Feb 11, 2015
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
Rupesh Parikh - Oppenheimer Charles Grom - Sterne Agee Meredith Adler - Barclays Ryan Gilligan - Deutsche Bank Joe Edelstein - Stephens Inc. Ken Goldman - JPMorgan Vincent Sinisi - Morgan Stanley Chuck Cerankosky - Northcoast Research Scott Mushkin - Wolfe Research David McGee - Suntrust Robinson Humphrey Stephen Grambling - Goldman Sachs Jerry Cowens - Cowen & Company
Operator
Good day and welcome to the Whole Foods’ First Quarter Earnings Call. Currently all lines are in a listen-only mode.
Later there will be an opportunity to ask questions during the question-and-answer session. [Operator Instructions].
It is now my pleasure to turn the program over to Cindy McCann, VP of Investor Relations. You may begin.
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. Our press release and scripted remarks are now available on our website.
I will now turn the call over to Walter Robb.
Walter Robb
Thanks, Cindy and good afternoon everyone from beautiful Austin, Texas. We’re pleased with our Q1 results, which reflect continued market share gains, healthy returns and a strong start to fiscal year 2015.
Sales grew over 10% to $4.7 billion with comparable store sale growth accelerating on one and a two-year basis. With broad based momentum across departments, storage, classes and regions we believe our many strategic initiatives along with improving consumer confidence are collectively contributing to our improved results.
Here are some of the highlights of our progress in Q1. We launched our Values Matter national brand campaign which you may have seen on TV and in prints, several times over the last few months.
It was a real boost to team morale and we’re looking forward to the final brand tracking study results. The early read is very positive indicating a 100% increase in awareness for our target audience with increases in both value perception and intent to shop versus our measured competitors.
We are now providing fresh grocery delivery options to more homes in America than any other food retailer. Since announcing our 15-market partnership with Instacart in September, our average weekly online delivery sales have already passed the $1 million mark.
With online delivery sales as high as 5% of total sales in some of our stores, we’re very excited about the future potential as we expand our reach to more markets, provide richer content highlighting our quality standard and broaden our product offering. A great example is happening this week for Valentine’s Day we’re offering flower delivery in as little as one-hour with prices starting at $25 for a dozen of our high-quality ethically sourced whole-trade roses.
Orders can be placed in advance, and combine with the ability to include chocolates or some other treats, this is a deal that’s hard to beat. With, the largest Apple Pay retailer in terms of both transactions and sales, further reinforcing the notion that our customer base wants to take advantage of the latest digital technologies.
This payment option has grown quickly to 2% of sales which we expect will continue to increase especially after the Apple Watch launches this year. We are exploring opportunities to extend this successful partnership, including expanding functionality to support our affinity program.
Speaking of, we are pleased with the results of our 12-store affinity test which shows high activation and registration rates and above average basket sizes for participants. We are continuing to incorporate customer feedback as we upgrade and add new features to this program, and recently added some new talent to lead our efforts in this area.
We’re excited to expand the pilot to our Washington DC customers this spring, with hopes of having the program live in a majority of our stores for the 2015 holiday season. And as promised, our new and improved Whole Foods Market app is now live with nearly 600,000 downloads to date, iOS, Android users can access personalized and local store offers, events and information along with 3,700 tested recipes where ingredients can be added to shopping list with a single tap.
Stay tuned for more unique and exciting features and upgrades throughout the year. We recognize the changing technology and growing demand for customization that fundamentally altered retailing forever.
Customers now expect to connect with the brand whenever, wherever and however they choose. And it’s part of our broader digital roadmap, we are rapidly building out an extended customer experience beyond the four walls of our stores.
At the same time, we believe the customers will always want the human connection, the sense of community and the unparalleled shopping environment our stores deliver. As we accelerate our new store openings and step-up refreshes of our older stores, we are focused on evolving a richer customer experience to innovation, improve value and higher levels of transparency on all the products that we sell.
In Q1, we opened nine new stores expanding into Ottawa, Canada, and revitalizing our brand with new large flagships in both Houston and Boston. After opening our first taproom in 2010, we now have over 100 taprooms and wine-bars companywide.
Our post Oak store in Houston took the next step debuting our first ever in-store micro-brewery. Our second brewery is already open and we expect many more to come.
