Jul 29, 2015
Executives
Cindy McCann - Global Vice President, Investor Relations Walter Robb - Co-Chief Executive Officer & Director Glenda Flanagan - Chief Financial Officer & Executive Vice President John Mackey - Co-Chief Executive Officer & Director David Lannon - Executive Vice President, Operations Jim Sud - Executive Vice President, Growth & Business Development A.C. Gallo - President & Chief Operating Officer
Analysts
Charles P. Grom - Sterne Agee CRT Meredith Adler - Barclays Capital, Inc.
Karen F. Short - Deutsche Bank Securities, Inc.
Rupesh D. Parikh - Oppenheimer & Co., Inc.
(Broker) Vincent J. Sinisi - Morgan Stanley & Co.
LLC Kenneth B. Goldman - JPMorgan Securities LLC Robert F.
Ohmes - Bank of America Merrill Lynch Mark R. Miller - William Blair & Co.
LLC Bill Kirk - RBC Capital Markets LLC Mark Gregory Wiltamuth - Jefferies LLC
Operator
Good day, everyone, and welcome to the Whole Foods Third Quarter Earnings Call. At this time, all participants are in a listen-only mode.
But later, you'll have the opportunity to ask questions during the question-and-answer session. It's now my pleasure to turn the conference over to Cindy McCann, Vice President, Investor Relations.
Please go ahead.
Cindy McCann - Global Vice President, Investor Relations
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 website.
We will discuss our Q3 comparable store sales growth results excluding the 95 basis point negative impact from the Easter shift and Team Member Double Discount Day. Also, please note our results include an $8 million expense, or 21 basis points related to the implementation of California's new paid sick leave law.
Walter?
Walter Robb - Co-Chief Executive Officer & Director
Thank you, Cindy. Good afternoon, everyone.
I will briefly review the quarter and focus most of my time today on our outlook going forward. Year-over-year, our quarterly sales grew $255 million to a record $3.6 billion.
We opened eight new stores, increasing our operating square footage 11% to 16 million and expanding our reach to 422 stores across 41 states and three countries. On an adjusted basis, comparable store sales increased 2.2% for the quarter, moderating 90 basis points from Q2.
We estimate that the negative impact from cannibalization was 30 basis points greater in Q3 than in Q2. Comps improved 20 basis points from the last nine weeks of Q2 to the first 10 weeks of Q3, driven primarily by a 70-basis-point improvement in traffic, which was partially offset by a 50-basis-point decrease in basket size.
We attribute the moderation in basket size primarily to our value efforts and to cost deflation in a few key volume product categories, including produce. Comps dropped sharply in week 11, after our New York City weights and measures audit received national media attention, and averaged just 0.4% for the last two weeks of the quarter.
We have seen a slight improvement in trends fourth quarter to date; however, comps are still well below our 2.5% average for the 19 weeks prior to the negative publicity. We believe increasing headwinds are also a factor as sales begun to stabilize in the last few weeks of Q3 last year.
I want to take a moment to address the New York City weights and measures audit. As soon as the New York Department of Consumer Affairs came to us, we worked to understand and address the issues to prevent them from happening again.
I want to emphasize, these were not systematic, but rather caused by inadvertent human error. The audit included errors that were favorable to customers as well.
These are weights and measures issues that can be found in any supermarket. Clear and transparent pricing is integral to how we operate.
We have taken immediate steps to address these issues including improving our training regarding in-store packing, weighing and labeling processes and expanding our third-party auditing process company-wide. We built our business on the core value of satisfying and delighting our customers.
It is what our customers have grown to love and expect from us, and our approach to pricing transparency is no different. If a price is not accurate and not priced in the customer's favor, then that item is free to the customer, no charge, no question.
Turning back now to our results, gross margin, ex-LIFO, decreased 66 basis points year-over-year, driven primarily by an increase in cost of goods sold as a percentage of sales. Our results reflect our more aggressive efforts to improve our price relevancy as well as higher shrink in the last two weeks of the quarter, given that purchases were planned for a higher level of sales heading into the 4th of July holiday.
SG&A increased 24 basis points to 28.4% of sales against a record low in the prior year, due primarily to higher depreciation as a percentage of sales. Results included 21 basis points in expense related to the implementation of California's new paid sick leave law.
Despite lower-than-expected sales, we maintained our labor expense disciplines and leveraged wages. Our new store class, for the last eight quarters, has averaged 38 stores with sales per gross square foot of approximately $700, translating to productivity levels of 78% on a weighted square footage basis.
Comparable stores less than two years old have averaged 15% comps and, most importantly, a 13% return on invested capital, well in excess of our weighted average cost of capital. In a challenging sales environment, we delivered 9.7% EBITDA margin, $287 million of operating cash flow and a 15% return on invested capital.
