Feb 8, 2017
Executives
Cindy McCann - Whole Foods Market, Inc. John P.
Mackey - Whole Foods Market, Inc. Jason J.
Buechel - Whole Foods Market, Inc. David Lannon - Whole Foods Market, Inc.
Glenda Jane Flanagan - Whole Foods Market, Inc. Ken Meyer - Whole Foods Market, Inc.
A.C. Gallo - Whole Foods Market, Inc.
Analysts
Kenneth B. Goldman - JPMorgan Securities LLC Zachary Fadem - Wells Fargo Securities LLC Edward J.
Kelly - Credit Suisse Securities (USA) LLC Rupesh Parikh - Oppenheimer & Co., Inc. (Broker) Stephen Tanal - Goldman Sachs & Co.
Shane Higgins - Deutsche Bank Securities, Inc. Marisa C.
Sullivan - Bank of America Merrill Lynch Charles Cerankosky - Northcoast Research Partners LLC Kelly Ann Bania - BMO Capital Markets (United States) William Kirk - RBC Capital Markets LLC Christopher Mandeville - Jefferies LLC Karen Short - Barclays Capital Vincent J. Sinisi - Morgan Stanley & Co.
LLC
Operator
Good afternoon. My name is Christine, and I'll be your conference operator today.
At this time, I would like to welcome everyone to the Whole Foods Market First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there'll be a question-and-answer session. Thank you.
Cindy McCann, Vice President of Investor Relations, you may begin your conference.
Cindy McCann - Whole Foods Market, Inc.
Good afternoon and thank you for joining us. On today's call are John Mackey, Chief Executive Officer; A.C.
Gallo, President; Glenda Flanagan, Executive Vice President and Chief Financial Officer; Jim Sud, Executive Vice President of Growth and Development; David Lannon and Ken Meyer, Executive Vice Presidents of Operations; and Jason Buechel, Executive Vice President and Chief Information Officer. 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. For easier comparisons, we will discuss our results excluding the charges we announced today.
In addition, our remarks include references to non-GAAP measures. For a reconciliation of our non-GAAP measures to the GAAP figures, please see the tables in our earnings release.
Please note our press release and scripted remarks are available on our website. I will now turn the call over to John Mackey.
John P. Mackey - Whole Foods Market, Inc.
Thank you, Cindy. Good afternoon, everyone.
As we have announced today, we are setting a new strategic direction for Whole Foods Market in order to deliver improved performance and higher returns over the long-term. While our nine-point plan is still very much intact, we are resetting and refining our growth strategy and moving faster in fully implementing category management, which is such an integral part of our go-forward merchandising, pricing, marketing, and affinity strategies.
Over the past 38 years, Whole Foods Market has played a leadership role in fresh, healthy, natural, and organic foods becoming mainstream. Now that we have, we must revisit the question of how to best serve all of our stakeholders.
What has become clear is that we don't want to compete in a race to the bottom as consumers have ever-increasing choices for how much and where they shop. Through our affinity work, we know that our core customers represent our largest customer segment and account for a majority of our sales.
They are dedicated to the high-quality, fresh, healthy foods, and transparency that we offer. While they are already highly engaged with our brand, there is still significant opportunity for growth.
And if these customers add just one more item per trip, the sales potential is significantly greater than with any other segment. Going forward, Whole Foods Market will focus on serving this growing niche of customers better than ever before.
This is a win-win, as delighting our most committed and informed customers, our Whole Foodies, results in a better experience for all of our shoppers. We see tremendous opportunities in applying this new, targeted approach to all aspects of our business, from marketing to merchandising to real estate.
Examples of some steps we are already taking include our recently-launched Eat Real Food brand campaign, the acceleration of our category management initiative, and the resetting of our growth strategy. We kicked off the new year with our Eat Real Food brand campaign, which targets our core customers with its Eating Well and Living Well theme.
While the campaign has been on air for just a short time, we're pleased with early indicators that show positive trends on ad recall and purchase intent, and we look forward to establishing an ongoing customer dialogue through our new, always-on paid media plan. Today, we announced plans to accelerate our timeline for fully implementing category management and have partnered with dunnhumby to help lead our efforts.