We refreshed 40 stores and on track to complete 200 by year-end. While results vary depending on the scope of the project and a variety of other factors, stores typically seen immediate sales lift and we expect these investments to be one of the many factors contributing the sales momentum this year and beyond.
We continue to see unit lift from the lower produce price we’re testing in several markets, which included external marketing to support these investments. It is too early for conclusive results particularly given the holidays.
However, we’re looking to expanding the test to additional markets as we believe more competitive produce pricing will greatly benefit our overall value perception. We launched our responsibly grown rating system which assesses growing practices and impact human health in the environment, and prohibit some of the most harmful pesticides.
We believe these ratings draw clear lines of differentiation between our produce our floral departments and those of our competitors. The program has been well received by suppliers and customers and close to 60% of our produce is already rated.
We have seen the power of our differentiated standards in other areas such as meat and seafood and believe are responsibly growing ratings in produce will see similar success over time. And after just two years of setting a deadline for full GMO transparency by 2018, we are well on our way with over 25,000 certified organic items and over 8,500 non-GMO project verified products in our stores.
Turning back now to the results, our results, sales increased 10% driven by comps of 4.5% and square footage growth of 9.4%. A 20-basis point decline in gross margin was partially offset by a 4-basis point improvement in SG&A.
It remains our intention to offset the impact of our strategic initiatives with improvements in our cost structure over the longer term. However the timing of investments and the cost cuts may not align as was the case this quarter.
Excluding $13 million or 28 basis points of estimated incremental marketing costs related to the launch of our brand campaign, SG&A improved 33 basis points due to leverage in salaries and benefits, more than offsetting the 20-basis point decline in gross margin. EBITDA margin was 8.5% and EPS increased 10% to $0.46.
For the last eight quarters, our new store classes averaged sales per square gross square foot of $709 translating the productivity levels of 82% on a weighted square footage basis. Comp stores less than two years old have averaged 17% comps and most importantly a 14% return on invested capital well in excess of our weighted average cost of capital.
Please see our press release for more details on our outlook for this year and note that we estimate this year’s Easter shift will positively impact comps in Q2 and negatively impact comps Q3 by about 50 to 60 basis points. As we look forward, we see more opportunities for the Whole Foods Market brand than ever before.
We have a deep and seasoned leadership team and have been adding some fantastic new talent. Our strong and vibrant culture contributes to low turnover and high morale which helps create a great customer experience.
The demand for fresh healthy foods continues to surge and we are best positioned to benefit as the leading retailer of natural organic foods in America’s healthiest grocery store. We are committed to continuing to improve and evolve.
And with 400 Nat-stores and 116 signed leases, we have confidence that we will cross the 500-store mark in 2017 and triple our store-base over the longer-term. We will now take questions.
Call will end at 4:45 p.m. Central Time.
So to allow for more time for questions, please limit yourself to one question at a time, that way everyone has an opportunity to participate. Thank you.
Operator
[Operator Instructions]. We’ll take our first question from Rupesh Parikh with Oppenheimer.
Your line is now open.
Rupesh Parikh
Thanks for taking my question, and congrats on a nice quarter. So maybe I’ll just start with your initiatives.
Clearly, a number of initiatives on-going and it seems that you guys are already gaining traction. So as you look at your performance this past quarter, is there a way to isolate maybe which initiatives you believe had the largest positive impact thus far?
Walter Robb
Well, this is Walter, we anticipated that question. And we talked a lot about ourselves.
And really the correct answer is we think it’s all of them contributing to the momentum. Because the comp results are broad-based across the company and storage classes, it just suggested every single of these things gained some - it really helped us to gain some additional traction.
Rupesh Parikh
Okay, thank you. And then just one more, just on store remodels.
How far along are we now in the process? And how the storage models would respond to that your expectations?
David Lannon
Hi everybody, this is David. Yes, we’re - we actually were very pleased that we were able to accomplish 40 refreshes in the first quarter, which has the holidays in it.
So we were able to work our way around the holidays. And we’ve got some great results.
Chicago, where we’re just about to open a lot of stores with our Dominic’s that we’ve turning into new Whole Foods. We finished a full remodeling Lake View, we were forced to refresh, Gold Coast to refresh, Tamarac in Denver, store like Reno, this is all new décor, new graphics, just a whole new look.
And we’re seeing like, as Walter described, great results in all these stores. And so, I would say in the next quarter we’re going to accelerate because we’ll have more time without the holidays.
