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May 9, 2002

USA: Whole Foods Market sees Q2 sales up 21%

Austin, Texas-based natural and organic foods retailer Whole Foods Market has reported record sales and earnings for its12-week second quarter ended 14 April 2002. Q2 sales increased 21% over the prior year driven by 17% square footage growth and better than expected comparable store sales growth of 10.1%. Sales in identical stores (excluding three relocated stores) increased 9.1%. Income from continuing operations increased 36% to US$20.2m from US$14.9m in the prior year, and diluted earnings per share increased 26% to US$0.34, compared to US$0.27 in the prior year.

Austin, Texas-based natural and organic foods retailer Whole Foods Market has reported record sales and earnings for its12-week second quarter ended 14 April 2002.

Q2 sales increased 21% over the prior year driven by 17% square footage growth and better than expected comparable store sales growth of 10.1%. Sales in identical stores (excluding three relocated stores) increased 9.1%. Income from continuing operations increased 36% to US$20.2m from US$14.9m in the prior year, and diluted earnings per share increased 26% to US$0.34, compared to US$0.27 in the prior year.

For the 28-week period ended 14 April 2002, sales increased 21%, with sales in comparable stores increasing 9.8% and sales in identical stores increasing 8.2%. Income from continuing operations increased 35% to US$40.4m, or US$0.68 per share, compared to US$30m, or US$0.54 per share in the prior year.

“We are delighted to report our tenth consecutive quarter of 20% plus sales growth,” said chairman, president and CEO John Mackey: “We are translating our strong sales growth into sound bottom line results with record store contribution profit of over 10% of sales and a 26% increase in earnings per share.”

For all stores, store contribution increased 56 basis points to a record 10.3% of sales, gross profit increased 8 basis points to 35.0% of sales, and direct store expenses improved 48 basis points to 24.8% of sales. For stores in the comparable store base, store contribution increased 59 basis points to 11% of sales, gross profit improved 12 basis points to 35.7% of sales and direct store expenses improved 47 basis points to 24.7% of sales.

General and administrative expenses as a percentage of sales were essentially flat over the prior year, primarily due to lower amortisation expenses. Depreciation and amortisation was US$19m in the quarter, and EBITDA was US$54.7m or 8.8% of sales.

Q2 comparable store sales and annualised returns:

                                                                 # of
                                      Average  Average   NOPAT   Comp
                                       Size     Comps    ROIC   Stores

==================================================================
    Stores over five years old        25,300     6.2%     64%     72
    Stores between two and
     five years old                   32,800    12.4%     25%     32
    Stores less than two
     years old (including relos)      37,100    27.7%     14%     15

All stores in comparable
     store base                       28,800    10.1%     37%    119
==================================================================

The company’s stated goal is to build long term intrinsic value measured by improvement in EVA. For the quarter, EVA improved US$3.1m over the prior year from negative US$4.1m to negative US$1m. Stores produced EVA of US$25m, a 30% increase over the prior year. NOPAT increased 27% to US$23m, and total capital increased 8% to US$1bn. These calculations reflect a 40% tax rate and 10% weighted average cost of capital in both years.

Capital expenditures were US$35m for the quarter of which US$25m was for new store development. The company’s credit line balance was US$61m at the end of the Q2, a decrease of US$26m from the prior quarter. The company had about US$231m in total long-term debt as of the end of the Q2 and its debt to equity ratio decreased to .47 to 1 versus .92 to 1 in the prior year. Subsequent to the end of the Q2 the company paid down its credit facility by an additional US$16m leaving about US$171m available on the line of credit and lowering its total outstanding long-term debt to US$215m.

Pre-opening costs reached around US$2.2m during the Q2 of which about US$1.6m was related to three stores openings. The remainder was for stores in development. Relocation expense was about US$3.2m of which US$1.7m was primarily related to the relocation of two non-retail facilities and an estimated US$1.5m was for the write-off associated with a recent decision to relocate a store in the Dallas market.

Last week, the company opened two stores in Toronto, Canada and in Providence, RI. The Toronto store is its first location outside of the US. One store was closed and two will be opened during the Q3.

Forward-looking guidance

The company is raising its sales growth guidance for the fiscal year to 17% to 22% from 15% to 20%, adjusted for the 53 weeks in FY 2001. Comparable store sales guidance is 7% to 8% for the Q3 and 6% to 8% for the Q4 due to tougher comparisons of over 10% year on year in the Q3 and Q4.

Whole Foods expects gross profit margin to be lower for the fiscal year due to the recently acquired Harry’s stores, which are expected to negatively impact gross margins in the range of 20 to 30 basis points.

The company is focused on producing operating margin improvement primarily through the leveraging of direct store expenses; however, the higher operating expenses of new stores will continue to have a partially offsetting impact. General and administrative expenses as a percentage of sales are expected to increase slightly compared to the prior year due to the additional infrastructure for the new South Region headquartered in Atlanta, GA, as well as an increased marketing investment related to the company’s national branding initiative. Pre-opening and relocation expense is now expected to be in the range of US$12m to US$14m for the year, including the US$1.5m in relocation expense.

Capital expenditures are now expected to be in the range of US$160m to US$180m for the year, excluding any cash acquisitions. The company does not expect any significant borrowings for the remainder of the year and is lowering its net interest expense guidance by US$1m to a range of US$9m to US$10m for the year. The company still expects diluted earnings per share for the fiscal year in the range of US$1.30 to US$1.36. For FY 2003, the company expects diluted earnings per share in the range of US$1.56 – US$1.63.

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