Evolving our purchasing operating model while developing data-rich, customer-centric category management capabilities are critical steps – steps that are integral to our go-forward merchandising, pricing, marketing, and affinity strategies, particularly with regard to supplier support. dunnhumby has a proven track record of using data-driven, customer-led insights to create relevant shopping experiences for customers on a market-to-market basis, and this strategic partnership will help us go faster, do more, and do it better.
We do not have specifics to share on timing today, but we do expect our shorter pilot phase and roll-out timeline to meaningfully accelerate the sales and margin benefits. We will continue to grow, but no longer have a goal of 1,200-plus stores.
We remain optimistic about the future growth potential for our 365 format but want to see how this next round of stores perform before getting more aggressive. As we work to position Whole Foods Market for long-term success, we have carefully evaluated our portfolio of stores and have made the difficult but prudent decision to close nine stores in the second quarter.
We believe our targeted and disciplined site selection and continued moderation in ending square footage growth will result in a healthier bottom line, increased free cash flow and higher returns as we minimize the negative impact from cannibalization and redirect our energy and capital on improving comps, EBITDA, and ROIC. I will now turn to our quarterly results.
For the quarter, sales increased 2% to a record $5 billion. In what continues to be a challenging sales environment, we maintained our expense disciplines, delivering 7.6% EBITDA margin and $0.39 in earnings per share and $284 million in operating cash flow.
In keeping with our capital allocation strategy, we invested $245 million in capital expenditures and returned $43 million to our shareholders through dividends and share repurchases, ending the quarter with $1.1 billion of total debt and $1.2 billion in total available capital. We have seen stability in our comps over the last three quarters with some modest traffic improvement from Q4 to Q1.
During the quarter, we saw wide swings in comps on a weekly basis, as is frequently the case in Q1 due to weather and holiday shifts. After a strong start for the first five weeks, comps dropped off sharply in the pre-and post-election weeks and then showed nice lifts over Thanksgiving and Christmas weeks.
We want to appreciate our team members across the company for all of their hard work in making our stores a preferred shopping destination for those important holiday meals. Many stores broke weekly sales records, and more than 100 stores surpassed the $1 million mark during each of those holiday weeks.
We welcomed 13 new stores in the quarter, including two relocations in Philadelphia and Winter Park, Florida. In Philadelphia, we relocated a 20-year-old 37,000 square foot store to a new 63,000 square foot location with a food hall that can seat 140 customers.
In addition, customers can enjoy lunch or an evening out in four fast-casual dining venues run by favorite local chefs; the Parkway Pub or the Parkway Perch upstairs, which offers a spectacular view of the Philly skyline. And in Winter Park, after being part of the community for 18 years, we were excited to provide our customers with a new store that is nearly twice the size, has more parking and includes exciting new culinary offerings such as self-service Japanese mochi ice cream bites and sushi burritos.
In markets where our brand is well-established, relocating older, smaller stores to larger locations offering more parking and an elevated shopping experience offers low risk and high returns. We expect three more relocations this year with another 12 in our pipeline and we'll continue to seek additional opportunities.
Over the last two years, we have moderated our lease signings, ending square footage growth, and capital expenditures as a percent of sales. We have terminated four leases in development to-date and are continually evaluating our pipeline.
We're also continually evaluating stores on a case-by-case basis, balancing the age, size and performance trends of the store with the potential returns from additional capital investments, monitoring lease renewals, and taking into account how each store fits into our longer-term strategy for that particular market. As a result of our evaluation, today we announced plans to close nine stores in Q2.
In keeping with our ongoing efforts to increase efficiencies and better leverage our size and scale, we're also closing our last three remaining commissary kitchens. These closures were all prudent, but difficult decisions.
And we are working closely with all affected team members to find other positions within our company. Turning now to our thoughts on the remainder of the fiscal year.
We have updated our outlook, primarily to reflect year-to-date sales and comp trends, lost sales related to store closures, and $14 million of estimated costs related to accelerating category management. We now expect sales growth of 1.5% or greater in earnings per share of $1.33 or greater for the fiscal year.
Please see our press release for more detailed information. We are pleased comps have shown stability over the last three quarters and are hopeful they will improve as our always-on brand messaging and other sales-building initiatives gain traction and comparisons get easier.