Year-to-date, we have produced industry-leading sales per gross square foot of $990, over $1 billion in EBITDA, and $1 billion in cash flow from operations. Through our strong balance sheet and robust cash flows, we have self-funded our new store development and strategic growth initiatives while returning over $325 million to our shareholders through dividends and share repurchases.
The Whole Foods Market brand has helped lead the shift in consciousness towards fresh, healthy foods. With 424 stores totaling more than 16 million square feet today, we expect to cross the 500-store mark in fiscal year 2017, and over the longer term, continue to see potential for 1,200 Whole Foods Market stores in the United States.
As announced last quarter, we are introducing a second format, 365 by Whole Foods Market, which we believe expands our growth opportunity beyond the 1,200 stores. While more streamlined than a typical Whole Foods Market store, our 365 stores will be guided by the same industry-leading quality standards.
As a second growth vehicle, 365 will be very complementary to our Whole Foods Market brand, allowing us to address the value-quality proposition in a new way, while maintaining the integrity the Whole Foods Market brand represents in the marketplace. 365 President, Jeff Turnas, is building a top-notch team and has hit the ground running.
We are excited today to announce leases for the five 365 stores in Los Angeles, Santa Monica, Portland, Houston, and Bellevue, Washington. These are all A+ real estate sites, which meet our required EVA hurdle return.
We are currently targeting up to five 365 store openings in the second half of next calendar year, with the expectation of doubling that number of openings in calendar 2017. With opportunities in new and existing, as well as urban and suburban markets, most of our first stores are expected to be in the existing markets to better leverage our existing team member base and infrastructure.
Our first 365 by Whole Foods Market store is scheduled to open in the Silver Lake area of Los Angeles, where we converted a lease in development from Whole Foods Market to 365. Los Angeles is the perfect dense, urban market where customers already love our quality standards and transparency to introduce our latest evolution focused on quality food and value in a convenient format.
We're excited to reveal more as things develop. Turning now to our outlook for Q4, we have opened two new stores and expect to open eight additional stores, including one relocation.
If current comp trends continue, we would expect sales growth of approximately 7% and diluted earnings per share of $0.34 to $0.35. This outlook reflects current trends as well as some headwinds from moderating inflation, increased cannibalization, and our own value efforts.
For the fiscal year, this translates to sales growth of approximately 9%, with comps in the low-single digits and square footage up 10%. We continue to expect EBITDA margin of approximately 9% and ROIC greater than 14%.
For the next fiscal year, we are forecasting ending square footage growth of approximately 9%, or 7.5% growth on a weighted square footage basis, reflecting a back-end loaded store opening schedule. We will provide additional details on our outlook next quarter.
In summary, in this retail marketplace, which is more dynamic and competitive than ever, we believe we are taking the necessary steps to position ourself for the long-term. While we acknowledge it is taking longer than we would have hoped, we believe continuing to invest in our price relevancy, our marketing and our technology is the right strategy to regain the sales momentum.
We are encouraged by the unit lift we have seen from our price investments and will continue to expand on that strategy. We are committed to investing in marketing to support our value efforts, as well as our brand and are excited by a new brand campaign this fall.
Year-to-date, we have made progress on our digital and technology efforts to better serve our customers. We are live with both Workday for all our team members, have launched our new iOS and Android mobile apps, refreshed our web experience, and are testing and evolving an affinity program.
While still in the early stages, we have also piloted our new OnePOS and kiosk ordering for food venues and are rolling out labor scheduling to our customer service teams. We will continue to build out and enhance these efforts next year while also beginning to mobilize our new product platform, which will bring us many new exciting capabilities such as perpetual inventory, replenishment, space planning and price optimization.
We remain focused on innovating and evolving to best serve our customers' diverse purchasing preferences in this rapidly changing marketplace. From the unique experience of our Whole Foods Market stores to the growing online channel for home delivery, to the exciting launch of our 365 by Whole Foods Market stores, we are leaning in to extend our reach to new as well as existing customers.
We will now take questions. Our call will end at 4:45 Central Time today to allow more time for questions.
So, please, if you can, limit yourself to one question at a time so everyone has an opportunity to participate. Thank you.
Operator
We'll take our first question from Charles Grom with Sterne, Agee. Please go ahead.
Charles P. Grom - Sterne Agee CRT
Thanks. Good afternoon.
Walter, when you look at the slowdown over the past five weeks, I guess, how can you guys be so precise that the New York audit is the primary factor? And I guess, more importantly, what steps are you taking to fix the problem given that it seems like it's bled into the first few weeks here of the fourth quarter?
