time and 2,700 seasonal team members. Full-time team members accounted for approximately 78% of all permanent positions at the end of fiscal year 2011 compared to 81% at the end of fiscal year 2010. Voluntary turnover of full-time team members was 9% in fiscal years 2011 and 2010, which we believe is very low for the food retailing industry and allows us to better serve our customers. All of our team members are non-union, and we consider our team member relations to be very strong.
For the past 14 years, our team members have helped Whole Foods Market become one of FORTUNE magazine’s “100 Best Companies to Work for in America.” Ranking 24th overall and 7th among large companies in 2011, we are one of only 13 companies to make the “100 Best” list every year since its inception.
We believe in empowering our team members to make Whole Foods Market not only a great place to shop but a great place to build a career. Our salary and benefits programs reflect our philosophy of egalitarianism. To ensure they are perceived as fundamentally fair to all stakeholders, our books are open to our team members, including our annual individual compensation report. We also have a salary cap that limits the total cash compensation paid to any team member in a calendar year to 19 times the average annual wage, including bonuses, of all team members. In addition, our Co-Founder and Co-Chief Executive Officer, John Mackey, has voluntarily set his annual salary at $1 and receives no cash bonuses or stock option awards.
All of our full-time and part-time team members are eligible to receive stock options through annual leadership grants or through service-hour grants once they have accumulated 6,000 service hours (approximately three years of full-time employment). Approximately 95% of the equity awards granted under the Company’s stock plan since its inception in 1992 have been granted to team members who are not executive officers.
Team members are encouraged to take an active role in choosing the benefits made available by the Company by participating in a company-wide benefits vote every three years. Under the current plan voted on by team members, Whole Foods Market provides health care at no cost to full-time team members who work 30 or more hours per week and have worked a minimum of 10,000 service hours. In addition, the Company provides personal wellness dollars in the form of either a health reimbursement arrangement (“HRA”) or, beginning January 1, 2012, a health savings account (“HSA”). Based on service hours, team members receive up to $1,800 per year to help cover the cost of deductibles and other allowable out-of-pocket health care expenses not covered by insurance.
Two initiatives developed to support our core value of Promoting the health of our stakeholders through healthy eating education were specifically designed for our team members. They include the Total Health Immersion Program and the Healthy Discount Incentive Program. The Total Health Immersion Program provides educational opportunities for team members that are fully paid by the Company. Since launching this program in the fall of 2009, nearly 1,000 team members have participated, and the program now is open to team member spouses as well, with the Company subsidizing 50% of their cost.
The Healthy Discount Incentive Program offers additional store discounts beyond the standard 20% that all team members receive, based on meeting designated biometric criteria (cholesterol/LDL, BMI or waist-height ratio, blood pressure) and being nicotine-free. In fiscal year 2011, approximately 15,000 team members participated in biometric screenings, with nearly 8,300 receiving higher-level discount cards compared to approximately 7,000 team members at the end of fiscal year 2010.
Competition
Food retailing is a large, intensely competitive industry. Our competition varies across the Company and includes but is not limited to local, regional, national and international conventional and specialty supermarkets, natural foods stores, warehouse membership clubs, smaller specialty stores, farmers’ markets and restaurants, each of which competes with us on the basis of store ambiance and experience, product selection, quality, customer service, price or a combination of these factors. Our commitment to natural and organic products, high quality standards, emphasis on perishable product sales, healthy eating products and education, range of choices based on price, and empowered team members who focus on unparalleled customer service differentiate us from the competition and have created a loyal core customer base. We believe our passionate support of causes and leadership in areas important to our customers reinforce our position as the authentic retailer of natural and organic foods, making us the preferred choice for customers aspiring to a healthier lifestyle.
Marketing
We spend much less on advertising and marketing than other supermarkets — approximately 0.4% of our total sales in fiscal year 2011. Instead, we rely on word-of-mouth recommendations and testimonials from our shoppers, and we allocate our marketing budgets among national and regional programs and our individual stores. We also connect and engage with our customers through social media websites, in addition to e-newsletters, and our own website and blog at www.wholefoodsmarket.com. Our stores spend most of their marketing budgets on in-store marketing-related activities, including promotional signage and events such as local farmers’ markets, taste fairs, classes, tours and product samplings. We also dedicate resources to The Whole Deal in-store value guide. Our marketing support mirrors our business model as well as our commitment to the community and environment. Each store retains a separate budget for making contributions to a variety of philanthropic and community activities, fostering goodwill and developing a high profile with the community. Contributions (including in-kind contributions of food) to not-for-profit organizations amount to at least 5% of our after-tax profits annually.
The Whole Deal
The Whole Deal value guide available in all of our U.S. stores features coupons, budget-conscious recipes and money-saving shopping and cooking tips. Also, we feature Sure Deals which highlight everyday value pricing on high-quality products our customers love. In fiscal year 2011, the average basket containing a coupon from The Whole Deal value guide was $68 and 19 items compared to our overall average basket in identical stores of $34 and eight items.
CEO BACKGROUND
Dr. John Elstrott , 63, has served as the Chairman of the Board since 2009 and has served as a director of the Company since 1995, serving as Lead Director from 2001 to 2009. Dr. Elstrott is a Clinical Professor of Entrepreneurship and the founding director of the Levy-Rosenblum Institute for Entrepreneurship at Tulane University’s Freeman School of Business, which was started in 1991, and has served as a director and member of the audit, compensation and nominating and governance committees of the board of directors of Stewart Enterprises, Inc. since April 2011. Dr. Elstrott has a PhD in Economics and significant business experience, including over 40 years of experience as an entrepreneur and investor. Dr. Elstrott brings to our Board of Directors management, financial and risk assessment experience as well as his entrepreneurial experience and history with the Company.