So we’ll be doing a lot of work in the next few quarters.
Operator
And we can take our next question from Charles Grom with Sterne Agee. Your line is open.
Charles Grom
Thanks good afternoon. When you guys, when you evaluate your cost structure and you look at the P&L and direct store expenses, G&A, corporate overhead.
I guess, where do you guys think the biggest opportunity is to get leaner in the years ahead and can we dive into that topic a little bit? Thanks.
John Mackey
I mean, I think it’s John here. I think it’s everywhere.
We’re getting leverage right now as we continue to grow. But I think it’s kind of taken that zero-based budgeting approach and looking at everything you’re doing.
I mean, we’re very proud that we took out over 200 basis points in our cost structure in the last five years. And I think it’s reasonable to conclude we can do the same thing on a go-forward basis.
But it just requires a lot of hard work, I mean, obviously if we knew exactly the big areas to cut we’d already have done that. So, it’s about working on it, studying it, making it our priority which is what our regional presidents were doing and our executive vice presidents for operations.
We’re very cautious of the fact that we need to take cost out of our system. And we’ve done it in the past, and we’re going to continue to do it going forward.
Walter Robb
This is Walter, I’ll just add Chuck that, in addition to the looking up and down the P&L for the cost savings and we’ve talked previously about distribution, purchasing and store labor. But also process changes and the way we do business and we’ve talked last quarter about our efforts around re-thinking our company and how we do business and in areas such as data and in purchasing.
These areas, there is, opportunities to make process change, business process changes resulting in being more productive. So that’s an area we’re looking at hard together right now.
Charles Grom
Okay. And this is a follow-up to, just when you think about reinvesting some of those cost savings, what are you looking to see from a unit in elasticity to reinvest those cost cuts back into two more produce items around the permit of the store and expanding to other markets beyond Austin?
Walter Robb
To be clear, we’re looking at three buckets. We’re looking at the price investments.
We’re looking at marketing and continuing our brand building efforts and third in the area of technology capability that we described a lot on the call today. But I think it’s a little early to give you direct answer on the produce because we’re still really evaluating, we have like four or five tests going on and we’ve stepped up a couple more.
And I think we’ll have more to say about that but I think it’s fair to say we’re seeing good unit lift already. Do you want to add to that John, or?
John Mackey
Well, we’re a public company. So we’ve got to juggle a lot of things, meaning that we, I mean, suppose if Whole Foods was a private company, we would act a lot faster.
But it’s been our experience that market often times overreacts to anything we do. So, the juggling act will be to continue to make price investments, continuing investment technology, continue to take cost out of the system as we can and hopefully this will be not perfectly aligned.
But we think we can do it in such a way that we can continue sort of in the same type of upward trajectory that we’ve been doing. And we have to evaluate how is our marketing, how did it do.
I mean, when we did the national television advertisement, we’re actually very happy with it but it’s hard to know exactly, we know how many impressions we got, it’s hard to know how much that drove sales. We’re making technology investments.
We think that’s going to help us to be more profitable in the long run. But we still have a lot of work ahead of us.
So, I think the company just kind of focus on these areas and we’re going to continue to work to take cost out of our system. And hopefully that we’ll be able to grow our sales and grow our comps and make all our stakeholders happy simultaneously that’s what we strive to do.
Walter Robb
Thanks Chuck.
Operator
And our next question comes from Meredith Adler with Barclays. Your line is now open.
Meredith Adler
Hi, thanks for taking my questions. I was going to ask you about sort of what you’re seeing with the produce tests, but as you said you would say more about that shortly, so I won’t ask that.
Question about if you can talk at all about the loyalty program you’re working on. Can you just give us any sense of what it looks like, because you don’t have a regular promotional program, so it’s not like you’re transferring that to the card.
So, can you say anything more about what you’re doing?
Walter Robb
Well, this is Walter, I’ll take a shot. I mean, it’s early, 12 stores.
And we deliver, we are going fast with the development, we’re doing it interactively. So that will incorporate in the feedback from customers as we go.
But I mean, it’s a combination of card and app. We’re using the term affinity as opposed to loyalty to try to suggest that we’re going to create an experience that’s resonant with our brand, that’s more than just sort of the pedestrian thing.
But actually additional benefits, additional loyalty, curetting some sort of an individual relationship for the customer. And it’s really, we’re just - I think what we’re seeing so far is that people are responding to it.