Walter Robb - Co-Chief Executive Officer & Director
Hey, Chuck. Well, again, I think in the comments here, we said that we – look, we try to give you the evidence in the chart there that showed the breakdown of the quarter, the weeks and the quarter, the end of the quarter, the start of the quarter, and the start of the new quarter to help you get some visibility into the impact of it.
Clearly, it affected the comps. Clearly, there's other factors that work here too in terms of the headwinds from the previous year strong sales and so forth.
But by any measure, it has significant impact on our sales. And with respect to the second part of your question, we've already taken the steps to – again, this was in nine of our New York City stores, to upgrade the training processes right away, to bring in a third party firm to audit our procedures and results and improve those and those steps have already been taken and in fact, we've been inspected subsequent times since without incident.
So, all those things are already in place.
Charles P. Grom - Sterne Agee CRT
Has the New York City store started to bounce back at all or are you still facing the pressures?
Walter Robb - Co-Chief Executive Officer & Director
We're not – I mean we're not really providing that level of detail as to the sales at this point, but I would say that – yeah, Glenda, maybe you want to...
Glenda Flanagan - Chief Financial Officer & Executive Vice President
Well, I just want to say that the impact was really felt across the whole country, not in New York City. This was national news.
So, looking at what's happening in the New York market is really not the right way to look at it. It's looking at it across the whole company and you can see that for the first three weeks in Q4, although we've seen a little bit of uptick from there, it's still pretty low.
Operator
Okay. And we can take our next question from Meredith Adler with Barclays.
Please go ahead.
Meredith Adler - Barclays Capital, Inc.
Thanks. I guess I would like to follow on Chuck's questions.
The question isn't just how you get your people to do the right thing, because clearly you've done that. The question is how do you change customer perception that somehow Whole Foods can't be trusted?
Walter Robb - Co-Chief Executive Officer & Director
Yeah, I mean I think that's a really fair question, Meredith. And then there's no – we're taking all the steps you can trust, has to be a trust is broken, it has to be rebuilt a step at a time and through solid, solid execution day in and day out.
And there's no magic bullet for restoring whatever trust was lost other than us being transparent about what it is, make sure you put this in context and this is something that every supermarket has, and that we've taken the steps and that we continue to convince our customers that we're doing the right thing by them each and every day. Every store now has the customer pledge at the register letting them know that if you have any concerns, I'll ask and we'll recheck and if you're dissatisfied, we'll give it back to you, whatever.
So all those things are in place and I think it's just a matter of sawing wood and doing the good work day in and day out to continue to rebuild that trust.
John Mackey - Co-Chief Executive Officer & Director
Meredith, John here. We don't think our track record is any different than any other supermarket.
We're not sure why Whole Foods was singled out for this attention, and we don't know why the media ran wild with this. Our error rates are very small.
We've done our own auditing, we've put in procedures now so that we can perhaps be perfect. But we believe in objective evaluation.
If you compare Whole Foods record, these are inadvertent errors and there's no systematic mistakes being made here. It's a very small percentage of our total product.
It's just something that went viral in the media, and it has hurt our trust and yet, we do feel like we're victims of – we don't know exactly why the DCA went after Whole Foods like this, and we're not sure why the media went crazy with it, but it did happen. We are taking steps to not give cause for this in the future.
As far as re-establishing trust with our customers, there's no magic wand we can wave. We're going to do third-party audits, we're going to show that, we're going to be transparent about it and hopefully over time, the basic integrity of our company and the good customer service we provide will put this in the past and we'll move on past it.
David Lannon - Executive Vice President, Operations
This is David and I'll just say we're very encouraged by the results of our third party audits. We're doing them across the country, not just on New York but everywhere and we're passing audit after audit, we're eliminating the few errors we do find and our team members are really active about this because they want to do right by their neighbors and their customers and we're all over it.
Walter Robb - Co-Chief Executive Officer & Director
Yes. I mean, so, Meredith, you see the sales trends you have them on the chart there.
You can see, as Glenda said, it's too early but it does – there is some hope that we're going back in the other direction now and we will – the additional steps we're taking, the bigger picture here to rebuild the sales momentum of the company, which is in our pricing efforts, our marketing efforts, our technology and platform efforts, all those things continue and to continue to do that and we do have our initial brand campaign coming this fall which again is an effort to kind of highlight what the company is all about and remind people what's different about Whole Foods Market.
Meredith Adler - Barclays Capital, Inc.
Okay, great. Thank you for those answers.
Walter Robb - Co-Chief Executive Officer & Director
You're welcome.
Operator
And we can take our next question from Karen Short with Deutsche Bank. Please go ahead.
Karen F. Short - Deutsche Bank Securities, Inc.
Hey, thanks for taking my question. Thanks for the color on the new 365 format.