Gabrielle Greene , 51, has served as a director of the Company since 2003. Ms. Greene has served as a Principal of a diversified investment fund, Rustic Canyon/Fontis Partners, LP, since its inception in October 2005. In addition, Ms. Greene served as Chief Financial Officer of the Villanueva Companies, a private holding company with diverse investment interests, from 2002 through 2005. Ms. Greene also serves on the board of directors of Stage Stores, Inc. and previously served on the boards of directors of IndyMac Bank from January 2008 through July 2009 and Bright Horizons Family Solutions from September 2007 through May 2009. Ms. Greene has an MBA with a focus in finance from Harvard Business School and a JD from Harvard Law School. Ms. Greene brings to our Board of Directors financial, management and risk assessment experience as well as her entrepreneurial experience and history with the Company.
Shahid (Hass) Hassan , 63, has served as a director of the Company since 2005. Mr. Hassan has been a General Partner of Greenmont Capital, an investment firm, since 2006. Mr. Hassan was a Co-Founder, President and CEO of Alfalfa’s Market, President of Wild Oats Marketplace and founded Fresh & Wild, Ltd., an organic food retailer in the United Kingdom in 1999. Mr. Hassan served as President and Executive Chairman of Fresh & Wild from 1999 until 2004, when it was acquired by the Company. Mr. Hassan has over 35 years of experience in the retail grocery business in both public company and private company settings. Mr. Hassan brings to our Board of Directors financial and risk assessment experience as well as his grocery retail, entrepreneurial and management experience and history with the Company.
Stephanie Kugelman , 64, has served as a director of the Company since November 2008. Ms. Kugelman is the Chairman of A.S.O., A Second Opinion, a strategy and branding consultancy she founded in 2006. She was previously Vice Chairman and Chief Strategic Officer of Young & Rubicam Brands, a worldwide marketing communications company, where she held positions of increasing responsibility commencing in 1971. Ms. Kugelman also serves on the board of directors of Home Shopping Network. Ms. Kugelman brings to our Board of Directors entrepreneurial, management, financial and risk assessment experience as well as her marketing strategy and branding experience.
John Mackey , 58, co-founder of the Company, has served as Co-Chief Executive Officer since May 2010, was the Chief Executive Officer from 1978 to May 2010 and was President from June 2001 to October 2004. Mr. Mackey has served as a director of the Company since 1978 and served as Chairman of the Board from 1978 through December 2009. Mr. Mackey brings to our Board of Directors financial and risk assessment experience as well as his grocery retail, entrepreneurial and management experience and history with the Company.
Walter Robb , 58, has served as Co-Chief Executive Officer since May 2010. Mr. Robb also served as the Co-President & Chief Operating Officer from 2004 to May 2010, as Chief Operating Officer from 2001 to September 2004, and as Executive Vice President from 2000 to February 2001. Mr. Robb has served as a director of the Company since May 2010. Mr. Robb brings to our Board of Directors financial and risk assessment experience as well as his grocery retail, entrepreneurial and management experience and history with the Company.
Jonathan Seiffer , 40, has served as a director of the Company since December 2008. He has been a Partner of Leonard Green & Partners, L.P. since 1999 and joined Leonard Green & Partners, L.P. in 1994. Leonard Green & Partners, L.P. is an affiliate of Green Equity Investors V, L.P. (“GEI V”), Green Equity Investors Side V, L.P. (“GEI Side V”) and Thyme Coinvest, LLC (“Thyme”). GEI V, GEI Side V and Thyme selected Mr. Seiffer to serve as a member of our board of directors beginning on December 2, 2008. Pursuant to the Company's agreement with GEI V, GEI Side V and Thyme and based on their current holdings of the Company’s common stock, the Company is required to nominate one person that they designate for election to the Board of Directors and to recommend the shareholders vote in favor of such designee. Mr. Seiffer has 17 years of experience in investment banking and private equity. Mr. Seiffer brings to our Board of Directors investment banking, financial, management and risk assessment experience.
Morris (Mo) Siegel , 62, has served as a director of the Company since 2003. Mr. Siegel is currently self-employed, having operated Capitol Peaks, an investment firm since 2002. Mr. Siegel was the co-founder of Celestial Seasonings, Inc., serving as Chairman and CEO from 1970 until 2002. Celestial Seasonings merged with The Hain Food Group, forming The Hain Celestial Group of which Mr. Siegel served as Vice Chairman from 2000 until retiring in 2002. Mr. Siegel also served on the board of directors of Spicy Pickle Franchising, Inc. until September 2011. Mr. Siegel brings to our Board of Directors financial and risk assessment experience as well as his food products entrepreneurial and management experience and history with the Company.
Jonathan Sokoloff , 54, has served as a director of the Company since December 2008. He has been a Managing Partner of Leonard Green & Partners, L.P. since 1994 and joined Leonard Green & Partners, L.P. in 1990. Leonard Green & Partners, L.P. is an affiliate of GEI V, GEI Side V and Thyme. GEI V, GEI Side V and Thyme selected Mr. Sokoloff to serve as a member of our board of directors beginning on December 2, 2008. Pursuant to the Company's agreement with GEI V, GEI Side V and Thyme and based on their current holdings of the Company’s common stock, the Company is required to nominate one person that they designate for election to the Board of Directors and to recommend the shareholders vote in favor of such designee. Mr. Sokoloff served on the Board of Directors of Rite Aid Corporation until May 2011. Mr. Sokoloff brings to our Board of Directors investment banking, financial, management and risk assessment experience.
