Nov 5, 2014
Executives
John Mackey - Co-CEO Walter Robb - Co-CEO A.C. Gallo - President Glenda Flanagan - EVP & CFO Jim Sud - EVP, Growth & Development David Lannon - EVP, Operations Ken Meyer - EVP, Operations Cindy McCann - VP, IR
Analysts
Charles Grom - Sterne, Agee & Leach, Inc. Mark Wiltamuth - Jefferies & Company Rupesh Parikh - Oppenheimer & Co.
Karen Short - Deutsche Bank Stephen Grambling - Goldman Sachs Kelly Bania - BMO Capital Markets Meredith Adler - Barclays Capital Kate Wendt - Wells Fargo Securities Mark Miller - William Blair & Company Mitchell Pinheiro - Imperial Capital Joe Edelstein - Stephens Inc. David McGee - Suntrust Robinson Humphrey
Operator
Good day everyone and welcome to today’s program. At this time, all participants are in a listen-only model.
Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions) It is now my pleasure to turn the conference over to Ms.
Cindy McCann. Please go ahead, ma’am.
Cindy McCann
Good afternoon and 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 Form 10-K. Please note our press release and scripted remarks are available on our Web site.
I’ll now turn the call over to John Mackey.
John Mackey
Thank you, Cindy. Good afternoon everyone.
We’re pleased with our performance for the quarter and fiscal year, which reflects continued market share gains and healthy returns. For the quarter, sales increased $280 million to $3.3 billion.
We saw stability in comparable store sales, which increased 3.1%, in line with reported results for the first three weeks of the quarter. We opened a record 13 new stores, expanded into seven new markets, and hit a new company milestone of five store openings in two days.
We see every new store as an opportunity to innovate, and with a record number of openings over the last four quarters, we are evolving and differentiating our shopping experience faster than ever before. One of our many competitive advantages is our ability to create unique community gathering places such as the rooftop Tap Haus in our new Asheville, North Carolina store and our At the Turn outdoor venue next to our five-hole putting green in our first Augusta, Georgia store.
We believe our leadership in retail innovation is a key driver of our continued market share gains, and it is exciting to see our new stores from Palm Desert, California to Toronto, Canada perform so well. For the last eight quarters, our new store class has averaged weekly sales per store of $503,000, translating to sales per gross square foot of $722 and productivity levels, on a weighted basis, of 83%.
High sales volumes have helped drive healthy store contribution of 4%. Most importantly, our comp stores less than two years old have averaged 15% return on invested capital, well in excess of our weighted average cost of capital.
As reflected in our gross margin results, we continued our value efforts and this was the 11th consecutive quarter in which we did not fully pass through higher product costs to our customers. We managed expenses to offset higher year-over-year investments in value, technology, and growth, resulting in near record 10.3% store contribution, 9.1% EBITDA margin and 6.3% operating margin.
Diluted earnings per share increased 9% to $0.35, and we produced a 14% return on invested capital. For the fiscal year, sales grew $1.3 billion to $14.2 billion, with sales per gross square foot increasing to a record $990.
It’s true that natural and organic products are increasingly available in stores and online, yet no one does what we do. We hold the idea of food to a higher standard, banning more than 75 ingredients commonly found in other stores, and we believe our unparalleled quality standards and selection are a large part of why we maintain a broad base of loyal customers and attract new customers aspiring to a natural and organic lifestyle.
Our sales mix reflects our unique offering, with an estimated 30% of total sales in organic products and 67% of sales in perishable foods. Our prepared foods and bakery departments also continue to be key differentiators, with combined sales increasing to $2.7 billion, or 19% of sales.
We added a record 38 new stores during the year, expanding to 15 million square feet across 399 stores in 42 states and three countries. Strong store-level operating disciplines drove our fifth consecutive year of improvement in direct store expenses and our third consecutive year of double-digit store contribution margin.
We generated record EBITDA of $1.3 billion, produced a healthy 15% return on invested capital, returned $750 million to our shareholder through dividends and stock repurchases, and ended the year with approximately $1 billion in cash and investments. We are particularly proud of our operating results given 2014 was a challenging year on many fronts.
We faced a dynamic competitive landscape, a lukewarm economy, and headwinds from our own growth and value initiatives. In our journey over the past 36 years, we’ve always viewed challenges as opportunities to learn and evolve, and believe we emerged from this past year as an even stronger company.
The last few months have been an incredibly exciting and rewarding time as we’ve introduced many of the strategic initiatives we outlined last quarter. I will share several highlights for you now: In early September, we partnered with Instacart to offer one-hour delivery in 15 major U.S.
cities. Initial customer response has been overwhelmingly positive, with orders 2.5 times our average basket size.
We piloted our new affinity program and have since expanded the one-store test to 11 stores. We are very pleased with the high percentage of active customers registering for the program.