Our two-year comps have continued to moderate, however, and while it has only been three weeks, we have seen further moderation in the second quarter-to-date. Given the competitive landscape continues to be very dynamic and it is uncertain how long a deflationary environment will continue, we believe it is appropriate to reset comp expectations at this time.
Please note Easter was in the second quarter last year and will fall in the third quarter this year, negatively impacting comps in Q2 and positively impacting comps in Q3. Historically, the impact has been approximately 50 basis points.
We covered a lot of ground today but before we turn it over for questions, I want to say I have never felt more energized and inspired to lead Whole Foods Market and strongly believe that refocusing our efforts on how to best serve our core customers, while pursuing a more targeted and disciplined growth strategy, will result in improved comps and healthier bottom line and increased free cash flow and higher returns. We'll now take questions.
Please limit yourself to one question at a time so that everyone has an opportunity to participate. Thank you.
Operator?
Operator
Your first question comes the line of Ken Goldman from JPMorgan. Your line is open.
Kenneth B. Goldman - JPMorgan Securities LLC
Hi. Thank you for taking my question.
I was just curious – and thank you for all the information in the press release and in the script, it is helpful – just curious if you could provide an update on the affinity card program. Maybe how it's doing versus your expectations.
I know there's some optimism there and I know you don't generally comment on how particular stores or regions are doing but just generally are you happy with how the comps are performing in the areas where the affinity card is more developed? Can you update us on maybe the potential for that?
Just maybe give us a little more possible tailwind factor going forward.
Jason J. Buechel - Whole Foods Market, Inc.
Hi. This is Jason.
I'll comment. First, as we talked about in our previous call, we put our second program in the Dallas market and we've been very pleased with the results that we've seen there.
We're seeing very healthy baskets over 2x of what we see for non-members, and we're increasing the percentage of sales. We're in the process right now of planning a migration of our Philly program to the program we have in Dallas.
One of the things that John mentioned earlier was connecting this to category management, which we feel is a really important step. When we look at how we'll plan our promotions, offers, and the relationships with our suppliers in the future, a key part of our affinity program is going to be bringing those pieces together in a very unified way.
So we plan to put together an additional test here. We'll be bringing those together and then bringing that to market with our customers.
And we're very excited with some of the work that we're already mobilizing in that space.
Kenneth B. Goldman - JPMorgan Securities LLC
And then just a quick follow up. Is it fair to say that – and if you can't answer this, I completely understand, but I'll go fishing anyway – is it fair to say that comps in those areas, Dallas and Philly, are maybe better than the corporate average at this point or is it too early to say?
Jason J. Buechel - Whole Foods Market, Inc.
We don't actually provide comps at a metro level at all, so I'm sorry. Your fishing expedition probably did not work there.
Kenneth B. Goldman - JPMorgan Securities LLC
I'll go fishing somewhere else. Thank you.
Jason J. Buechel - Whole Foods Market, Inc.
Thanks.
Operator
Your next question comes from the line of Zack Fadem from Wells Fargo. Your line is open.
Zachary Fadem - Wells Fargo Securities LLC
Hey, guys. Can you talk a little bit more about the decision to close the nine stores?
I presume these are all stores that are underperforming, but is there any color you can provide about specific stores and perhaps the metrics that you looked at when making the decision? And as we look forward and as you evaluate your stores on an ongoing basis, have you considered changing the format of any of these stores to 365 rather than simply closing?
John P. Mackey - Whole Foods Market, Inc.
John here. We looked at a lot of different factors.
We're constantly evaluating our store base as well as our pipeline. And, I mean, in the nine stores, I think six of them were smaller, older acquisitions that we had made that – and some of them negative EBITDA, some of them just had leases that were about to expire.
So we went ahead and instead of investing more capital, we just decided to close up shop. So there were a lot of factors we look at.
Of course, we think closing these stores will help our profitability, increase our EBITDA, increase our comps, so they were all – all the stores were – we made after actually quite a bit of discussion and thinking it through, and we think they're the right stores to close at this time. Looking forward, we don't anticipate that we're – that there are going to be a bunch of more stores we're going to close.
I mean, I think we recorded last time the company does not have that many stores that have negative EBITDA and even fewer that have negative EBITDAR. So I think we've cleaned up the stores that we needed to clean up for the time being, and we're looking forward to moving forward.