Dr. Ralph Sorenson , 78, has served as a director of the Company since 1994. Dr. Sorenson is the Managing Partner of the Sorenson Limited Partnership which focuses on venture capital investments in a diverse range of entrepreneurial start-ups. Dr. Sorenson is President Emeritus of Babson College (1974-1981); Professor Emeritus and former Dean of the University of Colorado Business School (1992-present); former Chairman and CEO of Barry Wright Corporation, a NYSE company (1981-1989); and a former faculty member at the Harvard Business School (1964-1974, 1989-1992). Dr. Sorenson is a former director of the Federal Reserve Bank of Boston and a Life Trustee and former Chairman of the Board of the Boston Museum of Science. He currently serves as a Trustee of The Colorado Nature Conservancy and is Colorado’s representative on the Conservancy’s National Trustee Council.
Dr. Sorenson brings to our Board of Directors management, financial and risk assessment experience as well as his entrepreneurial experience and expertise and history with the Company.
William (Kip) Tindell, III , 58, has served as a director of the Company since November 2008. He co-founded The Container Store in 1978 and is Chairman and CEO. Mr. Tindell serves on the Executive Committee of the National Retail Federation Board of Directors and was inducted into the Retailing Hall of Fame in 2006. Mr. Tindell brings to our Board of Directors financial and risk assessment experience as well as his entrepreneurial and retail management experience.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Whole Foods Market, Inc. is the world’s leading retailer of natural and organic foods and America’s first national “Certified Organic” grocer. Our Company mission is to promote vitality and well-being for all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance. The Company was formed in 1980 and, as of September 25, 2011, operated 311 stores: 299 stores in 38 U.S. states and the District of Columbia; seven stores in Canada; and five stores in the United Kingdom. We have one operating segment, natural and organic foods supermarkets.
Our results of operations have been and may continue to be materially affected by the timing and number of new store openings. New stores generally become profitable within their first year of operation; although some new stores may incur operating losses for the first several years of operation. The Company’s average weekly sales and gross profit are typically highest in the second and third fiscal quarters, and lowest in the fourth fiscal quarter. Average weekly sales and gross profit are typically lower in the first fiscal quarter due to the product mix of holiday sales, and in the fourth fiscal quarter due to the seasonally slower sales during the summer months.
Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Stores acquired in purchase acquisitions enter the comparable store sales base effective the fifty-third full week following the date of the merger. Identical store sales exclude sales from relocated stores and remodeled stores with expansions of square footage greater than 20% from the comparable calculation to reduce the impact of square footage growth on the comparison. Stores closed for eight or more days are excluded from the comparable and identical store base from the first fiscal week of closure until re-opened for a full fiscal week.
The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 2011, 2010 and 2009 were 52-week years.
Economic and Industry Factors
Food retailing is a large, intensely competitive industry. Our competition varies across the Company and includes but is not limited to local, regional, national and international conventional and specialty supermarkets, natural foods stores, warehouse membership clubs, smaller specialty stores, farmers’ markets, and restaurants, each of which competes with us on the basis of store ambiance and experience, product selection, quality, customer service, price or a combination of these factors. Natural and organic food continues to be one of the fastest growing segments of food retailing today. Our commitment to natural and organic products, high quality standards, emphasis on perishable product sales, healthy eating products and education, range of choices based on price, and empowered team members who focus on unparalleled customer service differentiate us from the competition and have created a loyal customer base.
We have worked very hard over the last couple of years to successfully improve our price image, particularly in perishables, and we remain focused on maintaining our relative price positioning in the marketplace. We are hopeful we can continue to strike the right balance between rising product costs and our retail pricing based on our contracts, distribution, and tools to manage value.
Highlights for Fiscal Year 2011
We are pleased to end fiscal year 2011 with strong sales growth, solid execution, and capital discipline. We believe our pleasurable store experience, outstanding service, high quality standards and differentiated product mix have been the primary drivers of our growth and success. We are committed to maintaining our unique positioning in these areas. We are gaining market share at a faster rate than most public food retailers and attribute much of our success to the progress we have made in our well-executed value efforts which have positively impacted our price image while continuing to raise the bar in areas that matter to our customers — particularly our quality standards, and health and wellness. These initiatives are aligned with our core customer base and reinforce our position as the authentic retailer of natural and organic foods, further differentiating the Whole Foods Market shopping experience and making us the preferred choice for customers aspiring to a healthier lifestyle. In fiscal year 2011:
• Sales increased 12.2% over the prior year to $10.11 billion driven by an 8.5% comparable store sales increase. Identical store sales increased 8.4% over the prior year;
• Income available to common shareholders increased 42.5% over the prior year to $342.6 million;
• Diluted earnings per share increased 35.0% over the prior year to $1.93;
• We produced $754.8 million in cash flow from operations and invested $365.0 million in capital expenditures;
• We repaid the $490 million balance on our term loan;
• The Company’s Board of Directors reinstated a $0.10 quarterly cash dividend to shareholders and we made three dividend payments to shareholders totaling $52.6 million; and
• We had cash, restricted cash, and investments totaling approximately $799.1 million at the end of the fiscal year.