So I just had a couple questions. I guess the 30,000 square foot size seems a little larger than I would have thought.
And you did indicate in the prepared remarks that there'll be A+ locations. So I guess with that type of location, how do you get comfortable that you can maintain your ROIC because obviously price points will be lower and rents seem like they're going to be in line with what you're paying at your Whole Foods format.
And then I guess, the four markets that you've indicated you're going to open, obviously, you've also told us some rationale from that. But there are obviously, I guess, close to existing Whole Foods stores.
So, how do you think about the risk of cannibalization?
John Mackey - Co-Chief Executive Officer & Director
Karen, John here. We actually think we'll get superior ROICs with the 365 format.
We're going to have significantly reduced capital investments, as well as significantly lower labor costs. And of course, we don't know until we actually open some stores.
But when we project this out, if we get anything close to what Whole Foods Market sales per square foot are in our new stores, the 365 stores are going to be incredibly profitable, and with very high ROICs, even with reduced gross margins. Will there be some cannibalization of Whole Foods?
I mean probably. But we don't know exactly how much until we do it.
It'll probably be less than when we open up an actual branded Whole Foods Market store, because it's going to appeal to a little bit different customer, we think. So it is an experiment.
We do have five stores committed and we have several other stores we are negotiating leases on. And a year from now we're going to have a lot more data for you, because we'll have some stores open, we'll see what they're doing, we'll see what the effects are, we'll see what our ROICs are.
All I can say is we're super excited about it. We think we're going to have great stores, good locations, low gross margins, low labor, low capital investments and very high returns on invested capital.
So...
Walter Robb - Co-Chief Executive Officer & Director
One other point I want to make is, with 365, we look at it as an and, and we feel like it's very complementary to being in the area of a Whole Foods that customer has choices between going into a 365 or a Whole Foods depending upon the time and what they want to accomplish with the shop. And so we're hoping that it captures both of their choices when they decide to go out and shop.
So if we look at the cannibalization, we think it's going to be lower, but we also are really encouraged by the chance that we have to capture more trips that the customer would have shopping.
John Mackey - Co-Chief Executive Officer & Director
Okay, go ahead, David.
David Lannon - Executive Vice President, Operations
This is David. Just – Ken and I have been working really hard on the – really excited about the Silver Lake design.
I think one of your questions was about the size difference, say, between 25k to 30k and we're staying disciplined about what we're going to do with the 365 model. But we have this concept we're calling Friends of 365 where we're actually talking to interesting local suppliers that might rent out a small part of the space.
So, again, our core store will be somewhere between 25 to 30, but we're also looking at opportunities to work with some local suppliers to give it some local flavor as well.
Karen F. Short - Deutsche Bank Securities, Inc.
Okay, that's helpful. And just one clarification on the wage and pay structure.
So I am assuming the wage rates will be the same, it's just that the lower labor costs will be because it's more technology-driven inside the store?
Jim Sud - Executive Vice President, Growth & Business Development
Lower service too. It's a simpler design, so the operational processes are going to be different and more simple so the labor structure will reflect that.
David Lannon - Executive Vice President, Operations
And at some point, we could probably eventually tell you about the head count difference between the Whole Foods and this store as we get closer. But there's just going to be a lot less team members that are going to be more generalist whereas at big Whole Foods, there's a lot more specialists.
Walter Robb - Co-Chief Executive Officer & Director
But we're going to provide a lot more detail as we go forward on that, Karen, as we nail it down and get closer to the opening, we'll be able to give you a lot more specifics about the spend and about the business model structure as well. I think one of the things on the Silver Lake is just that we did convert an existing store.
So, that's one reason why you can use the premise (20:58) of 365 to expand into that additional space. So...
Karen F. Short - Deutsche Bank Securities, Inc.
That's helpful. Thank you.
Operator
And we'll take our next question from Rupesh Parikh with Oppenheimer. Please go ahead.
Rupesh D. Parikh - Oppenheimer & Co., Inc. (Broker)
Hi. Thanks for taking my question.
So I had two questions related to the price investments. Maybe first, in terms of your gross margin decline during the quarter, maybe you can help us understand what portion of that decline was due to price investments, and what portion was related to shrink?
Glenda Flanagan - Chief Financial Officer & Executive Vice President
Hi, this is Glenda. If you look at the 66 basis points, there was probably about a third of that that was shrink in the quarter and the rest of it was the price investments.
Rupesh D. Parikh - Oppenheimer & Co., Inc. (Broker)
Okay, great. And then, as you look at the price investments that took place during the quarter, was that planned throughout the year?
Or was there something in the competitive environment that you needed to react to?
John Mackey - Co-Chief Executive Officer & Director
That's been planned and we've been saying for quite a while that we're making price investments and you saw that very clearly, I think, here in Q3. It's something we've been doing throughout the year and it's continuing to build up.