The registrations are higher than we expected. The basket size is very good it’s close to $100 on that program.
So granted it could be that those are some of our better customers that are using it but it’s still a very good result in terms of the basket sizes coming out there. I think we’re just really, we have a great team working on it and we’re really focused on continue to improve the brand of it as well as the experience of it.
And that’s where we are right now.
Meredith Adler
Great. Thank you, that’s helpful.
Operator
And our next question comes from Karen Short with Deutsche Bank. Your line is open.
Ryan Gilligan
Hi, it’s actually Ryan Gilligan on for Karen. Do you guys have an early estimate on what the front-end scheduling opportunity could mean to margins?
Walter Robb
This is the labor scheduling?
Ryan Gilligan
Yes, that’s right.
Ken Meyer
This is Ken, can you repeat the question?
Ryan Gilligan
Yes, sorry. I was asking if you have an early estimate for what that could mean to margins?
Ken Meyer
It’s too early to have any information on that. I could tell you that we were active with the roll-out with the anticipation that the customer service teams will be all in-line by the end of the fiscal year ‘15.
And right now we’re in the process of redefining our business processes and laying in the technology into that to create the new sort of set of operating practices related around the front-end and customer service. So that’s basically where we are with that.
We’re really excited about the tool. We think it’s going to be incredible add to the ability for us to schedule effectively and serve the customers.
Ryan Gilligan
Got it. And then just quickly on the remodels.
How much of the sales lift, the remodels or sales that were recovered from the younger stores by the older stores? Or is that another way or is the entire sales lift incremental to the top-line?
Walter Robb
Could you perhaps condense that question just a little bit, we’re trying to, there seems to be a couple of parts there. Did you understand, John?
Okay, got it good.
John Mackey
I mean, we think it’s mostly incremental. What you’re saying is, if we do a refresh that we might have some cannibalization of stores.
I think that’s probably is a little bit of that. But we think it’s mostly incremental of taking it from our competitors rather than from ourselves.
David Lannon
Yes, if you look at examples like I mentioned Reno, that’s a standalone store by itself. And it doubled its comp rate after the refresh.
So and that doesn’t affect store.
Walter Robb
Good result.
Ryan Gilligan
Great, thanks.
Operator
And we’ll take our next question from Joe Edelstein with Stephens Inc. Your line is open.
Joe Edelstein
Hi, good afternoon. Thanks for taking the questions.
I was hoping that you could quantify the impact from the pricing investments for the quarter and maybe just for the gross margin line or if you even want to refer to kind of the basket dollar growth. And then related to that, I was hoping you could even also comment just on the second quarter to date information, it does look like the basket growth just slipped a little bit.
I’m just curious if that’s mix related or perhaps you’re even getting a bit more aggressive with that price investment?
Glenda Flanagan
This is Glenda, I’ll answer your second question first, which is the second quarter results are for three weeks only. And we had a lot of weather about last year and this year that are skewing the results.
So, it’s very difficult to look at that and try to get too much information from it. So I caution you against doing that.
And we are not quantifying the - what you’re asking us for. We just want to say that we’re in a very early position in the produce price investments.
And we’re continuing to look at what we’re doing so far and tweaking it. And we have planned to roll it out as we said to more markets and do more tests in the quarters ahead.
So, hopefully we will be able to get better information at some point but we’re not prepared to do that this time.
Walter Robb
And I guess, its Walter. I would just point you to looking at the growth of the transaction count.
As if you look at the quarter and even the five-weeks in the new quarter, look at the tremendous improvement in the transaction. And so that’s much more the story I think in the basket as to see nice growth there.
Joe Edelstein
Okay, that’s helpful. And I’m also curious how would you characterize the competitive responses to your price investments at this point, is it still the case as it was kind of last quarter, prior quarters where others have been matching your moods?
A.C. Gallo
Hi, this is A.C. It varies, we have seen some especially when you’re often when you start a campaign in a particular area, a lot of times competitors will react to it.
And then they’ll back off a little bit over time. So we’ve seen a little bit of that.
We’ve been in some other markets where people have some competitors haven’t addressed it at all to what we’re doing. So, it’s kind of all over the, it’s kind of all over the math.
And I mean, I think eventually people wind up going back to what their normal strategy was after the initial reaction to what you do.