Just in time for the holidays, we launched our Wine Club, offering home delivery of high-quality wines from around the world. As the first national grocer to open in-store wine bars, we see our Wine Club as the next evolution in satisfying and delighting our passionate wine shoppers as well as potential new shoppers who might not live near a Whole Foods Market.
In keeping with our commitment to offer innovative new choices and conveniences for our customers, we were the first national supermarket to accept Apple Pay. We are one of the top retailers in terms of number of transactions, and our seamless experience has been widely publicized.
We also are especially proud, after several years of research and planning, to have introduced our exclusive Responsibly Grown rating system for our produce and floral departments. This Good, Better, Best labeling system assesses growing practices that impact human health and the environment and prohibits some of the most hazardous pesticides.
We are pleased to further differentiate our produce and floral offerings and provide our customers yet another way to make more informed purchasing decisions. We launched our first national brand campaign, focusing on a Values Matter theme to communicate our deeper purpose and reinforce our unique position as America’s Healthiest Grocery Store.
The campaign calls out what makes Whole Foods Market special, our food different and our quality superior, reaffirming our unwavering commitment to our core values, which are at the heart of everything that we do. During its run, the campaign is expected to deliver nearly 350 million impressions and reach close to 70% of our target audience an average of six times.
Collectively, our efforts have led to very high team member morale, more choices for our customers and a tremendous amount of favorable publicity. We believe the heightened visibility of our brand is generating significant momentum and has positively impacted our sales trends over the last eight weeks.
In addition, we have now fully cycled over the significant cannibalization we saw in Boston last quarter -- last year. Quarter to date, our comps have increased 4.6%, accelerating to 10.4% on a two-year stacked basis.
On that note, let’s turn our thoughts to 2015 and beyond. With the beginning of the new fiscal year, we are taking the opportunity to shift our conversations with the investment community to focus on a broader directional point of view and the metrics that we believe are key to the long-term health of the Company.
Our annual targets for fiscal 2015 are as follows: Sales growth over 9%, comparable store sales growth in the low to middle single digits, square footage growth of 9% to 10% based on 38-42 new stores, including five to six relocations, EBITDA margin of approximately 9%, and ROIC greater than 14%.We have a stakeholder philosophy and are focused on managing our business for the long-term. We remain focused on the following strategic initiatives: We strongly believe in investing in new and existing stores will grow comps and result in healthy returns for our shareholders.
We are very excited about the stores opening this year, which reflect a range of sizes from 20,000 to 60,000 square feet. We will be expanding into six new markets, such as Ottawa, Canada, while invigorating our brand with new flagships in some of our older markets including Houston, Boston and New York City.
We are refreshing approximately 70% of our stores over 10 years old. These refreshes will range in scale from décor updates, to adding or remodeling venues, to full-store remodels.
With several projects already underway, we expect refreshed stores will see an immediate boost in sales, with the benefit to our overall comps more fully realized in fiscal year 2016 and beyond. Each week over 7 million customers visited our stores with 1.7 million subscribing to our online newsletter and 9 million connecting with us through social media.
In 2005 -- okay, sorry about that again. We are refreshing approximately 70% -- yes, we’re refreshing approximately 70% of our stores over 10 years old.
These refreshes will range in scale from décor updates, to adding or remodeling venues, to full-scale -- full-store remodels. With several projects already underway, we expect refreshed stores will see an immediate boost in sales, with the benefit to our overall comps more fully realized in fiscal year 2016 and beyond.
We remain committed to the highest quality standards and to expanding our value offering. Our value focus is on perishables where we see opportunities to broaden our selection of products at entry-level price points, increase promotions, and narrow price gaps on select known value items.
We are encouraged by the pricing experiments we are running in several markets, and if results continue to be positive, we expect to expand our tests to more markets during the year. Reflecting our value efforts, we expect the year-over-year decline in gross margin, excluding LIFO, in fiscal 2015 to be greater than last year’s 20 basis point decline.
We are focused on improving and extending our customer experience and will be making additional technology investments this year. For example, we expect to introduce our new and robust Whole Foods Market mobile app to dramatically improve our customer’s digital and mobile experience before, during and after visiting our stores.
Our affinity pilot is underway, and we hope to roll it out to a majority of our stores by next holiday season. We are also continuing our efforts to unify our POS systems, as we move toward the ultimate goal of establishing a common platform for a seamless buying experience.
Over the longer term, this will increase efficiencies in POS management and maintenance, create opportunities for enhanced global and personalized promotional offers, and provide deeper digital integration in the purchase experience. We have successfully reduced operating expenses by 180 basis points over the last five years and are working to further improve our cost structure.