So, this is the clearest indication of the price investments we're making.
Rupesh D. Parikh - Oppenheimer & Co., Inc. (Broker)
Okay. Thank you.
Operator
And we'll take our next question from Vincent Sinisi with Morgan Stanley. Please go ahead.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Hi. Thanks very much for taking my question.
And also just to follow up on the price investments, can you give any further color in terms of, are they coming from an expanded number of SKUs or is it more heavier cuts from still the relatively same select base? Can you give any color around that?
A.C. Gallo - President & Chief Operating Officer
Yes, hi. Well, we've been – I would say it's a little of both.
We definitely have continued. At the beginning of the year, we started a round of produce investments which we've continued through the year and we've added some additional ones in some categories.
But it's been more of a constant work primarily in produce, a little bit in grocery, a little bit in meat and seafood where we've worked on prices, we've tried to really get ourselves very clear on pricing to the marketplace. We've watched what's going on in the marketplace, adjusted for some of that and it's kind of an ongoing process where we're happy with – we're especially happy with the unit growth that we've seen in produce and in some of the other areas.
And that's encouraged us to look forward to doing even more next year.
David Lannon - Executive Vice President, Operations
Yes, this is David. I also want to say, we really feel like we're hitting our groove with our produce prices here in the Austin market and we're encouraged to roll that out in other places in the next year.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Great. Thanks very much and if I could, just one quick, quick question, can you just give us an update going back to the trust and loyalty?
Can you just give us an update in terms of how many stores have the Affinity program and plans for the rest of this year?
Walter Robb - Co-Chief Executive Officer & Director
Yeah, the Affinity program is currently in the Philadelphia market and we're moving shortly to another couple of markets with some additional tests. We have slowed down the rollout which we originally anticipated because we've gotten so much feedback from our customers about the features they like or the suggestions they have.
So we're on to a couple new markets and that's where we are right now. We're just going a little slower in order to get it right as we go, but we are – so that's where we are.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Great. Thanks very much.
Walter Robb - Co-Chief Executive Officer & Director
Okay, thank you.
Operator
And our next question comes from Ken Goldman with JPMorgan.
Kenneth B. Goldman - JPMorgan Securities LLC
Hi, thanks. In terms of that 365 store in Silver Lake, at least according to some media reports, that location originally was going to be a legacy banner with a wine bar, et cetera.
I'm curious, can you talk about some of the factors that went into your choosing this particular location for the 365 launch? What about that area was most appealing that led you to go with that one rather than somewhere else?
John Mackey - Co-Chief Executive Officer & Director
Well, it's a super cool neighborhood; probably all want to live there. So we're pretty excited about – we're excited about it, we feel it's a very knowledgeable core customer that understands Whole Foods.
We also think that there's a variety of other stores right inside that market that we can compete with very well. And it's also, with our 365 brand, we see that size store, that's in Silver Lake, actually fits within that brand, the 365 model and Whole Foods is the mother ship that will be bigger stores, more like 40,000 to 50,000 square feet and that kind of fit the right market and also we really were excited about the work that Ken and I and Jeff and the team have done in terms of the very interesting store designs, some of the tech enhancements, and we want to get it out in the public sooner than later because so we've signed that – we had that signed lease, so we just kind of intercepted it for the 365 concept and we're thinking that we're probably going to be able to still sneak a wine bar in there.
Kenneth B. Goldman - JPMorgan Securities LLC
Okay. Great.
John Mackey - Co-Chief Executive Officer & Director
Yeah. One way to think about it, I mean, this is not going to be a hard and fast rule, because there'll be exceptions made, but in general, the Whole Foods Market brand is going to be bigger stores.
It's going to be where we can do all the really cool stuff with our prepared foods, lots of venues, bigger product selection; it's just these are going to be – I mean, more stores kind of like our flagship store in Austin and we think that type of format has tremendous competitive advantages in the marketplace. We see the – but to get big store locations, that's a more selected markets that we can do those type of stores.
We see the 365 stores as being a smaller and able to slide in, in lots of markets where we can't find a big format store. So, same quality standards, and they'll be just a little bit different focus.
It'll be a lot easier to explain actually when we open a store up and people can see it, then it'll be really clear, it's like oh, I get it. And hopefully you'll say this is a terrific idea.
Walter Robb - Co-Chief Executive Officer & Director
Again, Ken, I think the intent here, just to remind you on the 365 is just to expand the reach to more customers to more communities and while we're starting in one that we're well-established in, it's an area that we're not exactly in right now. And I think – so it does complement the other stores that are around it, but it just – that's the whole purpose of 365, is to see about broadening our reach a little bit.