Also during fiscal year 2011, we began opening in-store Wellness Clubs. Our Wellness Club offerings include nutrition courses; skill-building classes; culinary classes; Supper Clubs and special events; coaching and support; a wellness assessment tool; and access to benefits from a growing local network of community businesses. Members also receive a 10% discount on thousands of designated healthy foods when they shop in stores where Wellness Clubs are located. We are learning and evolving with each Club we open. While still very early, we are pleased with the initial results we are seeing. We hope customers will continue to embrace the concept and that we can expand our offering to more customers in the future.
Sales
Sales totaled approximately $10.11 billion, $9.01 billion and $8.03 billion in fiscal years 2011, 2010 and 2009, respectively, representing increases of 12.2%, 12.1% and 1.0% over the previous fiscal years, respectively. Comparable store sales increased approximately 8.5% and 7.1% in fiscal years 2011 and 2010, respectively, and decreased approximately 3.1% in fiscal year 2009. Identical store sales increased approximately 8.4% and 6.5% in fiscal years 2011 and 2010, respectively, and decreased approximately 4.3% in fiscal year 2009. As of September 25, 2011, there were 298 locations in the comparable store base. Identical store sales in fiscal years 2011, 2010 and 2009 exclude from the comparable calculation 6, 6 and 12 store relocations, respectively, and 1, 2 and 3 remodels with major expansions, respectively, during portions of each fiscal year.
The number of stores open or acquired 52 weeks or less equaled 18, 18 and 15 at the end of fiscal years 2011, 2010 and 2009, respectively. The sales increase contributed by stores open or acquired within 52 weeks or less totaled approximately $222.0 million, $251.8 million and $234.8 million for fiscal years 2011, 2010 and 2009, respectively.
We believe our efforts around value and differentiation continue to be a significant contributor to our momentum. Our customers have shifted their buying toward branded and organic products, higher priced tiers, and to several discretionary categories. With the return of inflation, we are seeing our identical store sales breakout move toward our historical pattern of approximately 60% transaction count and 40% basket size. During fiscal year 2011, our transaction count in identical stores increased 5.7%, an acceleration from the 5.1% increase we experienced in fiscal year 2010. During fiscal year 2011, our basket size increased 2.4% compared to the 1.1% increase for fiscal year 2010, primarily driven by higher average prices per item as we selectively passed through some product cost increases and continued to see signs of customers trading up.
Gross Profit
Gross profit totaled approximately $3.54 billion, $3.14 billion and $2.76 billion in fiscal years 2011, 2010 and 2009, respectively. Net LIFO inventory reserves increased approximately $10.3 million in fiscal year 2011, due primarily to inflation in product cost compared to a decrease in net LIFO inventory reserves of approximately $7.7 million and $5.6 million in fiscal years 2010 and 2009, respectively, due primarily to lower average inventory balances and net deflation in product costs. Despite the 19 basis point impact from the LIFO charge, the Company maintained healthy gross margins by balancing rising product costs while maintaining our relative value position. During fiscal years 2010 and 2009, the Company realized sequentially lower cost of goods sold by taking advantage of buying opportunities and improving our distribution, shrink control and inventory management.
We have maintained our commitment to offering highly competitive prices on known value items in addition to implementing targeted pricing and promotional strategies. To the extent changes in costs are not reflected in changes in retail prices or changes in retail prices are delayed, our gross profit will be affected. Our gross profit may increase or decrease slightly depending on the mix of sales from new stores or the impact of weather or a host of other factors, including seasonality, competition, inflation or deflation. Relative to existing stores, gross profit margins tend to be lower for new stores and increase as stores mature, reflecting lower shrink as volumes increase, as well as increasing experience levels and operational efficiencies of the store teams.
Direct Store Expenses
Direct store expenses totaled approximately $2.63 billion, $2.38 billion and $2.15 billion in fiscal years 2011, 2010 and 2009, respectively. The 38 basis point decrease in direct store expenses as a percentage of sales in fiscal year 2011 primarily reflects leverage of 28 basis points in wages and 19 basis points in depreciation expense, partially offset by an increase in costs, including worker’s compensation expense of 5 basis points as a percentage of sales. During fiscal year 2010, the 34 basis point decrease in direct store expenses as a percentage of sales was primarily driven by an 18 basis point leverage in depreciation expense as a percentage of sales and a decrease in asset impairment charges related to ongoing locations of 17 basis points as a percentage of sales.
General and Administrative Expenses
General and administrative expenses totaled approximately $310.9 million, $272.4 million and $243.7 million in fiscal years 2011, 2010 and 2009, respectively. The increase in general and administrative expenses as a percentage of sales during fiscal year 2011 was primarily driven by higher wages, including wage costs associated with new strategic initiatives, totaling six basis points as a percentage of sales. General and administrative expenses for fiscal year 2010 include share-based payment costs related to restricted common stock grants of approximately $4.2 million. General and administrative expenses for fiscal years 2010 and 2009 include FTC-related legal costs totaling approximately $2.5 million and $14.7 million, respectively.
Pre-opening Expenses
Pre-opening expenses totaled approximately $40.9 million, $38.0 million and $49.2 million in fiscal years 2011, 2010 and 2009, respectively. The Company opened 18, 16 and 15 new store locations during fiscal years 2011, 2010 and 2009, respectively. Average pre-opening expense per new store, including pre-opening rent, totaled approximately $2.5 million, $2.6 million and $3.0 million in fiscal years 2011, 2010 and 2009, respectively.