In fiscal year 2015, we expect the biggest savings to come from internal distribution, coordinated purchasing and labor leverage. With the recent implementation of Workday, we transitioned a significant amount of paperwork and workflow to an efficient and productive online HR management system, and look forward to rolling out a labor-scheduling solution to our front-end store teams this year, which will be a big win for our customers in terms of faster check out times.
Results may fluctuate on a quarterly basis, but for the fiscal year, we expect annual diluted earnings per share growth in line with or slightly higher than sales growth. It remains our intention to offset the impact of our strategic initiatives with improvements in our cost structure over the longer term.
However, our priorities are to compete effectively in this highly dynamic market and deliver strong EBITDA and returns on invested capital. While we do our best to estimate the impact of our value efforts, it is more art than science, and customer reactions will likely vary from our predictions.
Additionally, the timing of our investments and expense reductions will not always align, for example in the first quarter, when we will have the upfront cost of our brand campaign. Please see our press release for additional information on our expectations for the year.
We crossed the 400-store mark yesterday, expect to pass 500 stores in fiscal 2017, and over the longer term, see demand for 1,200 Whole Foods Market stores in the United States alone. Our new stores are delivering higher-than-projected sales and operating results, and our current 114-store pipeline is projected to reach cumulatively positive EVA before our five-year hurdle.
Each week, over seven million customers visit our stores, with 1.7 million subscribing to our online newsletter and 9 million connecting with us through social media. In 2005, it was a major milestone for us to report that we had six stores averaging $1 million in sales per week.
We now have 60 stores exceeding that level, with several averaging over $2 million. Our business model produces industry-leading sales per gross square foot, healthy returns on invested capital, and strong cash flow.
We believe as we move forward with our strategic initiatives, continuing to innovate and evolve at a fast pace, we’ll see further market share gains and produce increasing returns on invested capital over the long term. We will now take questions.
Our call will end at 4:45 Central time today. So please limit yourself to just one question at a time so that everyone has an opportunity to participate.
Thank you.
Operator
We apologize for any noise you may have heard, as addressed. (Operator Instructions) We’ll take our first question from Charles Grom with Sterne, Agee.
Your line is now open.
Charles Grom - Sterne, Agee & Leach, Inc.
Thanks. Good afternoon, everybody.
I’m just -- if you look out over the next couple of years, Walter, where should we anticipate your gross profit margin rate? And could you discuss your internal views on investing in price versus -- I’m sorry, investing in price to drive traffic versus maintaining a certain gross profit margin structure longer-term?
Thanks. Did you guys hear that question?
Walter Robb
No, we do not hear that question.
Charles Grom - Sterne, Agee & Leach, Inc.
All right. Just if you guys could just discuss your view towards gross profit margins and investing in price relative to driving traffic, and relative to maintaining a certain gross profit margin structure over time -- sort of the balance that you guys see necessary to get your traffic levels back up to maybe where they were a couple of years ago, versus maintaining a 34%, 35% gross profit margin rate.
Walter Robb
Well, this is Walter. I think this quarter is some good evidence that we’re finding a nice balance between the two right now and this quarter it was a 35 to down 20 basis sequentially, but that -- there is plenty of room in that number between our historical ranges of 34 to 35.
So I think we’re just continuing to as we said in the script, its more of an art and science, but we’re -- I think we put the momentum here on the back of all of these initiatives taken together. And I think the margins that’s coming out here is sort of a reflection of all those kind of blended together.
Charles Grom - Sterne, Agee & Leach, Inc.
Okay. And just as a follow-up, Walter, can you talk about the improvement in gross profit margins relative to the past couple of quarters?
I mean, ex-LIFO, you guys are basically flat. The past couple of quarters was down 30 to 50 basis points even though your comp got a little bit worse sequentially.
Just talk about the drivers there. Thanks.
Walter Robb
Well, I think we did have some improvement. We had some -- we did not do all the pass-throughs there.
So that’s going the other direction, but I think we had some improvement in -- on the buy side of the operation. We worked hard to integrate our global buying and regional buying systems, particularly on our promotional efforts and that made a big difference and I think the inflation is really not in the factor at all right now, other than potentially in the future for beef and pork.
Glenda Flanagan
We also had improve -- some improvement in occupancy in Q4 that we didn’t have in Q3. So that help Q4 somewhat as well, but cost of goods sold was up in both quarters.
Walter Robb
Right.
Charles Grom - Sterne, Agee & Leach, Inc.
Okay, great. Good luck.
Thanks.
Walter Robb
Next question please. Operator, you there?
We are not hearing any questions.
Operator
We will take our next question from Mark Wiltamuth with Jefferies. Your line is now open.
Mark Wiltamuth - Jefferies & Company
Thank you. I wondered if you could give us any color on the quarter to date comp?
Is that comp lift largely a function of lapping out of the Boston cannibalization? Or just what do you think is behind that comp lift?