Kenneth B. Goldman - JPMorgan Securities LLC
Thank you. That's very helpful, I appreciate it.
Walter Robb - Co-Chief Executive Officer & Director
Thank you for the question.
Operator
Our next question comes from Robert Ohmes with Bank of America Merrill Lynch.
Robert F. Ohmes - Bank of America Merrill Lynch
Hey, guys. Thanks for taking my question.
I just wanted to ask a little bit more on the perishables deflation. It's obviously something that a lot of players are struggling with right now.
Is it something that affects Whole Foods differently or harder than maybe some of the conventional grocers? And also how do you foresee it playing out?
When do you think you could anniversary the pressure on the perishables deflation side? And just my second sort of little question.
Any comment on sort of when we might be hitting the peak cannibalization or should we expect sequential pressures on comps to continue from cannibalization? Thanks again.
A.C. Gallo - President & Chief Operating Officer
Hi, it's A.C., I'll answer the first part. We've definitely been seeing some deflation in produce and a lot of it is our pricing investments.
Because we're not seeing deflation, for instance, in organic produce, there's a lot of demand there. And there's still upward pressure on prices.
And we sell a lot – such a high percentage of organic produce that affects us. But our pricing initiatives in produce have definitely caused us, overall, to see lowering of prices.
As I said earlier, we've been very happy with the unit lift there. The other area we've seen a little bit of deflation is in seafood.
Some of the higher volume items that we sell like wild salmon at this time of year is cheaper than last year. Shrimp prices have come down and we also are selling more of our value frozen program.
I know that I've seen some other retailers talk about a deflation in dairy, and while conventional dairy has come down a little bit, organic dairy which we sell a lot of, is still seeing inflationary pressures. So, in cases like that, we're probably dealing more with an issue of trying not to pass along some of the price increases that we've been seeing to keep those prices reasonable.
We're also seeing a little bit of inflation in a few key areas like nuts like almonds and pistachios have definitely been seeing a lot of inflation because of the droughts in California. And we saw a lot of olive oil, and there was a big crop failure in Italy this year, so we're seeing a little there.
So, we're really seeing a little bit going both ways in inflation.
Glenda Flanagan - Chief Financial Officer & Executive Vice President
Now with regard to cannibalization, just a little bit on that. We do estimate that in Q3, the impact was about 30 basis points greater than it was in Q2 and that'll probably continue, if not get a little bit worse in Q4.
David Lannon - Executive Vice President, Operations
Yeah, this is David, just adding a little color to what Glenda said. We just opened our six of seven Dominick's locations we acquired last year, Green Bay Road.
And we're going to open our seventh, Willowbrook, a little bit later in the year. But no market in Whole Foods will be affected as intensely as Chicago was this year in 2016.
Walter Robb - Co-Chief Executive Officer & Director
Yeah.
Robert F. Ohmes - Bank of America Merrill Lynch
Got it. That's really helpful.
Thanks very much.
Walter Robb - Co-Chief Executive Officer & Director
Thank you.
Operator
We'll take the next question from Mark Miller with William Blair.
Mark R. Miller - William Blair & Co. LLC
Hi. Good afternoon, everyone.
Can you explain what's happening with the square footage development next year that's creating that back weighted dynamic? And then, is the organization giving consideration to moderating the expansion pace?
And then I know there's a belief in the long-term, but given the fluidity of comps, it would seem like you would need to have visibility on what that comp rate can be to know what you can pay for real estate. So, why not slow down the growth?
Glenda Flanagan - Chief Financial Officer & Executive Vice President
So, just with regard to the square footage growth, this is Glenda, that's just timing of store openings that creates the difference between the ending square footage growth and the average square footage growth next year. So, we have quite a few openings towards the end of the year.
Walter Robb - Co-Chief Executive Officer & Director
Yeah. And with respect to your second question, I'll say it.
John, you want to add some too a bit? I would tell you, this team is 100% focused on looking at every aspect of our business, including growth rates and what possibilities might be there with some of the leases signed on their way.
There's some limited flexibility in the first bit of time, but all those scenarios are being looked at as to what makes the most sense for the company. So, do you want to add to that, John?
John Mackey - Co-Chief Executive Officer & Director
Well, of course, I hope this isn't heresy, but we actually don't manage the company to maximize same-store sales, but to maximize return on invested capital and EVA. And what the slowdown in comps does in real estate is that it requires us to reformulate or recalculate when we look at new stores with a lower comp base that means it's a tougher real estate hurdle.
So we just had a real estate meeting on Tuesday and all the sites that we were looking at on Tuesday, which was about 10 sites, they all had to have a lower comp expectations. And that made achieving our five-year EVA hurdle more difficult for them and a couple of them washed out that would have passed in previous real estate meetings with more aggressive comp assumptions.