Relocation, Store Closure and Lease Termination Costs
Relocation, store closure and lease termination costs totaled approximately $8.3 million, $11.2 million and $31.2 million in fiscal years 2011, 2010 and 2009, respectively. The Company relocated or closed six, one and six store locations during fiscal years 2011, 2010 and 2009, respectively. Relocation, store closure and lease termination costs for fiscal years 2011, 2010 and 2009 include charges totaling approximately $1.6 million, $6.9 million and $9.5 million, respectively, to increase store closure reserves for increased estimated net lease obligations for closed stores. During fiscal year 2010, the Company recorded a gain totaling approximately $3.2 million related to the sale of a non-operating property. The Company recorded a charge totaling approximately $4.8 million in fiscal year 2009 to adjust the carrying value of leases and fixed assets to fair value relating to the potential sale of certain operating locations as part of the Federal Trade Commission (“FTC”) settlement agreement.
Interest Expense
Interest expense, net of amounts capitalized, was approximately $3.9 million, $33.0 million and $36.9 million in fiscal years 2011, 2010 and 2009, respectively. Interest expense for fiscal years 2011, 2010 and 2009 consists principally of interest expense on the term loan we entered into to finance the acquisition of Wild Oats Markets. The reductions in net interest expense are primarily due to the repayment of $490 million and $210 million of the term loan during fiscal years 2011 and 2010, respectively. The Company had no amounts outstanding on its revolving line of credit at September 25, 2011 or September 26, 2010.
Investment and Other Income
Investment and other income includes interest income, investment gains and losses, rental income and other income totaling approximately $8.0 million, $6.9 million and $3.4 million in fiscal years 2011, 2010 and 2009, respectively. The Company held higher average investment balances during fiscal years 2011 and 2010.
Income Taxes
Income taxes resulted in an effective tax rate of approximately 37.9%, 40.3% and 41.5% in fiscal years 2011, 2010 and 2009, respectively. The lower effective tax rate for fiscal year 2011 resulted primarily from the savings realized as a result of certain initiatives and investments.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements at September 25, 2011 consist of operating leases disclosed in the above contractual obligations table and the undrawn portion of our revolving credit facility discussed in Note 8 to the consolidated financial statements, “Long-Term Debt,” in “Item 8. Financial Statements and Supplementary Data.” We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial condition.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 2 to the consolidated financial statements in “Item 8. Financial Statements and Supplementary Data.” We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.
Inventory Valuation
We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (“LIFO”) method for approximately 92.3% and 93.9% of inventories at September 25, 2011 and September 26, 2010, respectively. Under the LIFO method, the cost assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items purchased remain in inventory and are used to value ending inventory. The excess of estimated current costs over LIFO carrying value, or LIFO reserve, was approximately $29.7 million and $19.4 million at September 25, 2011 and September 26, 2010, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method. Cost is determined using the item cost method and the retail method for inventories. The item cost method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase cost (net of vendor allowances) of each item and recording the actual cost of items sold. The item cost method of accounting enables management to more precisely manage inventory and purchasing levels when compared to the retail method of accounting. Under the retail method, the valuation of inventories at cost and the resulting gross margins are determined by counting each item in inventory, then applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are certain management judgments and estimates which could impact the ending inventory valuation at cost as well as the resulting gross margins.
Our cost-to-retail ratios contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding inventory mix, inventory spoilage and inventory shrink. Because of the significance of the judgments and estimation processes, it is possible that different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. A 10% difference in our cost-to-retail ratios at September 25, 2011 would have affected net income by approximately $0.7 million for fiscal year 2011.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Forward-looking Statements
We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission (“SEC”), news releases, reports, proxy statements, registration statements and other written communications, as well as forward-looking statements made from time to time by representatives of our Company. These risks and uncertainties include those listed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2011. These risks and uncertainties and additional risks and uncertainties not presently known to us or that we currently deem immaterial may cause our business, financial condition, operating results and cash flows to be materially adversely affected. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risks and uncertainties, including general business conditions, changes in overall economic conditions that impact consumer spending, including fuel prices and housing market trends, the impact of competition and other factors which are often beyond the control of the Company. The Company does not undertake any obligation to update forward-looking statements.
This information should be read in conjunction with the consolidated financial statements and the accompanying notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2011.
General
Whole Foods Market, Inc. is the world’s leading retailer of natural and organic foods and America’s first national “Certified Organic” grocer. Our Company mission is to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance. As of July 1, 2012 , we operated 328 stores: 315 stores in 38 U.S. states and the District of Columbia; 7 stores in Canada; and 6 stores in the United Kingdom. We have one operating segment, natural and organic foods supermarkets.
Our results of operations may be impacted by the timing of new store openings, construction and pre-opening expense, store closures and relocations, and the range of operating results generated from newly opened stores. The Company’s average weekly sales and gross profit are typically highest in the second and third fiscal quarters, and lowest in the fourth fiscal quarter. Average weekly sales and gross profit are typically lower in the first fiscal quarter due to the product mix of holiday sales, and in the fourth fiscal quarter due to the seasonally slower sales during the summer months.
Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Identical store sales exclude sales from relocated stores and remodeled stores with expansions in square footage greater than 20% from the comparable calculation to reduce the impact of square footage growth on the comparison. Stores closed for eight or more days are excluded from the comparable and identical store base from the first fiscal week of closure until re-opened for a full fiscal week.