Walter Robb
Well, we know that we have anniversaried the Boston cannibalization as well as some other stores as well. So there is less cannibalization going on right now.
In addition, I mean, we do think our value strategy is having -- beginning to have a positive lift. We’ve also begun our national branding campaign.
So we’re getting lots of publicity. We got lot of publicity through Apple Pay and Instacart.
Our key members are very pumped up about the national branding campaign. They’re very enthusiastic and so I think service levels and the basic energy in the stores has picked up.
So we think all of those are contributing to it, but I mean, it’s hard to know exactly what it is.
Mark Wiltamuth - Jefferies & Company
Is there any way to quantify the cannibalization part of it, so you can just lay the rest of it on your own efforts to drive comp?
Walter Robb
I mean, what makes that so difficult is that some stores anniversary, new ones come in, new competitive openings, -- anniversary, one of the things that I don’t -- I never felt like the market completely understands is that, say in 2014 Trader Joe’s entered into Florida, Texas and Colorado markets. That hits us for a one-time type of hit on our costs, and then of course we have begun anniversarying some of those as well.
But then again, new competitors come in, so it’s very dynamic. It’s very hard to exactly quantify.
So -- and the Boston -- for example, even Boston where we’ve now anniversaried all the openings, we’ve been gradually anniversarying some of those stores as over the last couple of quarters. So it’s very hard to give you the exact kind of breakout that you might like.
Mark Wiltamuth - Jefferies & Company
Got it.
David Lannon
This is David Lannon. I just wanted to say, one thing about the values matter campaign, the brand campaign, is that its really electrified our team member base and when our team members are engaged and excited, it translates into sales and anecdotally what Ken and I are seeing in the operations in the stores is the team members are thrilled by the value matters campaign holding them up and supporting them in their retail efforts and we think the customers are really seeing us in a new light.
Ken Meyer
So Walter, it is just our own calculations internally. We don’t think there has been -- there was a significant shift in cannibalization effect from QtoQ and so I think what you’re seeing here in terms of this jump of comps is attributable to this wide range of efforts that we take and that we’ve laid out.
I mean, the value efforts, the pricing efforts that we’ve done particularly on the perimeter are working, the values came in, David just mentioned the focus on the customer experience through technology, all of these things are driving the increase. This is a legitimate, a real increase and we’re really, really pleased to see it happening.
Mark Wiltamuth - Jefferies & Company
Okay. And just, if you could give us a little color on that produce price reduction test, just any of the early feedback there?
Thank you
A.C. Gallo
This is A.C. We really -- we started at the beginning of the fiscal year, so we’ve really been in it -- this is our fifth week that we’ve been doing it.
And we’ve got it happening and several different markets where we’re testing slightly different pricing strategies and so far we’ve seen really good lift in the stores where we’re doing it, good unit lift. Customer -- team members are happy about it.
Customers seem to be happy. We are pretty encouraged by it.
We combined it with some external advertising, which is something we hadn’t done before. It seems to be getting good reaction from that.
So we’re encouraged, we think that it looks pretty good. It’s really going to take -- it takes a while to really see overall how effective it is, but so far it’s encouraging and if it continues to do well, we can see ourselves doing it in more markets going forward.
Mark Wiltamuth - Jefferies & Company
Okay, thank you.
Operator
Once again, we apologize for the noise. We will take our next question from Rupesh Parikh with Oppenheimer.
Your line is now open.
Rupesh Parikh - Oppenheimer & Co.
Thanks for taking my question and congrats on a good quarter. I just wanted to touch a little bit more on just how you're thinking about competition and cannibalization this year.
As you look at competitor openings in your market for these next couple of quarters, do you expect them to moderate from what we saw this past year or about the same? Maybe you can provide more color there.
And then just on cannibalization, like, how you are thinking about cannibalization year-over-year in your markets as well? Thank you.
Walter Robb
I think -- this is Walter, I’ll start there, I mean, I think last year was -- I think last couple of years have been an acceleration of competition. I think the market is structurally changing to have more people offering products, although it represents again the fact that the opportunity continues to get larger, but I’d say that, I think that its going to continue to maybe slightly moderate.
We had a competitive opening every other day this past year, that’s pretty intense. And I think the cannibalization, now there is some dropping off, some coming on, as John said.
So these are forces that are kind of continue to play as the marketplace evolves, but I think we’re trying to talk about today is how those are not the biggest pieces of the equation. The bigger pieces are the steps that we’re taking to really grow the company and their working.
Rupesh Parikh - Oppenheimer & Co.
And then just one follow-up question. On your store remodel program, what type of comp do you guys typically see from a store remodel?
Comp width, you see from a store remodel?
David Lannon
This is David Lannon. We see some big comps.
