Rule #1 Finance Blog

With Investor Phil Town

HOW TO READ A QUARTERLY CONFERENCE CALL (PART TWO)

OK. Picking up from where we left off yesterday… reading WFMI’s quarterly report.

Our gross margin, direct store expenses and G&A results as a percentage of sales were consistent with our historical averages and with our stakeholder philosophy of producing earnings growth through sales growth rather than through significantly leveraging these particular expenses.

More jargon for kinds of expenses and kinds of net income.   Fuggettaboudit.

In any given quarter, our gross margins may be up or down depending on our execution, the mix of sales from new stores, the impact of weather or a host of other factors, including inflation. We believe our historical results, which have consistently been in the range of 34 to 35 percent of sales, continue to be the best indicator of our future results as we have not changed our long-term strategy. We have initiatives in place to drive better purchasing, which we usually pass on to our customers as lower prices. Our pricing strategy continues to be market driven; we aim to be competitively priced on the same or similar items in grocery and Whole Body, while our perishables may be priced at a premium to reflect the higher quality of product available in our stores . Our consistently robust sales, comps, and gross margins seem to indicate that we are striking the right balance here.

More jargon for "we are kicking butts" because their game plan works so they are going to keep doing it.  He calls it "striking the right balance".

For the quarter, pre-opening and relocation expenses, excluding the pre-opening rent accounting adjustment were $9.1 million, versus $3.7 million in the prior year. This total was higher than our prior guidance by approximately $2 million for several reasons. Pre-opening costs per store are rising – primarily because the store size and number of prepared foods venues are increasing – and we did have one store in the quarter which was significantly over budget on pre-opening. The good news is that store is another home run for us with early sales significantly exceeding our projections.

It cost them more to open new stores than they expected but made up for it with a lot bigger sales.

For the year, we produced EVA® increased $6.6 million to $10.4 million.

EVA is not a high maintenance girlfriend.  EVA is a cool bit of jargon that I hope we see a lot more at other businesses.   It’s a way of looking at the numbers to see if your investments in the growth of the business are getting you a good rate of return or if you — the CEO — are just empire building.

John isn’t into stupid empire building.   Rule #1 investors like EVA a lot because EVA is kind of like Return on Invested Capital.  Essentially what you do with EVA accounting is charge yourself for using money.   Whole Foods uses a 9% charge.

That means if you are a manager of a Whole Foods market fresh foods section and you want to add a whole bunch more fresh veggies, you have to be pretty certain that the investment of rent for the space you are taking up, the cost of setting up the shelf space and sprinklers and buying the new veggies and hiring extra people, is going to pay for itself AND 9% on whatever it cost to do all that — because if it doesn’t do that, you just lost money … and that ain’t a great way to get ahead at WFMI … especially because 500 managers at WFMI have their compensation plans tagged to EVA.   

EVA accounting means the LESS money MY business has invested in their little section of the business and the more net earnings they can make in their section, the bigger their bonus.  Simply put, if they can do more with less money spent, they get recognized for a job well done. That makes 500 managers at WFMI think like a CEO.  Thinking like a CEO means thinking about how to best use the surplus capital that the business makes (if it’s a wonderful business).

Surplus:  Should you buy Wild Oats wid it?  Should you buy a company jet?  Should you build a new store?   Or should you give it back to the owners?

Since that surplus is MY money he’s talking about, I want it paid to me, absolutely no question, cough it up because I OWN Whole Foods and the money is MINE ALL MINE.   So gimme it.  Except for only one other possibility.  Only one.

If you give it to me (and let’s forget obscene double taxes on dividends here for a minute and later when we think of it again, go write our congressperson and DEMAND they get rid of that illegal tax) … if you give it to me I get to decide how I want to invest it, and since it is my money, since I own the business, it is my right to decide.   And since I can allocate that money to other businesses where I can make 15% a year, gimme it.

Unless.  Unless YOU, John Mackey, will keep it and make MORE than 15% on it for me.  Then in that case, I’d rather have you keep it.

So John, who is very smart and very cool, and who realizes that since he took WFMI public, the owners need to be treated fairly (unlike in many other public businesses), he instituted EVA to make sure that the biz would get a good return on investment — or he would give the money back.   Quite often he decides that the business can’t really invest ALL the surplus cash laying around after the last big year and get a high enough return to invest it (because you can only grow so fast unless you get sloppy) — so he gives some of it back in the form of dividends.   He keeps as much as he can, EVA invest plus a nice cushion of cash, and then he returns the rest to us.

Now why doesn’t everybody do that!?  Because many CEOs are empire builders, not ethical managers who feel a strong moral commitment to their BAG (John’s is to get the whole world eating moral and healthy food), their employees and the business owners.   Empire builders sacrifice their values, their people and their owners’ money to their own egos.  The world is full of these kinds of people, but we can figure out who they are and refuse to invest in their businesses.   Or we should do that if we are Rule #1 investors.   There is a lot less risk with a John Mackey at the helm.

So what John is saying here is that WFMI’s real return on the owners’ surplus capital was invested successfully and has gone up a bunch since last year.   

MORE TOMORROW IN PART THREE…