Whole Foods 2007 Annual Report Download - page 34

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Oats stores into our operations and new store openings will drive strong sales growth and comparable store sales growth in
future periods. For fiscal year 2008, on a 52-week to 52-week basis, the Company expects sales growth of 25% to 30%, of
which approximately 10% is expected to come from the Wild Oats stores, and comparable store sales growth of 7.5% to
9.5%
Gross Profit
Gross profit consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and
food preparation operations. Gross profit totaled approximately $2.30 billion, $1.96 billion and $1.65 billion in fiscal years
2007, 2006 and 2005, respectively. Gross profit as a percentage of sales was 34.8%, 34.9% and 35.1% in fiscal years 2007,
2006 and 2005, respectively. 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 inflation. Relative to other stores in a region, 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. We have many buying initiatives in place that are
benefiting our customers. Our strategy is to be competitively priced on a market-by-market basis on commodity-type
products and on identical product brands in grocery and Whole Body; however, our perishables may be priced at a premium
to reflect the higher quality, broader selection, and better customer service available in our produce, meat, seafood, bakery,
specialty and prepared foods departments.
Direct Store Expenses
Direct store expenses totaled approximately $1.71 billion, $1.42 billion and $1.22 billion in fiscal years 2007, 2006 and
2005, respectively. Direct store expenses as a percentage of sales was approximately 26.0%, 25.4% and 26.0% in fiscal years
2007, 2006 and 2005, respectively. Direct store expenses in fiscal year 2005 include natural disaster costs totaling
approximately $13.4 million. For all years, higher direct operating expenses of new stores continue to have a partially
offsetting impact on store contribution. Direct store expense as a percentage of sales tends to be higher for new stores and
decrease as stores mature, reflecting increasing operational productivity of the store teams. The Company does not expect to
leverage direct store expenses in fiscal year 2008 due primarily to anticipated investments in labor and benefits at the
acquired stores and continued, though more moderate, increases in health care costs as a percentage of sales.
General and Administrative Expenses
General and administrative expenses totaled approximately $217.7 million, $181.2 million and $158.9 million in fiscal years
2007, 2006 and 2005, respectively. General and administrative expenses as a percentage of sales were 3.3%, 3.2% and 3.4%
in fiscal years 2007, 2006 and 2005, respectively. General and administrative expenses in fiscal year 2007 include
approximately $13 million, or $0.06 per diluted share, in costs incurred during the fourth quarter related to legal matters,
Wild Oats integration efforts and the addition of Wild Oats' expenses. The Company currently expects general and
administrative expenses as a percentage of sales in fiscal year 2008 to be in line with the 3.3% reported in fiscal year 2007,
due primarily to the temporary costs associated with integrating the Wild Oats acquisition along with the cost of fully
staffing the Company’s three smallest regions which gained the greatest number of stores, as a percentage of our existing
store base, in the merger.
Pre-opening and Relocation Costs
Pre-opening costs include rent expense incurred during construction of new stores and other costs related to new store
openings, including costs associated with hiring and training personnel, supplies and other miscellaneous costs. Rent expense
is generally incurred approximately nine months prior to a store’s opening date. Other pre-opening costs are incurred
primarily in the 30 days prior to a new store opening. Relocation costs consist of moving costs, remaining lease payments,
accelerated depreciation costs and other costs associated with replaced facilities. Pre-opening and relocation costs totaled
approximately $70.2 million, $37.4 million and $37.0 million in fiscal years 2007, 2006 and 2005, respectively. Pre-opening
and relocation costs as a percentage of sales were 1.1%, 0.7% and 0.8% in fiscal years 2007, 2006 and 2005, respectively.
Stores newly opened and relocated were as follows:
2007 2006 2005
New stores 16 11 12
Relocated stores 5 2 3
Total stores opened 21 13 15
Interest Expense
Interest expense, net of amounts capitalized, was approximately $4.2 million, $32,000 and $2.2 million in fiscal years 2007,
2006 and 2005, respectively. The increase in net interest expense in fiscal year 2007 over the prior fiscal year includes
interest expense on the $700 million term loan we entered into on August 28, 2007 to finance the acquisition of Wild Oats
Markets. The reduction in net interest expense in fiscal year 2006 from the prior fiscal year includes the decrease in interest