We are really encouraged with some of the comps we see. A good example is our store in Indianapolis.
We just finished a remodel in Minneapolis. It was an old Wild Oats.
It’s now a brand new modern Whole Foods and that store was negatively comping, and now it’s comping up into the double-digit. So we’re bullish on that.
We’re focusing on our older stores. We’ve got about 40 stores this quarter that we’re refreshing and remodeling, and we’re going to keep that rolling throughout the whole year in addition to all of our new stores that we’re opening.
Rupesh Parikh - Oppenheimer & Co. Inc.
Thank you.
Operator
We’ll take our next question from Karen Short with Deutsche Bank. Your line is now open.
Karen Short - Deutsche Bank
Hi. Just a couple of questions on the loyalty card.
So, I guess maybe can you talk -- or affinity kind of program. Can you maybe talk a little bit about what drove the decision to target the stores in the market that you’re currently in?
And then, I guess, based on your early read-through is this the format you think the affinity program will take going forward as you introduce it to other markets? Or are you thinking you’re going to kind of keep tweaking it and testing it until you find the right one?
Walter Robb
Hi, Karen, this is Walter. Well as you know we’re now in 11 stores, and kind of set out a goal of being in the majority of our stores by the end of next year.
But its really constantly evolving based on what the customers are telling us. So, I think we’re kind of co-creating the app together as people would tell us what they value and don’t.
But so far it’s pretty clear that it’s driving in a higher basket. It’s pretty clear that they want the opportunity to personalize the information that they get, and they are already exercising the reward.
So, I think some of the basic components are in place, but they are really helping us to evolve. What it means, what they value as an Whole Food Shop or what they’re looking for from the program.
And there is plenty of runway to keep evolving and changing it based on their feedback.
Karen Short - Deutsche Bank
Okay. And that’s helpful.
And then just in terms of your comments on what the offsets will be for gross margin investments. Just to clarify, your comment on labor leverage, maybe can you just elaborate a bit on that?
And then do you think you’re at the right ratio in terms of full-time, part-time mix? Or do you think there is some changes that you can move more -- even more to part time?
Walter Robb
I mean, we don’t exactly know of course what the right mix is for gross margins, value, pricing, full-time, part-time. These are all very dynamic and they’re -- we’re constantly experimenting.
And I think that experimentation is going to continue. The trend has been towards -- gradually towards a little bit more part-time.
I mean, Whole Foods has always had one of the highest ratios of full-time to part-time in the retail industry. But we have gradually moved to more part timers; we found that of course from a healthcare standpoint that reduces our cost structure tremendously.
So, we don’t know what optimum is for that, and we know that there are lots of advantages to having full-time team member in terms of loyalty, commitment, levels of return on training investments, and versus the offset of the lower cost structure.
A.C. Gallo
Part timers. Yes.
So many of our best team members also started as part-time. Regional President, Laura Derba in Boston started as a part-time team member.
We are looking for great talent, if you want to work 10 hours a week or 40 hours a week.
Karen Short - Deutsche Bank
Okay. Thanks.
Operator
We’ll take our next question from the line of Stephen Grambling with Goldman Sachs. Your line is now open.
Stephen Grambling - Goldman Sachs
Hi. Good afternoon, and thank you.
Just to quickly follow-up on Karen’s questions on the cost reduction measures. I was hoping you could also elaborate on the internal distribution opportunity, just maybe give us a little bit more detail on what you’re doing now or where the buckets are?
Thanks.
Walter Robb
Internal distribution, we’ve been working to lower our cost to serve across all our DC’s, every one of the regions has our own DC. And so, that’s been a ongoing multiyear initiative to continue to find great efficiencies and productivity, and I can say we’re reaping good savings each and every year.
So that continues, that effort continues. Second of all, we have some continued opportunity with our primary distributor which is United Naturals continued to have scale opportunities there.
And third, we’re looking at some -- just looking at some other areas associated with purchasing and on the supply side of the business and also in terms of truck routes and those sorts of things to see what's possible.
Stephen Grambling - Goldman Sachs
That’s helpful. Thanks.
If I can sneak one quick one in as well, just on capital allocation. What is the assumption in terms of buyback going forward?
Thank you.
Glenda Flanagan
Hi, this is Glenda Flanagan. What we’ve been doing recently is looking for opportunistic buys when we see that the stock price and our cash balances and other opportunities are coming together.
But also for most quarters we at least buyback the amount that we issue in dividends that quarter and that was $44 million for last year, and its up to about $47 million or $48 million this year, that’s been our history.
Stephen Grambling - Goldman Sachs
So you wouldn’t have anything embedded in your guidance to be clear? Thank you.
Walter Robb
Correct.
Operator
We’ll take our next question from Vincent Sinisi with Morgan Stanley. Your line is now open.
Vincent, your line is now open.