The Company reports its results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal year 2012 is a 53-week year and fiscal year 2011 was a 52-week year.
Economic and Industry Factors
Food retailing is a large, intensely competitive industry. Our competition varies across the Company and includes but is not limited to local, regional, national and international conventional and specialty supermarkets, natural foods stores, warehouse membership clubs, smaller specialty stores, farmers’ markets, and restaurants, each of which competes with us on the basis of store ambiance and experience, product selection, quality, customer service, price or a combination of these factors. Natural and organic food continues to be one of the fastest growing segments of food retailing today. Our commitment to natural and organic products, high quality standards, emphasis on perishable product sales, healthy eating products and education, range of choices based on price, and empowered team members who focus on unparalleled customer service differentiate us from the competition and have created a loyal customer base.
We have worked very hard over the last couple of years to successfully improve our price image, particularly in perishables, and we are focused on improving our relative price positioning in the marketplace. We are hopeful we can continue to strike the right balance between rising product costs and our retail pricing based on our contracts, distribution, and tools to manage value.
Sales for the twelve and forty weeks ended July 1, 2012 totaled approximately $2.73 billion and $8.79 billion , respectively, increasing 13.6% and 13.3% , respectively, over the same periods of the prior fiscal year. Comparable store sales increased 8.2% and 8.8% during the twelve and forty weeks ended July 1, 2012 , respectively. As of July 1, 2012 , there were 307 locations in the comparable store base. Identical store sales, excluding six relocations and two expansions, increased 8.0% during the twelve weeks ended July 1, 2012 . During the forty weeks ended July 1, 2012 , identical store sales increased 8.4% and excluded six relocations and three expansions. Relocations and expansions are removed from the comparable calculation to reduce the impact of square footage growth on the comparison. Comparable and identical store sales for the twelve weeks ended July 1, 2012 include a negative impact of 62 basis points resulting from the shift of Easter from the third fiscal quarter of the prior year to the second fiscal quarter of the current year. At July 1, 2012 , there were 24 stores that were opened or acquired fifty-two weeks or less which contributed approximately $121.7 million and $262.6 million to total sales during the twelve and forty weeks ended July 1, 2012 , respectively. During the twelve weeks ended July 1, 2012 , our transaction count in identical stores moderated to 6.4%, including a negative impact of three basis points resulting from the shift of Easter from the third fiscal quarter of the prior year to the second fiscal quarter of the current year.
The Company’s gross profit as a percentage of sales for the twelve and forty weeks ended July 1, 2012 was approximately 36.0% and 35.6% , respectively, compared to approximately 35.4% and 35.1% , respectively, for the same periods of the prior fiscal year. Gross margin increased 62 basis points and 47 basis points for the twelve and forty weeks ended July 1, 2012 , respectively, compared to the same periods of the prior fiscal year. The increase in gross profit as a percentage of sales for the twelve weeks ended July 1, 2012 was driven primarily by equal improvements in occupancy costs and cost of goods sold as a percentage of sales, while the increase in the forty weeks ended July 1, 2012 was primarily driven by occupancy cost improvements. Occupancy costs continue to be leveraged through strong disciplines through lease negotiation and were benefited by milder weather through much of the United States during the third fiscal quarter. Improved cost of goods sold during the twelve weeks ended July 1, 2012 reflect a focus on stronger buying and inventory management, including better shrink control and lower days inventory is on hand. We are confident that we will continue to see leverage in occupancy expenses, improvement in shrink control, and incremental leverage on the buy side. However, we think that leverage will be offset with our price investments as we continue to try to make ourselves more competitive relative to the marketplace.
Direct store expenses as a percentage of sales for the twelve and forty weeks ended July 1, 2012 were approximately 25.3% and 25.5% , respectively, compared to approximately 25.9% and 26.1% , respectively, for the same periods of the prior fiscal year. The 57 basis point and 54 basis point decrease in direct store expenses as a percentage of sales for the twelve and forty weeks ended July 1, 2012 , respectively, primarily reflects leverage in healthcare expense and wages.
General and administrative expenses as a percentage of sales were consistent for the twelve and forty weeks ended July 1, 2012 at approximately 3.2% compared to approximately 3.0% and 3.1%, respectively, for the same periods of the prior fiscal year. The 16 basis point and 10 basis point increase in general and administrative expenses as a percentage of sales for the twelve and forty weeks ended July 1, 2012, respectively, was impacted by our higher stock price, resulting in increases in share-based payment related expenses.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements at July 1, 2012 consist of operating leases disclosed in the above contractual obligations table and outstanding letters of credit discussed in Note 7 to the consolidated financial statements, “Long-Term Debt.” We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial condition.
Recent Accounting Pronouncements
Recent accounting pronouncements are included in Note 2 to the consolidated financial statements, “Recent Accounting Pronouncements.”
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers (principal executive officers) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Co-Chief Executive Officers and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Co-Chief Executive Officers and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
CONF CALL
Cindy McCann - Global Vice President of Investor Relations
Good afternoon. 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; and David Lannon and Ken Meyer, Executive Vice Presidents of Operations.
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 Forms 10-Q and 10-K.
Please note, our press release and scripted remarks are available on our website. We assume you've read our press release so we will use this time to focus on highlights from the quarter and our future outlook.
I will now turn the call over to Walter Robb.