John Mackey
Yes, John here. One thing to understand is that in only few of our markets, just Whole Foods Market have like the leading market share for food, in supermarkets or food retailing.
I mean, in almost all of our markets but maybe a few, we are, our market share is relatively low. We’re not, I mean, we, the point of it is, is we’re not a big threat to a major supermarket who dominates the market.
It doesn’t make, in most cases, it doesn’t make much economic sense for them to go overreact and lower all their produce prices to try to match Whole Foods Market because they’re destroying our profitability or harming our profitability for very little market share gains. So this is an example, we’re not having a big market share work to our advantage because supermarkets either won’t reach or they won’t - we don’t think they hold the prices for a long period of time A.C.
may mentioned to. So, yes, I mean, for the most part I think only one or two markets has, they have been much of a reaction at all.
Joe Edelstein
Thanks for the comments. And good luck this year.
Walter Robb
The customers reacted though. All right, next question.
Operator
And we’ll take our next question from Ken Goldman with JPMorgan. Your line is now open.
Ken Goldman
Hi, thank you for the question. I don’t think it’s possible I missed, but I don’t think you provided ID sales or sales per square foot produce stores this period.
If I just missed it, I apologize, but if possible, could you help us out with those figures?
Glenda Flanagan
We have started reporting ID sales, and we did report new store productivity in the scripted comments.
Ken Goldman
Okay, I missed that, I’ll go back.
Glenda Flanagan
It was $709.
Ken Goldman
Okay, thank you. And if I could speak one more, and the gross margin down 20 basis points year-on-year.
I think that was probably close to what you anticipated internally if I’m reading you right. But were there any surprises in terms of the drivers of that number either positively or negatively?
Walter Robb
This is Walter, not really, no. I think what we said is we expected to be down sequentially more this year than last year in the sort of 20 to 25 basis points range, it still seems like that’s the path we’re on as John mentioned.
That represents the balancing of all these various things they were up to. And we’re actually kind of right on the path we expected to be.
Ken Goldman
Great, thanks very much.
Operator
And we can take our next question from Vincent Sinisi with Morgan Stanley. Your line is open.
Vincent Sinisi
Great. Thanks very much for taking my question and congratulations on a nice quarter.
I wanted to ask you about the refreshes. If you can give any further color regarding the 40 that you recently refreshed in terms of was an overwhelming majority more towards a lighter refresh or versus more towards a full-blown remodel?
And then maybe if you can also talk about the 200 that you have earmarked by year-end, kind of what levels of refresh are you expecting?
David Lannon
Yes, David here. So really the strategy we came up with was based on our great experience in Southern California, in some of the old Whole Foods Markets in the company, the former Mrs.
Gooch’s. And we saw that the results of just doing lighter refreshes, essentially new color, new décor, new flooring sometimes, some new lighting.
That immediately caused kind of customers to kind of see the store and kind of a new light. And it really we saw an immediate sales boost.
So we essentially with the 200 refreshes, we’re primarily talking about décor, putting up to the most up-to-date look and feel of our stores, stores like Brooklyn, New York, things like that. We’re trying to, we’re looking at some of the way those stores feel.
And so, it’s mainly décor and that kind of stuff. But we do, every year we do a significant remodeling across our stores, adding new concepts like juice bars.
Can you add anything to that?
John Mackey
I’d say, in the middle of that class you have sort of where we’re adding new cases, new programs and taking the latest things that we’ve done in our newest stores and then implementing them into the existing stores throughout the group of stores in different region. So a lot of the new product work that A.C.
is working on in private label and frozen product requires more freezer doors, more dairy space. So we’re adding cases in the growth areas of the business.
Vincent Sinisi
Okay, very helpful. Thank you.
And just as a follow-up question to that, I know you mentioned the Reno location earlier. But as a class, are those 40 refreshes - would it be safe to say that the comp lift that you’re seeing in total is maybe within a few hundred basis points between some of the ones that were seen the most versus the least up-lift?
Walter Robb
It gets murky so there is lot of other factors. I don’t think you could actually say that too.
Vincent Sinisi
Yes, okay. All right, no, fair enough.
Thanks very much and best of luck.
Walter Robb
Thank you.
Operator
And we will take our next question from Chuck Cerankosky with Northcoast Research. Your line is now open.