Regarding 365, of course, we are – some of those stores were too small to even be a 365 store. So we, over time, as we get into 365, the next group of stores is going to open in 2017, and if those stores do as well as we think they will, then that could be a formula that we will apply to some older stores that we might, instead of closing down or convert to 365.
And the case, we didn't think any of these stores qualified to be converted.
Zachary Fadem - Wells Fargo Securities LLC
Got it.
John P. Mackey - Whole Foods Market, Inc.
David, you want to add anything on the 365?
David Lannon - Whole Foods Market, Inc.
That's good.
John P. Mackey - Whole Foods Market, Inc.
Okay. Thanks.
Zachary Fadem - Wells Fargo Securities LLC
Thanks, John.
Operator
Your next question comes from the line of Edward Kelly from Credit Suisse. Your line is open.
Edward J. Kelly - Credit Suisse Securities (USA) LLC
Yeah, hi, guys. Good afternoon.
Can we just – I want to go back to store growth and just how we should really be thinking about the go-forward strategies around store growth. I think I heard you say that you're going to be moderating growth a lot.
How do we sort of think about that? Are you essentially kind of stopping growth at this point, at least until you get a better sense of the how 365 is doing?
And then as we think about that, how do we think about the impact that cannibalization has had on your comps, how that could change over time, and then over time, what you might do with the improved free cash flow?
John P. Mackey - Whole Foods Market, Inc.
That's a lot of questions, and so we'll try to take them. First, this does not mean we're stopping growth.
First of all, we've got 80-some-odd stores in our pipeline at this point, so we've got a number of stores that are queued up to open. So we're going to continue to move through those stores.
We're probably going to moderate the number of future lease signings that you see. We are – part of the reset that Whole Foods is talking about today is that we're going to continue to grow, but we're going to be, I think, a more disciplined growth company than we've been in the past.
We are going to focus a little bit less on growth and a lot more on getting our comps increasing and getting – and focused on increasing our EBITDA, our returns on invested capital, and our free cash flow. And we don't have any numbers to give you, but, obviously, as our growth slows down a little bit in terms of the number of stores that we're opening, we expect our free cash flow to go up; we expect our EBITDA to go up.
We expect our – since new stores do not produce in the short first few years as much as more mature stores do, so we do expect that's going to have a positive impact on our comps, our EBITDA, percentages, free cash flow, et cetera. In terms of what to do about investing that money, well, we still have a – we have a couple of years of stores in our pipeline we've got to work through, so there's not going to be any significant changes for the next couple of years.
And by the time we are starting to really pile up free cash flow higher than what we've been producing, we'll have a better answer for you on that question.
Edward J. Kelly - Credit Suisse Securities (USA) LLC
All right. Thank you.
Operator
Your next question comes from the line of Rupesh Parikh from Oppenheimer. Your line is open.
Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)
Thanks for taking my question. So I had a question on the quarter-to-date comp trends, if you can provide any more color in terms of what you think is contributing to that moderation in the basket size?
I was just curious if you're seeing any trade-down or even any weakness related to the inauguration or the election.
Glenda Jane Flanagan - Whole Foods Market, Inc.
Hi, Rupesh. It's Glenda.
What we show in the – we do think there was some impact from weather in that period of time which impacted both the transaction count and the items per basket. But it's such a short period of time that we really don't want to draw any major conclusions from it.
John P. Mackey - Whole Foods Market, Inc.
Yeah, I don't know if people picked up in the press release, but we are not – this will be the last time we give partial week comps.
Glenda Jane Flanagan - Whole Foods Market, Inc.
Partial quarter.
John P. Mackey - Whole Foods Market, Inc.
Partial quarter comps in our press release going forward because we find people overreact on the positive or negative side of that, and it's such a short time period. Weather and holiday changes and closings, they so affect a weekly comp that people draw too many conclusions from it, so.
Glenda Jane Flanagan - Whole Foods Market, Inc.
Well, and also, we've just seen that it's not indicative, as you saw in the last quarter in Q1. It's not indicative.
Frequently, it's not indicative of what we see for the full quarter, so we've decided not to report it on an ongoing basis.
Rupesh Parikh - Oppenheimer & Co., Inc. (Broker)
Okay. Great.
Thank you.