Walter Robb - Co-Chief Executive Officer and Director
Thank you, Cindy, and good afternoon, everybody. Our Q3 results reflect another quarter of strong sales momentum and outstanding execution. We produced 27% EPS growth on 14% sales growth, delivering significant year-over-year improvement, including a 62-basis-point increase in gross margin to 36%, a 57-basis-point decrease in direct store expenses to 25.3% of sales, a 119-basis-point improvement in store contribution to 10.7% of sales, a 104-basis-point increase in operating margin to 6.9%, 94-basis-point improvement in EBITDA margin to 9.6% and 192-basis-point improvement in return on invested capital to 15.2%.
Our solid performance, capital discipline and increasing stock price generated close to $300 million of cash during the quarter through a combination of $211 million in cash flow from operations and $88 million in proceeds from team member stock option exercises.
We invested $13 million in new and existing stores, repurchased $25 million of common stock and returned $25 million in quarterly dividends to our shareholders. During the quarter, our total cash and investments increased $154 million to $1.5 billion.
Turning back to sales, given the continued moderation in inflation along with some sluggish economic data points, we were very pleased to produce our second consecutive quarter of 24.5% 3-year stacked idents or 3 years of 8%-plus increases. Excluding the Easter shift, our comps increased 8.9%, and our idents increased 8.6%. Transaction count increased 7%, with broad-based sales momentum across regions, departments and store age classes.
On a year-over-year basis, our customers have continued to shift their purchases toward organic products and several discretionary categories. We also continue to see meaningful increases in $50-plus sized baskets.
Our robust sales and focused operating disciplines, along with moderating inflation, helped to generate another quarter of exceptional margin performance. A 51-basis-point increase in gross margin x LIFO was driven primarily by equal improvements in occupancy costs and cost of goods sold.
Sequentially from Q2, we saw an approximate 30 basis point decrease in gross margin, which we attribute in part to seasonality, as well as some impact from our strategy of improving our relative value positioning by increasing our level of price investments. The success of this ongoing strategy is reflected in our continued sales momentum, as well as our most recent competitive survey, which indicates that we are improving our pricing position versus our competitors during the quarter.
Turning now to new store growth. We are very excited to have opened a record 9 new stores in Q3 in Greensboro and Wilmington, North Carolina; Kailua, Hawaii, Edina, Minnesota; Wexford, Pennsylvania; Laguna Niguel, California; 2 stores here in Austin and a relocation of our Soho store in London. Greensboro and Wilmington are both new markets for us. Kailua is our second store on Oahu and our third store in Hawaii. We closed our small store in Soho and opened a new 18,000-square-foot store in Piccadilly that is a great location and triple the size. And more than 7 years after opening our flagship store in Austin, we now have 2 new stores in our hometown.
This quarter's openings speak to the breadth and the variety of market opportunities available to us in new and existing markets, as well as both urban and suburban locations.
We continue to be very pleased with the performance of our new stores. For the last 5 quarters on average, our new store class has consisted of 21 stores opened for approximately 6 months. At 38,000 square feet in size, they have produced average weekly sales of $575,000, translating to sales per square foot of $786 and have generated a contribution margin of just under 6%. We expect these outstanding results, combined with our lower average capital investment per store, will drive strong returns over time. Please check out the Beyond the Numbers section of our Investor Relations webpage for more information about the new stores that we opened during the quarter.
Since our second quarter earnings release, we have signed 12 new leases averaging 38,000 square feet in size: Palm Desert, California; Pompano Beach, Florida; Park Ridge, Illinois; Wichita, Kansas; Boston; Columbia, Maryland; Kansas City, Missouri; Lincoln, Nebraska; Parsippany, New Jersey; Greenwood, Pennsylvania; Dallas; and Houston. Four of these leases are in new markets. We have signed 37 new leases over the last 12 months and are on track to open 25 new stores this year, 28 to 30 new store -- 28 to 32 new stores next year and 33 to 38 new stores in fiscal 2014. We currently have 76 stores in development totaling 2.8 million square feet and representing about 22% of our operating store base.
I will now give some additional color on our raised outlook for fiscal 2012, which is a 53-week year, and our initial outlook for fiscal year 2013, a 52-week year. Please refer to our press release for more detailed information.
For the first 3 weeks of Q4, idents increased 9.5% or 18.8%, on a 2-year basis. While we are pleased with these results, they represent a short period of time and also include some positive impact from the July 4 holiday shift. Our new range for the year implies idents of 7.6% to 8.6% for Q4 or 16% to 17% on a 2-year basis and 24.7% to 25.7% on a 3-year basis. For 2 and 3-year trends, these ranges are in line with our Q3 results on the low end and reflect an acceleration on the high end.
As currently reflected in Street [ph] estimates, we typically see high average weekly sales in our second and third quarters, which drive stronger bottom line results, and then sales tend to drop in the fourth quarter, which is seasonally our weakest quarter. Based on our Q3 results and our higher expectations now for the fourth quarter, we have raised our fiscal '12 outlook for operating margin to 6.4% and our diluted EPS range by $0.05 to $0.07. Our new fiscal year EPS range of $2.51 to $2.52 implies EPS of $0.59 to $0.60 for Q4. This includes the estimated impact on earnings from the extra week in Q4 of approximately $0.06 per share.
For the fiscal year, adjusting for the impact of the extra week in Q4, we expect 27% EPS growth on total sales growth of 13% to 14%. For fiscal year 2013, on a 52-week to 52-week basis, we expect comps of 6.5% to 8.5% and EPS of $2.83 to $2.87.