Chuck Cerankosky
Good evening everyone. When you are looking at the improved customer confidence you mentioned, how is it showing up in your perishable sales max, as far as the more loyal customers when you talk about it overall and in the growing basket size?
And is it trading up with the loyal customers?
Walter Robb
This is Walter. Looking at the, we saw pretty good growth in all the basket sizes, and particularly with on the higher-end baskets, they continue to grow nicely.
But I mean, that we offered, we think we started by offering kind of our initiatives as kind of being the principal reasons for the momentum. And we offer the consumer confidence is kind of a backdrop.
And we have correlated the consumer confidence index to comps to look at what the relationship there but I think this has more to do this quarter with our particular efforts in these different areas that together combined have created a positive momentum for the company.
Chuck Cerankosky
Sorry to separate everything, what do you feel is more way to do what you’re doing in your ultimate pricing effort?
Walter Robb
Definitely, absolutely, yes, I think we took charge and did some things and I think they’re working.
Chuck Cerankosky
All right. Thank you.
Walter Robb
You’re welcome.
Operator
And we’ll take our next question from Scott Mushkin with Wolfe Research. Your line is now open.
Scott Mushkin
Hi guys, thanks for taking my questions. So I was wondering if we had any idea what CapEx is going to be for the year, I know you’re doing a lot of remodels on these stores.
I’m not sure we’ve seen that number yet. Any thoughts on where that’s going to come in?
Glenda Flanagan
Scott, we did not give CapEx guidance for the year. If you look at the first quarter though, you’ll see it’s, remember its 16 weeks.
And on a weekly basis if you average that out, it’s pretty consistent with what we had in Q4. We certainly have, we have to look at the numbers, new stores in the year.
But I think, I bet you can get pretty close.
Scott Mushkin
So, you just kind of used that run rate as a good run rate for the year, is that what you’re saying?
Glenda Flanagan
Yes. I mean there is nothing significantly different than in prior years or anything significantly different than current quarter trends.
Scott Mushkin
Okay, perfect. That’s really good guidance.
And then my next question is regarding competition, I mean, clearly this has been a focus of the market, it’s been a focus of some of the stuff that we’ve done. Costco adding in a lot of stuff, Targets can add in a lot of organics, Kroger’s been.
What are your guys thoughts about the, I know back in the 2000s, John you mentioned that, you thought it was good when these companies were doing this. Can we get an update on your thought process as more of the big companies in the Staples retailing space add in organics and better for you?
A.C. Gallo
Hi, it’s A.C. It’s a real dynamic changing marketplace.
We do see products in a lot of price - lot of organic products going to lot of different retailers. It’s interesting we had recent meetings with lot of our top suppliers.
And some of them were telling us that as soon as the product hits our shelves they get calls from other competitors saying we want that product too. So we kind of take the pride of being the first of getting products on the shelf.
And that’s what we do, we really innovate. A lot of our culture is about innovation.
And so, there is, we know that in this kind of market, people are going to be looking to sell lot of the products we do, because they know that we’ve been successful. And it’s our job to keep innovating and coming up with new products, new things like responsibly grown produce program continuing to push our animal welfare and our sustainable seafood and all those kinds of things.
So, it’s really a challenge to us to continue to grow and innovate and that’s what gets us excited. And that’s what we’ve been doing and that’s where our focus is.
Scott Mushkin
Do you think you’re going to have to price some of these liquid items where these competition are priced or is that not going to be a problem?
John Mackey
I mean, Whole Foods is about quality, it’s about service, it’s about selection, it’s about ambience. We’ve never been and we never will be trying to be the lowest priced supermarket that’s sort of not very attractive, doesn’t give very good service.
That’s not what we’re about. I mean that’s a valid niche in the marketplace just to be at a low priced, low-cost operator.
But that’s not Whole Foods’ strategy. Our strategy has always been about the quality and the service and the selection.
And yes, I mean, competition is harder today than it used to be, but on the other hand, Whole Foods is a lot better today than it used to be. In fact, competition, it is your ally.
It’s your ally that helps you to get better. It knocks you out of your complacency.
It keeps you from being lazy, it forces you to evolve. And Whole Foods Markets are very competitive company.
And when we are challenged, when competition rears its head, we respond. And that’s what we’re doing right now.
We’re responding, we’re evolving, we’re getting better we’re getting better quicker than our competitors are. So, they’re chasing us still and maybe they’ve closed the gap a little bit but we’re accelerating our innovation cycle.