So we've already adjusted, you might say, to a lower comp basis. And that makes it more difficult for locations to hit the ROICs and EVAs that we require.
I suppose the good news is that even with the lower comps, we still found a lot of sites that are going to be extremely profitable for us and profitable for the shareholders. So I think the key takeaway there is that we're not going to slow down our growth unless we can't find locations that are going to produce five-year EVAs on a present value basis and give us the returns on invested capital that we're looking for.
As long as we can, that's how we're going to continue to manage the business. And so, anyway that's our answer.
Jim Sud - Executive Vice President, Growth & Business Development
I'd make one more point, with the 365 stores, you have this ability to look at real estate differently and the low cost to build-out gives you that opportunity for growth there that we could look at sites that are Whole Foods, and we could also look at sites that are for 365. So that opens a whole new dimension for us with real estate as well.
Walter Robb - Co-Chief Executive Officer & Director
Well, said another way, Scott (sic) [Mark] (34:46), we did go back and look at everything and again look at all the metrics for the ones that have been improved or in improvement. And to John's point, just apply the higher standards to make sure the growth that we're doing, we're on track with from an investment and capital allocation standpoint and so that's where we are.
We feel good about what we're doing and that's why we reaffirmed our growth goal.
Mark R. Miller - William Blair & Co. LLC
And just a clarification, after the financial crisis, you were able to go back and adjust some of the terms and conditions. Was that a function of that era or as necessary, could you do that here with 114 in the pipeline if as circumstances develop you need to?
Thanks.
Jim Sud - Executive Vice President, Growth & Business Development
This is Jim. I think 2008 was more a function of the economic reality of the time, particularly as it related to developers.
Many of the sites that we terminated were because the landlords could no longer deliver the sites on the terms that we had set forth. And so, it gave us an opportunity to exit some sites that became marginal based on the economic times.
John Mackey - Co-Chief Executive Officer & Director
Yeah, they couldn't get their financing, so we terminated. We're not in the same situation today.
We have gone back and reviewed all our real estate and, yes, there are a few locations that given the current comp environment are not five-year EVA deals anymore, but they're still good deals for us. And so the most important thing is for the ones that are in the pipeline, in a sense, we're legally committed to go forward.
And we're still very confident that most of those stores are really outstanding stores. All we can do is adjust to the new comp environment by changing our real estate protocols to have a steeper approval hurdle to get through and we've done that.
We've made the adjustment. And so the stores that we, for example, signed and announced today, those are all going to do well with very low comps according to our projections.
Jim Sud - Executive Vice President, Growth & Business Development
And if you look at the development schedule as a whole, the 114 stores, prior to the adjustment in comps, they average less than five years EVA on a pro forma basis. So it's not as though we've gone from five years to six years to seven years, we feel like the overall schedule is still within the five-year EVA.
John Mackey - Co-Chief Executive Officer & Director
Maybe one other thing to add, we've also made the real estate hurdle even tougher because we have assumed our – we've looked ahead and we've assumed the price investment for making, we've dialed that into the formula. So we're assuming for new stores, much lower gross margins than they've historically had.
And even so, we still are finding great sites at lower gross margins with lower comp growth that still hit our five-year EVA hurdle.
David Lannon - Executive Vice President, Operations
This is David. Also the stores that we opened this year, we opened a lot of blockbusters and we are very excited.
Stores like Miami, Streeterville, Ink Block in Boston, Dublin, Northern California, Upper East Side, Avalon in Atlanta, Playa Vista, these are all blockbuster, high volume locations. And we're encouraged about the next crop that's going to come in the next year as well.
A.C. Gallo - President & Chief Operating Officer
And also there's some concern there about the cannibalization that these new stores have, but keep in mind that we always factor in cannibalization to all of our EVA approvals for new sites. So that's in the factor of us approving it within a five-year EVA.
Walter Robb - Co-Chief Executive Officer & Director
So wrapping it all up with a bow Scott (sic) [Mark] (38:32) I guess what you want to know is that we really have gone back and looked diligently at that, at the different scenarios, done the work, reset the standards and so there's our numbers for 2016 at the 38 stores to 40 stores. So thanks for the question.
Mark R. Miller - William Blair & Co. LLC
Yeah, it's Mark, Walter, but...
Walter Robb - Co-Chief Executive Officer & Director
Mark, I'm sorry.
Mark R. Miller - William Blair & Co. LLC
Thanks for all the color.
Operator
Okay. And we can take our next question from Bill Kirk with RBC Capital Markets.
Bill Kirk - RBC Capital Markets LLC
Hey, guys. So I was just wondering what were comparable store sales in the period if you excluded the impact of store refreshes?