Walter Robb
Next question.
Operator
We’ll take our next question from Meredith Adler with Barclays. Your line is now open.
Walter Robb
Operator, we’re not hearing these questions.
Operator
Yes, unfortunately there was nobody there. We’ll take our next question from the line of Kelly Bania with BMO Capital.
Your line is now open.
Kelly Bania - BMO Capital Markets
Hi, good evening. Hope you can hear this question.
I was wondering if you could talk it all about regional trends either during the quarter or quarter-to-date? And I guess, I’m asking because you mentioned some of the pricing experiments in certain markets and I’m curious if there is any different comp trends in certain markets where you’re doing those pricing experiments, and what you’re learning from those?
Are those a little bit deeper pricing? Or what have you learned from those experiments?
Walter Robb
Well, we’re doing a variety of experiments and it’s very early in the process. It’s hard for us to reach any general conclusions yet because most of these perishable pricing experiments are six weeks, only six weeks old.
And we have reduced gross margins and prices significantly a lot in some markets, less in others and not at all. We have control groups as well.
So, it’s too early to make generalized conclusions. But as A C.
said, we’re pretty pleased with the initial results that where we’ve made significant reductions in price and are particularly in produce, we have seen very good results. And we do anticipate that we will probably extend that experiment to other markets in the second half of the fiscal year.
But we haven’t made any definite determinations, and it’s too early to make broad conclusions I think. Wait till next quarter; we’ll have more for you then maybe.
Operator
We’ll take our next question from Meredith Adler with Barclays. Your line is now open.
Meredith Adler - Barclays Capital
Thank you. Can you hear me now?
Walter Robb
Yes, Meredith.
Glenda Flanagan
Yes, Meredith, we can hear you.
Meredith Adler - Barclays Capital
Sorry about that. I was just -- I wanted to first follow-up on Stephen Grambling’s question which I’m not sure you heard about whether the guidance includes any stock buybacks at all?
Glenda Flanagan
We don’t normally include the forward stock buybacks in our guidance.
Meredith Adler - Barclays Capital
Okay. Great.
And then I have another question about, kind of -- what kind of customer analytics you have even though I know your affinity program is still on a test mode, and also whether you have specific tools for optimizing the promotions you’re doing. Are there systems out there you can use?
Are you building that kind of database for figuring out if the promotions are successful?
Walter Robb
So, where we’re right now as we have a volunteered customer base that’s pretty good size that people have opted to be in that relationship. But we’re really in the first inning with respect to building our analytics capability.
And one of the things that we’re -- what's happening with the affinity experience, we’re generating a lot of data. And as we go we’ll continue.
So we’re right where we are as the team is talking about how we take those next steps to be able to do that. So, I would say, what you’re seeing today is the results you’re seeing today and they are so encouraging.
We have a whole another tailwind to look to as we build that capability.
Meredith Adler - Barclays Capital
And in terms of promotions, which would be separate I guess from the customer information or database or a system for keeping track of what works and what doesn’t work?
A.C. Gallo
Yes, Meredith, this is A C. Yes, we developed some pretty good tools for us to be able to analyze the different promotions we’re doing.
Analyze them in a lot of different ways to try to understand the lift, the unit lift in that particular department, the unit lift in the store, the results versus other control stores. So, that’s a whole separate process that we’re going through to do that analysis.
Meredith Adler - Barclays Capital
Great. Thank you.
That’s helpful.
Operator
We’ll take our next question from the line of Kate Wendt with Wells Fargo. Your line is now open.
Kate Wendt - Wells Fargo Securities
Yes. Thanks so much.
So I just was wondering if you could talk a little bit about the remodels in terms of maybe the cadence throughout next year. How you’re prioritizing which stores get touched first?
And then, whether in the tests that you’ve done so far, you’ve seen accomplish from kind of the entire spectrum whether you just kind of do a light refresh or a full-scale remodel? Thanks.
David Lannon
This is, David. And Ken and I can talk about it.
It’s not a test. We refresh and remodel our stores all the time.
Our goal is to make our -- to lessen the difference between our brand new stores and our oldest stores. So we’re focusing on our stores that are over 10 years old.
So, stores in this first quarter like Gold Coast, Lakeview and River Forest in Chicago or Fresh Pond in Boston or lots of different stores. We just re-branded all four of the stores that we acquired from New Frontiers in Arizona and San Luis Obispo today.
So the actual signs that say Whole Foods Market went up on those buildings and from our experience in the past where we changed the name of some of the acquired stores, sales immediately take a bump up. We’re based in a lot of our blueprint and what we did in Southern California where we had some of our oldest stores in the company and we were very encouraged by the results in terms of the sales.
So, we’re -- our cadence is essentially to do -- we’re going to touch close to 200 stores this year in either refreshes which are things like décor, lighting, paint, new messaging all the way up to remodels and also expansions or relocations.