Operator
Your next question comes from the line of Stephen Tanal from Goldman Sachs. Your line is open.
Stephen Tanal - Goldman Sachs & Co.
Hey, guys. Thanks for taking the question.
I guess just to start, on the nine store closures, is there any sort of common theme there that you would call out? Is it lower income markets or maybe competitive markets?
Anything – any commonalities that we can think about?
John P. Mackey - Whole Foods Market, Inc.
Well, I feel like we sort of already addressed that question. There's a number of factors that went into the decision-making to close those nine stores.
Some of the stores – a majority of the stores were older stores that we had acquired that were small stores that simply, in a more competitive market, weren't competitive. In many cases, they had negative EBITDA, and a few had negative EBITDAR.
Some of them, just leases were going to be up at the end of 2017, so we just thought we'd go ahead and accelerate it and close them now. And in some cases, the stores were just simply in markets that we had too many stores already existing, so we thinned out the market a little bit to improve our comps and improve our overall profitability in that market.
So it's hard to generalize about it. Each one of them was a strategic decision, and kind of each closure stands on its own as a right decision for the company.
David Lannon - Whole Foods Market, Inc.
This is David. I would add in addition, though.
In many cases, we do have larger, higher volume stores close by, so we expect to see a transfer in sales for many of these locations, as well as we're really looking for a lot of the team members to transfer from those stores to some of the newer, more modern Whole Foods.
Stephen Tanal - Goldman Sachs & Co.
Got it. Okay.
Makes sense. And then, just one in terms of SG&A leverage.
You called out wages leveraging 42 basis points, and as we think about the mechanics behind that, it seems to imply kind of wages per store are down pretty meaningfully. Can you talk about where that's coming from?
How you're harvesting it, and whether you feel like there's any sort of risk to the in-store experience? Obviously you've got quite an edge in service and the experience side of things.
John P. Mackey - Whole Foods Market, Inc.
Well, we actually have worked very diligently to, what we call, smart service at Whole Foods Market, asking, where does the customer want us to provide service, and where do they not want us to provide service? In many cases – I mean, a trivial example is, traditionally, we've done pizza in our prepared foods has been a service department.
But we found when we go to self-service, that sales go up meaningfully. I mean, in many cases the sales go up 100%.
And that is true in bakery, it's partially true in meat and seafood, so we're just sort of thinking through our business model and doing lots of experiments in terms of where we can reduce labor costs that do not affect or negatively impact the customer. So a lot of those labor cost reductions have just been about us reorganizing our stores in a more intelligent ways.
We also have initiatives in place in order-to-shelf where we're improving our back room and reducing back room inventories, and the amount of time that's spent doing that. We're basically examining every aspect of our retail operations and asking what are we doing here that's not creating value?
That's just adding unnecessary cost. And so that's what you're really seeing as we work our way through that, and I think you'll see that over time.
We'll see increased efficiencies gained as we go to automatic replenishment, which we're pioneering at some of our stores right now. As order-to-shelf is rolled out through the whole company, as category management gets into place, there's just a lot of initiatives that we are operating on right now that we think will reduce our operating expenses.
At the same time, we're also making investments. We are investing more money in marketing than we've ever really invested before.
We are accelerating our category management, and so we've given guidance today. That's going to increase our short-term costs, but it's going to produce, we think, meaningful gains for our investors over time.
David, do you want to add some color?
David Lannon - Whole Foods Market, Inc.
Yeah. I mean, one-story I'd really point out, especially since a lot of you folks are in New York, is to go check on our new Bryant Park store, where we have order kiosks where customers can order and pay for their lunch and we have a very, very efficient way to get out things like sandwiches and burritos and items like that.
And in our first week, on the average hour, we were achieving four times the amount of orders on the kiosk than any other store we've ever had. So this is a technology that we're putting in place in all of our stores.
And again, it's faster for customers, so they appreciate it, but we also have the additional benefit of needing less labor in the store when we do things like that.
Stephen Tanal - Goldman Sachs & Co.
Awesome. That's really helpful.
Thanks guys. Good luck.
Operator
Thank you. Your next question comes from the line of Shane Higgins from Deutsche Bank.
Your line is open.
Shane Higgins - Deutsche Bank Securities, Inc.
Hey. Good evening.