John Mackey - Co-Chief Executive Officer & Director
We didn't make that calculation. So I don't know if we could answer off the top of our head.
Bill Kirk - RBC Capital Markets LLC
Okay. I guess, so slightly different direction, back on 365, I'm a little confused.
Is the primary goal to capture new incremental customers who don't currently shop Whole Foods? Or is it to capture additional trips from existing customers?
John Mackey - Co-Chief Executive Officer & Director
It's both. It's both.
Bill Kirk - RBC Capital Markets LLC
(39:40) strategy.
John Mackey - Co-Chief Executive Officer & Director
Although not to quibble with words, we never feel like we can capture any customers. At best, we can rent them for a little while if we continue to create value and service to them.
But we do think the 365 is going to have a – it'll have some appeal to our existing Whole Foods customer base, and maybe have a better – in some cases, it'll have a greater appeal to more value-oriented customer that we already have. But I think it's going to open up a whole new set of customers who, so far, have for various reasons, have not liked Whole Foods Market.
Potentially, potentially, they think our prices are too high. There's no question 365 is going to have very, very competitive prices.
Bill Kirk - RBC Capital Markets LLC
Okay. And then real quick on the House passing H.R.1599, do you guys have any comments there on what the next steps are toward GMO labeling?
A.C. Gallo - President & Chief Operating Officer
Well, we know that the House passed it and we know that the proposal is that there would be USDA would set up programs and that no mandatory labeling would be required. And if any laws were passed by states, they would be preempted.
We know that it still has to go to the Senate and it could still -a lot could change from what it is currently. It may happen, it may not happen, we don't really know any of that.
We've made very clear that we support labeling. We think it's important from a transparency standpoint.
We've heard from a lot of our customers. And we have polls that have shown that the vast majority of Americans would like to know if there's GMOs in the products.
So we support labeling because for people to know that. How it will affect us, we don't know, we're not exact 100% sure, but we don't think that it affects any of the current labeling that we have in place that we've worked with the non-GMO project and are working with some other third-party verifiers.
We think that from the way we read the law that they would be able to get – the programs they're working with wouldn't be disrupted by this and eventually they could get accredited to continue to do what they're doing.
John Mackey - Co-Chief Executive Officer & Director
Yeah. My interpretation, John here, is that it doesn't affect Whole Foods at all.
Whole Foods is still committed to transparency regarding GMOs. We're going to continue with doing exactly what we committed to do, and we will hit our deadlines.
My interpretation of reading that is they're basically trying to preempt states like Vermont and other states from creating their own GMO laws. So they're trying to prevent the states from doing that.
It will not affect a private certification or Whole Foods' own efforts for transparency.
Bill Kirk - RBC Capital Markets LLC
Okay. Thank you.
Operator
And we'll take our last question from Mark Wiltamuth with Jefferies. Please go ahead.
Mark Gregory Wiltamuth - Jefferies LLC
Hi. Thank you.
Wanted to dig in a little more on your produce price cut test markets. Our price arrays were showing that you were doing about a 10% to 12% price cut in those produce areas.
And initially, it sounded like you were getting a double-digit volume lift there. You now had some duration to it.
Are you still seeing enthusiasm from customers now that the test has been going on for some time? And have you been taking some of those best ideas out to the other stores in the produce sections?
A.C. Gallo - President & Chief Operating Officer
Well, we've often said – we've found in the past that when you make price adjustments and price investments in the produce department, there's lag time. It can take anywhere from six months to nine months until you start to see – initially you'll see a nice increase in units, but you still maybe negative in overall sales dollars because, depending on how deep your price cuts are.
So we've been encouraged and started to see in the last couple of periods where the actual sales have gone positive, and those produce departments are comping positive now so that the units now have increased in a lot of them above where the investment is. That's been very encouraging to us.
And we definitely have plans to use those learnings in additional stores and regions as we go forward, especially next fiscal year.
Mark Gregory Wiltamuth - Jefferies LLC
And you had mentioned you were going to move beyond five markets. So how many are you in now with the produce price cuts?
A.C. Gallo - President & Chief Operating Officer
They're currently – the produce investments we did were in five regions. And each region has several markets that they're in.
Mark Gregory Wiltamuth - Jefferies LLC
Okay. Thank you very much.
Walter Robb - Co-Chief Executive Officer & Director
Thank you.
Walter Robb - Co-Chief Executive Officer & Director
Okay. Thank you, everyone, for listening in today.
A transcript of the scripted portion of this call along with the recording of the call is available on our website as well. And we look forward to speaking with all of you again in November for our Q4 earnings call.
Have a nice evening.
Operator
This does conclude today's program. Thanks for your participation.
You may now disconnect. Have a great day.