Walter Robb
Thank you. Next question.
Operator
We’ll take our next question from the line of Mark Miller with William Blair. Your line is now open.
Mark Miller - William Blair & Company
Hi. Good afternoon everyone.
The improvements in the cost structure, I just wanted to be clear for internal distribution and coordinated purchasing. Are these flowing through the -- these are not in the gross margin, if you can confirm that?
And then as we’re looking at these gains to the organization. Do you think of these as linear improvements from what we’ve seen in the past?
Or are we getting to any type of step function improvements? I know you’re wanting to be increasingly efficient as you are on this journey towards centralization.
Just basically how much of this can we be seeing ’15 and ’16?
Glenda Flanagan
This is Glenda. With regard to your first question, some of those savings would show up in the gross margin line item and depends on what we’re actually buying because it’s coordinated purchasing not just a product that’s for resale, but other types of supplies as well.
So, some of it might show up in DSC as well, but, so we’re trying to say that we’re making the cost structure changes that will offset the investments that we’re making in lower prices and in technology et cetera. And what was your second question?
Mark Miller - William Blair & Company
I mean, so the company has made nice progress over the years in operating expenses, but I sense that the team is feeling somewhat greater urgency to become more efficient and take greater steps towards centralization. I guess, I’m asking, are we going to see that in bigger bunches?
Or is it more just linear improvement?
Walter Robb
No, its not. What you just said is not necessarily true.
But we think we’re going to continue to get leverage as we continue to grow. We are going to continue to get leverage on our scale.
We’re going to continue to think through what we’re doing in our stores and a lot of the direct store expenses are just cut out by or reduced by simply thinking it through and asking yourself is this cost justifying. Is this cost creating value for our customers or is this something we can reduce.
It’s the way Whole Foods does and we think about these things not in an office in Austin, but throughout the distributed intelligence for the whole organization. So, in a sense everybody at Whole Foods is thinking about this.
All the leaders are just thinking about it. And we’re getting little nickels and dimes every day in different parts of the company in different stores and together that all rolls up in steady continued reductions.
We don’t think we’ve reached the end of it. We think we’ve got -- I wouldn’t be surprised at all if we didn’t duplicate our success in the next five years, what we did over the past five years.
I think that’s what's we’re hoping to do. And we don’t see any intrinsic reason why we can't do it.
Operator
We’ll take our next question from the line of Mitchell Pinheiro with Imperial Capital. Your line is now open.
Mitchell Pinheiro - Imperial Capital
Yes. Thanks for taking the question.
Just quickly, I wanted to hear your thoughts on the GMO labeling the defeats in Colorado and Oregon, and how you think this plays out from here? And if this may affect your strategy?
A.C. Gallo
Hi, it’s A C. Yes, we saw that Colorado and -- the ballot initiatives in Colorado and Oregon lost.
As you know we had supported those initiatives, because we support labeling. Our customers we believe want the labeling and transparency, and as you know we’ve committed to transparency on our products by 2018.
So, where we think it’s going forward from here. We know that, there are no other obviously valid initiatives that are in place.
We know there is a lot of legislative initiatives that are in place that maybe getting through certain states. We also know that there is some work that’s been done on a Federal level to see if there could be a Federal, a national standard for it.
As far as affecting our own, it doesn’t -- what happened in Oregon and in Colorado doesn’t really affect. We had made the commitment about a year and a half ago to have transparency for our customers by 2018, and we’re working diligently in that vein, and that we expect to be able to accomplish that in a timeframe that we laid out.
Mitchell Pinheiro - Imperial Capital
Okay. Thank you.
I appreciate it.
Walter Robb
I’m actually disappointed that those valid initiatives lost, and we think over the long-term what's happened in Europe with mandatory labeling won't be what happens in United States as well, but it hasn’t happened as fast as Whole Foods would like it to happen. But we think it will -- it will try up in the end, that’s what we think.
Next question.
Operator
We’ll take our next question from Joe Edelstein with Stephens Incorporated. Your line is now open.
Joe Edelstein - Stephens Inc.
Hi. Thanks for taking the questions.
I realize that the price tests are really just getting going six weeks old for some of the produce price test that you mentioned. Just curious, are you starting to see what competitive response to those tests and perhaps even different responses by market at all, if you could comment, please?
David Lannon
Yes. This is David Lannon.
So, yes of course. That’s the retail game, is that you make one move and the other retailers make another move.
Exciting thing for our regions where we’re doing the test is they have a lot more leeway to make those tests directly. They are at the store or at the region in partnership with our global team.
So, we have -- we feel like we’re matching toe-to-toe with all of our competitors where we’re doing these tests. And our customers are responding, transactions are up, unit growth is up, its early days.