Just actually a bit of a follow up to the previous question. I noticed that the inventory per store was down about 9%.
John, is that a reflection of the category management efforts that you discussed? And how do you balance the inventory levels with obviously with driving comps?
Ken Meyer - Whole Foods Market, Inc.
This is Ken here. The biggest thing with that inventory reduction is through the process of our order-to-shelf project led by Bart Beilman and his team, and that has transformed the inventory levels that we have in the back room, essentially clearing them out so that we're mainly focusing on, what we call, our never-outs, the key items that we need to have in stock all the time in our stores.
And so that reduction isn't really showing up on the sales floor on the shelf as much as it's showing up in clearing out the back rooms of inventory that's not necessary. So it's creating a really strong, efficient process from the way the goods are received in the back door to bring them right out to the shelf.
And it's really improving and helping our out of stocks, as well, dramatically.
Shane Higgins - Deutsche Bank Securities, Inc.
And I assume that's also helping with shrink as well?
Ken Meyer - Whole Foods Market, Inc.
Absolutely, absolutely. Because what happens in our perishable departments when we reduce the inventory in the back room, it's handled less and it's, essentially, when you take away the handling, it improves the reduction in shrink in the stores.
David Lannon - Whole Foods Market, Inc.
Anecdotally, in the stores where we really fully put in order-to-shelf, we're actually looking at some very empty back room spaces and coolers so we've actually started to contemplate with new store design how much – we actually need less room in the back of the house than we did traditionally at Whole Foods Market.
Shane Higgins - Deutsche Bank Securities, Inc.
All right. Great.
Thanks.
Operator
Your next question comes from the line of Robby Ohmes from Bank of America. Your line is open.
Marisa C. Sullivan - Bank of America Merrill Lynch
Hi. This is actually Marisa Sullivan on for Robby Ohmes.
I just want to touch on the basket size changes quarter-to-date. To what extent – and maybe some color on Q1 as well – to what extent are you seeing your promotions and price investments driving the change in basket size?
And to what extent, particularly in this quarter-to-date, is deflation a factor?
A.C. Gallo - Whole Foods Market, Inc.
We've seen pretty good trends over the last couple of quarters in – with an increase in our basket size. We think that that has come from some of the work we've done over the past, especially over the past year with certain price investments in key categories, such as in produce.
And so – now, that's been going along with a relatively – we've seen a really flat cost and retail increases. We saw a little deflation towards the end of last year, and that's pretty much moderated for us.
We're seeing pretty flat quarter-to-quarter or year-to-year in our costs and in our retail prices.
Marisa C. Sullivan - Bank of America Merrill Lynch
Got it. Thank you.
Operator
Your next question comes from the line of Chuck Cerankosky from Northcoast Research. Your line is open.
Charles Cerankosky - Northcoast Research Partners LLC
Good afternoon, everyone. John, could you reflect on the range of organic, natural, and related merchandise, such as non-GMO, that's in many other food retail locations that you compete with and how it affects your pricing and marketing and traffic, et cetera?
John P. Mackey - Whole Foods Market, Inc.
Could you try to – I'm not – that's such a broad question. Is there a way to – are you just saying how we're doing with the competition that's picking up more natural and organic foods?
Is that the thrust of your question, Chuck?
Charles Cerankosky - Northcoast Research Partners LLC
Well, not only that, but also the fact that it's marketed as being better for you just because it might be free from an ingredient. You're up against retailers sometimes that aren't nearly as organic or natural as your stores but they still have enough organic merchandise and free-from stuff to maybe attract customers.
John P. Mackey - Whole Foods Market, Inc.
Okay. Maybe this is an opportunity to just reflect on the larger competitive trends that we see in the marketplace.
I mean, for the longest time, we always just see the Whole Foods as kind of this – is a niche player. Pretty much, we were ignored for most of our history.
Nobody paid any attention to us. And – but we continued to expand and grow and we got more and more successful, and then kind of the conventional supermarkets, they were – I think they were really pre-occupied with Walmart, and trying to be competitive with Walmart for a long time.
And then I think they began to pay more attention to Whole Foods Market and they began to pick up more of our products. They began to study it in a more systematic fashion, and particularly as they began to see their customers begin to migrate over to doing more and more shopping with Whole Foods Market.