In summary, in an economic environment that is proving difficult for many retailers, we are thriving. We have opened 19 stores year-to-date and created over 7,000 new jobs throughout the company over the last 12 months. We just reported excellent quarterly results, raised our guidance for the current fiscal year and initiated guidance for next year. For 2013, we expect another year of healthy comp store sales growth, a record 28 to 32 new store openings, continuous operating margin improvement and earnings growth of 16% to 17%.
Our growth plans are on track with ending square footage expected to accelerate through 2014. We are well positioned to internally fund our growth and believe we will continue to gain market share through further differentiating our shopping experience, improving our relative value position -- proposition and reinforcing our standing as America's healthiest grocery store.
We will now take questions. Please limit yourself to one question at a time so that everyone has an opportunity to participate. And our call will end at 4:30 Central Time. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Charles Grom with Deutsche Bank.
Charles X. Grom - Deutsche Bank AG, Research Division
If I just look at the next year and look at the $2.83 to $2.87 EPS guidance, if my math's correct, I think it implies operating margin compression or maybe flat, which looks obviously pretty conservative. I'm just wondering if you could flush out the pluses and minuses on the margin line next year and if you could speak to what the impact from cycling the extra week this year will be.
Glenda Jane Flanagan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary
Well, the impact from cycling the extra week didn't really show up significantly in any way in operating margin; only in the percentage growth numbers, which we have adjusted for in the numbers we gave. And it does not imply operating margin compression, but we are going to be hopefully prepared to give more detail when we announce the fourth quarter than what we're giving today. We're very excited about the results that we're seeing so far in Q4 and what we've seen in Q3, and there's certainly no reason for us at this time to have anything negative to say about next year. We're very excited about next year.
Walter Robb - Co-Chief Executive Officer and Director
And I would just add to that, Chuck, that we -- out right in the script, it's just -- we're just talking about committing to incremental improvement of operating margin, so that's the direction we're headed.
Operator
We'll go next to Ken Goldman of JPMorgan.
Kenneth Goldman - JP Morgan Chase & Co, Research Division
What are you seeing in the fourth quarter ahead of where you are right now that could lead to deceleration from the quarter-to-date ID and comp sales that you've seen so far? Your implied guidance suggests a slowdown in performance. I'm just curious what you're seeing that would lead to that.
Glenda Jane Flanagan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary
Let me just say that the first 3-week numbers reflect positive impact from the July 4 holiday. July 4 was in Q3 in both years. But last year it was on a Monday, so we saw the positive sales impact in Q2 when people shopped over the weekend. This year, July 4 was on a Wednesday, so we saw the positive impact this year. So we do expect some slowdown in the comps for the rest of the year compared to those 3 weeks. Also possibly some moderation in inflation before we get to the end of the year.
Kenneth Goldman - JP Morgan Chase & Co, Research Division
And then just a follow-up. Can you quantify the July 4 impact or is that too hard to do?
Glenda Jane Flanagan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary
If you just look at what we have guided to for the full quarter, that is reflected in there.
Operator
We'll go next to Ed Aaron of RBC Capital Markets.
Edward Aaron - RBC Capital Markets, LLC, Research Division
Nice to see the plans for another step-up in the square footage growth in '14. When you think about the pipeline, are there any regions where maybe you're at the point or nearing the point where you feel like you kind of have to ease back a little bit just on the rate of store development because culturally, it's just hard to push it any farther? And then I guess, along those same lines, are there any areas where you think maybe you do have room to still push higher from here?
John P. Mackey - Co-Founder, Co-Chief Executive Officer and Director
John Mackey here. Actually, we don't think your question -- I mean, we're not seeing any regions where we're having to slow down on growth. We're actually, as you see, we're accelerating our growth. And we have greater capacity. We have more infrastructure in place. It's a great thing about the Whole Foods model with the 12 distinct regions. Each of them has the infrastructure in place on a regional basis to grow. And I mean, obviously, there's some type of physical limitation that a region could handle effectively for an upward limit, but we're not close to that in the region. In fact, it's just the opposite. We're finding that we're able to open stores in some of our larger regions a lot quicker than we ever have been able to do so. For example, I think in the Midwest region, aren't we opening about -- how many stores are we opening in 12 months?
Walter Robb - Co-Chief Executive Officer and Director
10 stores in 20 months.
John P. Mackey - Co-Founder, Co-Chief Executive Officer and Director
Yes, we're opening 10 stores there in 20 months.
David Lannon - Executive Vice-President of Operations
This is David. Just here in the Southwest, we just opened 2 stores in this quarter at 4 weeks apart Arbor Trails and Bee Cave, and then they're opening another store in San Antonio 4 more weeks from now. So the regions are showing the capability and maturity as they grow to open stores as close as 4 weeks apart without good, strong operations in existing stores.
John P. Mackey - Co-Founder, Co-Chief Executive Officer and Director
We're opening also on average smaller stores than we've opened a few years ago. The smaller stores are less complex to design, build and open so that's also a plus there.
Walter Robb - Co-Chief Executive Officer and Director
And I would just -- one last bit of color, Ed, is that what I see is that people of the regions are using this growth to innovate in how they're supporting the store openings. They're evolving their structure and they're expanding their, like John said, their capability to do it. It's really exciting to see -- we just opened one in Des Moines here last week, and to see how they've evolved their support structures to be able to do these simultaneously or more rapidly. So I agree with John. We're nowhere near our capacity, and we're increasingly confident in our ability to do it.
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Fund Letters