So, I think that’s something people have never understood about Whole Foods Market. They think we’re going to sit still and let people catch us.
But we’re not going to sit still. We’re going to rapidly innovate and improve, that’s what we’ve done for over 35 years and that’s what we’re going to do going forward.
Walter Robb
Yes, and I guess Scott, just to add to that Scott. We’re going to be relevant on price.
We said that before, we say it again. Our tracking of competitor’s pricing and indexes is much more sophisticated now than it was two or three years ago.
We know where we stand relative to the others. And yes, of course, on the items that are ubiquitous, we’re going to be in and we’re going to have to price them right.
And we understand that and that’s part of where some of these investments are going and where we continue to, where we’ve kind of laid out the path over the next few years. But it all fits within the broader context John just laid out about how we think about go into market and competing and showing up as leading retailer in the marketplace.
Scott Mushkin
Perfect, thanks guys. I really appreciate the color.
Operator
And we can take our next question from David McGee with Suntrust Robinson Humphrey. Your line is open.
David McGee
Yes, hi, good afternoon everybody.
Walter Robb
Good afternoon.
David McGee
First question has to do with the home delivery, it sounds like it’s gotten very good traction thus far in certain stores. I’m curious, how much penetration does it get in the store, would you expect?
And then secondly, how of that business do you think is additive versus sort of cannibalizing the store?
David Lannon
This is David. We really, we’re having great partnership with our friend in Instacart.
We’re working super-close together with them. And the sales are growing week over week every single week, so we’re very excited about that.
And we’re looking, we feel like we’ve just scratched the surface, this week with the Valentine’s promotions and new thing, we really haven’t touched prepared foods we really haven’t started with that business yet. And that’s coming.
So we’re adding products all the time. And we’re working with Instacart to, we’re starting to actually reach capacity in some of our stores and needing to add more stores where the Instacart shoppers shop in some of our cities.
And it’s really just the beginning, it’s early days. But the sales are real, we’re seeing some exciting stuff with the bad weather lately where we’re seeing orders really take off before bad weather.
So we’re picking up some additional sales that were lost to the bad weather before. Instacart adds additional shoppers in the days like that.
So, all good news.
Walter Robb
We do have incremental business here, we have a working number inside that’s pretty good size. And I think I’d like to have a run it a little bit before we started to talk about that.
But it’s not insignificant in terms of incremental business, so.
John Mackey
Yes, and if you look over the long-run, I mean, Whole Foods Market is not going to have a supermarket on every corner. And yet we have very loyal customers.
So we’ll begin to get more of the convenience business through Instacart than we’ve ever had before. It’s because, let’s say they come to Whole Foods after driving past other supermarkets to come to Whole Foods, and they do that maybe once a week or once every couple of weeks.
But now with Instacart, if they need to pick up a quarter mil for and they pick up some berries for their cereal, they can just order from Instacart, they don’t need to go drive over to one of our competitors who might be closer than Whole Foods. So I think there will be some cannibalization of course, and there will be incremental sales that we get.
So and as Walter and David said, it’s so early, I mean, it’s so early in this. And we’ll have so much more information a year from now than we have today.
But all we can say is that it’s growing very rapidly, our customers love it and we’re really happy with it.
David Lannon
Last thing. And we are seeing some exciting steps being taken in terms of long-distance ordering where customers live in one place but their kids live in another place, where Instacart is and they can still shop at Whole Foods, the college kids, parents.
So the expansion of Whole Foods shopping universe is growing.
David McGee
Thank you sounds good. And just one quick follow-up.
On the marketing side, it sounds like you’re pretty happy with the national ad, sort of the values marketing. Are you doing any local advertising now that would be highlighting that the price changes that you’ve made?
Walter Robb
Well, that’s exactly what we did do when we launched that. Thus we did marketing in every one of those markets to partner with the investment.
So we still are doing that and we expect to continue doing that along with whatever the next steps are. We decide to take with respect to our brand campaign which the first phase is kind of wrapped up.
So I will say we got a great new Global Vice President of Marketing and Communications, Jeannine D’Addario, happy to have her on the team. She’s brought tremendous years of experience to our group.
And so we have a real leader in that area now. And we’re just kind of rediscovering, we’re kind of rediscovering marketing after all these years in the power of communicating what your differences are and what you’re up to.