So what it means for us is that in a lot of ways, the more conventional mainstream supermarkets have upped their game. They've picked up more of their products.
And that has slowed the erosion of some of their business that was heading towards Whole Foods Market. One of the things that we've noticed, for example – and it's also given people a good enough alternative in some cases.
So one of the things we've noticed, for example, is that many of our stores where people used to drive long distances on the weekends and do big shops, we're seeing a little bit of a decline on that. We're not getting as much – some of our comp deceleration has been particularly on the weekends.
We're not getting as many people coming in on the weekends buying as bigger baskets. And we conclude that's partly because the competitive alternatives mean people aren't coming to us as frequently as they did previously.
But the thing is, is that we still see that our core customer, the Whole Foodie customer, the person that's really, really dedicated to Whole Foods Market, they are still coming to us. And so, part of what our strategy here is, is to – we're going to double down on focusing on our best customers.
We are going to create more value for them than we've ever created for them. We're doing a lot of marketing research just like the conventional supermarkets are trying their very best to keep their customers from eroding to Whole Foods Market.
We're going to do the best job that we can to keep our core customers from migrating back over to those guys. So that's kind of our strategy.
We're refocusing on our very best customers and that means we're decelerating our growth. We are focused on data through category management, through managing our company a lot more with data and marketing information.
And so I do think the world is very different today than it was five years ago. And Whole Foods Market is adapting to the new world that it finds itself in and we think we're making good, strategic decisions that position ourselves to create a great deal of shareholder value in the future.
Charles Cerankosky - Northcoast Research Partners LLC
Thank you. That's appreciated.
Operator
Your next question comes from the line of Kelly Bania from BMO Capital. Your line is open.
Kelly Ann Bania - BMO Capital Markets (United States)
Hi. Thanks for taking my question.
I was wondering if you could talk about the decision to accelerate the category management. And if you could talk about what you have done – what categories you have done?
What kind of results you've seen so far with that effort? And I guess I'm just wondering with the dunnhumby announcement, does it make sense to wait until you have some more informed data or insights before accelerating that program?
A.C. Gallo - Whole Foods Market, Inc.
Hi. A.C.
here. We have done, as we've mentioned before, we've done one test so far in the category management in a couple of regions, in one of the categories.
And have been very pleased with the results. We are building up right now to do a second test this summer in another category, and what we saw from our first results and with the potential of what we've been able to do, we felt like the amount of time it was going to take to go through all the testing phase and then start rolling it out to all the other regions, it was just going to take too long for the benefits that we really believe are there.
So we made the decision to speed this up, and the reason that we are very excited and wanted to start working – create this partnership with dunnhumby is that we feel they give us the tools to not only go faster, but to be much more – go a lot deeper and be a lot more effective in the type of category management that we're going to be able to do. The tools they have and the experience they have allows us to gain much better insights into what we're doing, and to be able to take that to other markets much faster because the experience they have in doing that, we'll have to do a lot less testing this way and be able to implement a lot faster.
So we're really excited about it, and we're – it's kind of got us really energized and really excited about what we're going to be able to do and be able to have it happen a lot faster than it was going to take before.
Kelly Ann Bania - BMO Capital Markets (United States)
That's helpful. And, I guess, just one other follow up.
As you kind of refocus on this core customer, and you outlined that strategy, I was just curious if you could talk about where you stand on kind of price investments? It seems like maybe it's pulled back a little bit in the last couple of quarters.
I mean, how do you think longer term about price investments?
A.C. Gallo - Whole Foods Market, Inc.
Well, we have, as we've talked about over the last couple of years, we've made some significant price investments, and going into this year, we've made a few – we're making a few strategic ones. We've got a lot more strategic this year about where we're investing based on markets.
We felt like the investments we've made up to this point are having some – are working well and we wanted to – as we looked into getting into category management, we realized that the best results we're going to have is through the category management process in terms of future investments because they'll be a lot smarter investments. They'll be targeted a lot better into specific markets, into specific categories.
So we are not right at this point investing – we did not increase right now a lot more investing over what we've currently done in the last year or so, but we're looking really to integrate it into our category management rollout as we move into that through the next period of time.
John P. Mackey - Whole Foods Market, Inc.