But the first six weeks and they’re in the store, they’re excited about buying those items and then they continue to shop throughout the rest of the store. So it’s definitely making us more nimble in those markets and we’re taking advantage of it.
Joe Edelstein - Stephens Inc.
That’s helpful. And I was hoping you could also just directionally help us in terms of the gross margin structure as we think about for this next year.
I know you indicated that it would be price investments and leading to gross margin pressure likely greater than what we saw this past year. But just in terms of magnitude, are we talking maybe 30 to 50 basis points or is it potentially even something over 50 basis points that we could see happening this year?
Walter Robb
No, we’re shifting the share as we said to -- we appreciate the question, and it’s a good question to get up on the table, just to -- again to confirm what we said in the script that we’re giving our intention and the direction this year. We have been talking about this for a couple of years about continuing to invest in our value pricing.
We have added some things around the values campaign and also around our technology investments. With the intention to offset those investments through our cost structure savings as John outlined.
I’m giving you kind of the direction that it’s going to be. The decline year-over-year will be greater than it was from ’13 to ’14, and that’s really what we’re seeing and preserving some flexibility for us to compete and for us to adjust, and as we go through the year.
So that’s what we’re able to give you, and that’s what we want to share today.
Joe Edelstein - Stephens Inc.
Thank you very much, and good luck.
David Lannon
Thank you.
Walter Robb
Thank you.
Operator
And we’ll take our last question from David McGee with Suntrust Robinson Humphrey. Your line is now open.
David McGee - Suntrust Robinson Humphrey
Hi. Thank you and good numbers.
I had a question regarding just your relative satisfaction with your pricing on the non-perishables in the store right now. And then, with regard to the perishables, is the goal here to eventually be just sort of at parity on both the organic, non-organic?
Or do you eventually want to be more of a pricing leader out there?
Walter Robb
We can't really answer that question because it’s just a competitive dynamic marketplace and we don’t know exactly what is the absolute perfect strategy. It will depend upon the competitor.
It will depend upon the market. And it will depend upon what we need to do to create the most value for our customers and the most value for all of our stake holders including the investors.
So, I don’t think the same strategy will be in place in every Whole Foods market, in every city. Its not going to be the same strategy and it will depend upon the competitive conditions we find ourselves in and it will be very pragmatic.
We’ll find out what works best and we will evolve it as we need to evolve it in each of the competitor markets that we find ourselves in. So it’s not really a top down strategy.
It’s a much more distributed strategy based on where we find ourselves in the competitive market place. I think this is Whole Foods one of our great strengths as the company is, our intellectual capital is widely distributed in the organization, and we are able to adapt and evolve in a very flexible, creative way.
So, that’s one of the reasons where we’re hesitant to try to give hard and fast gross margin numbers. Of course we want to maintain our flexibility to create the most value possible for both our customers and our shareholders.
So we think we have a good strategy and we are very encouraged by the initial results. We have seen good lifts in our comps.
We have seen enthusiastic team members, excited customers. So what we’ve done so far is really working and so we anticipate we are going to expand that.
But it will probably evolve over time. I mean what exactly is the right produce strategy?
Should we be the leader? Should we just be a little bit off?
Or should we way off? It’s really kind of hard to say because we’re going to try all of the above and whatever works the best we’ll do more of it, and whatever doesn’t work very well, do less of it.
Ken Meyer
I just wanted to add that, you probably know, we also launched our new responsibly grown produce standard. So part of our strategy is not just price, and is also a quality in setting the standard.
These are the -- these are industry leading standards that no one else has but you have a greater degree of transparency into how the produce is being raised and give the consumer more information to make good choices only available on Whole Foods and 65% of our growers now enrolled and on our way to getting them all. And so the strategy for Whole Foods is to bring, yes the relevant price but also the outstanding quality and the standards that back it up.
David Lannon
And that’s a big part of our brand campaign is actually highlighting the transparency. Highlighting the differences between us and our competitors in terms of our standards.
And we have fully differentiated product with seafood, and meat and now produce, we win.
David McGee - Suntrust Robinson Humphrey
Okay. Great.
Thank you.
Walter Robb
Okay. Look, we want to apologize for all the technical difficulties we had on this call.
And public for 22 years, I can't remember this many problems on any call or all the calls combined as a matter of fact. But we want to thank everyone that stuck with us through this call.
Thank you very much. And we want to encourage you to visit Whole Foods market in our stores and online for everything you need to enjoy the great meals over the holidays.
And join us in February for our first quarter earnings call. The transcript of the scripted portion of this call along with the recording of the call is available on our Web site as well.
We look forward to speaking with you again in February for our Q1 earnings call. Have a great day.
Talk to you guys next quarter. Bye.
Operator
This does conclude today’s conference. You may disconnect at any time.
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