David McGee
Okay, thank you. And good luck.
Operator
And we’ll take our next question from Stephen Grambling with Goldman Sachs. Your line is now open.
Stephen Grambling
Good afternoon and thanks for taking the question. You had mentioned the need to balance the physical and store experience.
And you’ve also been talking about the digital offering. And how is this balancing act being factored into your real-estate strategy with regards to any changes in the size or type of store you’ll be opening going forward?
Jim Sud
Yes, this is Jim. As far as store size goes, we’re really focused on store-size of at least 40,000 square feet.
We think our sweet-spot is somewhere between 40,000 and 50,000 and in most of the markets that we’re currently serving. Even some of the smaller markets we’re finding that we need to go a little bit bigger in order to get our full offering in there.
Stephen Grambling
And so, in those larger stores, just correct me if I’m wrong but they tend to have a little bit of a longer tail in terms of the maturation, is that right?
Jim Sud
Yes, of course. They tend to, all of our stores tend to start-off pretty strong but the bigger stores definitely take longer to reach maturity.
We’re building them for the long-term. And we don’t want to cut ourselves short.
So we think there is a lot of opportunity with the bigger stores. This quarter I think we - our average store size as we signed was approximately 44,000 square feet.
And it’s been running about 38,000 to 39,000 before this. So you can see that it trends towards the bigger stores again.
Stephen Grambling
That’s helpful. And then one other follow-up if I may.
There is some comments on innovation. I’m just trying to understand how you think about an opportunity to tie Whole Foods brand to the food itself in a bigger way, perhaps where there is opportunities to take private label beyond some of the traditional categories?
A.C. Gallo
Hi, this is A.C. Could you give an example of I’m not exactly sure what you’re looking - what you’re asking about?
Stephen Grambling
I guess I’m just trying to understand whether there is additional opportunity to leverage Whole Foods as a brand with the food itself, whether that’s in the produce in a bigger way or even in dry grocery if there is still opportunity?
A.C. Gallo
Well, we are continuing to work we’ve kind of built up over the last couple of years, our exclusive brands team. It’s a very robust team now.
It’s, they just did a great job with some really nice holiday items for us. We’re looking at continuing to grow the products that we have and improve the quality in the grocery department.
We have our primary exclusive brand has been our 365 brand which is a little more value oriented but still really good quality. But we started to brand more items now under the Whole Foods brand in grocery.
And generally, like for instance in the olive oil category we went to single-sources around the globe and got some really nice olive oils and we market those as a Whole Foods brand versus our Value 365. We’ve also just in the produce department rebranded a lot of salad mixes that we had into mostly into the Whole Foods brand as well.
So we are looking for opportunities in different parts of the store to continue to expand the 365 and the Whole Foods brand.
Stephen Grambling
Thanks so much, best of luck.
Operator
And we have time for one more question. We’ll take that question from Jerry Cowens [ph] with Cowen & Company.
Your line is now open.
Jerry Cowens
Hi thanks, this is Jerry. Thanks for taking my question.
Just looking at your gross margin, it looks like you were performing a little bit better than the worse than 30 basis points said last year. I guess you talked about with your comps easing a little bit, especially the next couple of quarters, why that wouldn’t get better?
And I guess, what drivers, what are the drivers of that, what expectations do you have built into that gross margin guidance?
Walter Robb
We didn’t actually give gross margin guidance I guess we gave some direction about that. I would just kind of point you back to our discussion earlier which is to say our intention is and we’ll continue over a multiyear process to continue to bring the gross margins down in a sequential fashion, through a combination of these efforts around the price investments as we true-up to the marketplace as needed offset by our investments in, our improvements in cost structure and process changes.
So kind of what we’re talking about is kind of a sort of a glide path that in the order each year sequentially a little bit more and that’s kind of how we’ve talked about the gross margin. So I think we’ll leave it at that for now.
Operator
This does conclude the question-and-answer session. I’d like to turn the program back over to Walter Robb for any closing comments or additional remarks.
Walter Robb
Okay. Thanks everyone for listening in, Happy Valentine’s Day.
And we look forward to seeing you again in May for our Q2 earnings call. A transcript of the scripted portion of this call along with a recording of the call is available on our website as well.
Take care.
Operator
Thank you for your participation in today’s program. You may disconnect at any time.