We really want those investments that we make – we are going to make more price investments at Whole Foods. We're not going to be in this race to the bottom.
We're not trying to be the cheapest, but we're going to be very strategic about it. We know it needs to be data-driven, and we think it really needs to be combined with our category management in order to produce the most value for our customers and for our investors.
So one of the reasons we want to accelerate category management is because we want to accelerate our price investments, but we want to do it in a more strategic and efficient way than say we've done so far.
Kelly Ann Bania - BMO Capital Markets (United States)
Thank you.
Operator
Your next question comes from the line of Bill Kirk from RBC Capital Markets. Your line is open.
William Kirk - RBC Capital Markets LLC
Thank you for taking the question, and it's related to Kelly's question. Can maybe explain the differences between what Nielsen can do for you and what dunnhumby can do?
And did it require one POS system being in place for them to really get started or for them to get started?
Jason J. Buechel - Whole Foods Market, Inc.
This is Jason. I can help comment on a few things.
I'll start with the point-of-sale piece. There's a lot of improvements that we now have because we have sort of one way of bringing in sales data, which is helping us in partnerships both on the Nielsen and the dunnhumby side of things.
For Nielsen, it's really for us to be able to better understand the market share of where we take up and really do a deeper dive into the category as it relates to our competition and the rest of the marketplace. For dunnhumby, we're really leveraging them as resources and tools to accelerate category management.
So they're going to be bringing experts that will be working side by side with our team. They're bringing capabilities that are going to allow us to move faster and quicker through some of those processes, and we'll continue to leverage the insights from Nielsen as part of this process as well.
William Kirk - RBC Capital Markets LLC
Okay. Thank you.
That's it for me.
Operator
Your next question comes from the line of Chris Mandeville from Jefferies. Your line is open.
Christopher Mandeville - Jefferies LLC
Yeah, thanks for taking my question. So this one's probably for A.C.
On deflation, and obviously keeping in mind that you guys have a pretty clear quality differential versus what most offer, was there anything notable this quarter versus the prior period? And can you actually help us quantify that?
And I guess kind of moving a little bit forward here, there's been a little bit of conflicting remarks as it relates to organic produce and what pricing has been for that specific category. So I'm curious of what you're seeing there as well as kind of the conventional offering counterpart?
And what your expectations are going forward?
A.C. Gallo - Whole Foods Market, Inc.
Hi. Well, I would say, yes, we did see some deflation in Q1 in produce, in certain organic produce categories, like organic apples were a lot less expensive this year.
They were a great item to promote. We really got a lot of tonnage out of them.
And then certain organic vegetable commodities have also been lower because of a little oversupply from California. There's been other things, though, that have balanced that out.
Avocados were a lot more expensive this year versus last year because of some supply issues out of Mexico. Right now, citrus prices are up because of all the rain in California.
So – but I would say that, yes, there was some deflation in produce cost in the quarter. The other area that we saw some deflation was in the price for our beef.
We do contract over a really long period of time with suppliers to grow to our specific quality standards. Sometimes our costs don't react as fast as the rest of the market.
The conventional beef market really started dropping two years ago, and specifically really a lot last year. And ours came down more slowly than that, but we're definitely seeing lower beef costs.
That has resulted in our lowering some of our beef retails and doing a lot more promotions during the first quarter. We balanced that with some – in seafood, probably our highest volume item is our farm-raised seafood.
We sell a lot of it. And there was a shortage in Q1 worldwide.
And it resulted in significantly higher costs there. And in that particular case, we absorbed those costs because we didn't want to raise our retails because we think it's a temporary situation that the price of the farm-raised salmon will come down later in the year.
When we look at balance through all the departments, as I said earlier, our costs overall were relatively flat. We saw a little deflation in some areas; we saw pickup in some others.
And our retail prices were relatively flat. As we said last quarter, there's certain commodities, like eggs, conventional eggs, which the bottom dropped out of last year and it's been huge deflation in that.
We haven't – we don't see that same deflation because the eggs that we sell all have to be raised to our specific standard. They're under contract.
We pay our growers based on their cost of production. So that is – some of those areas stay relatively flat for us when the conventional market really drops out.
Christopher Mandeville - Jefferies LLC
That's helpful. And then sorry, if I could just sneak one follow up in there as it relates to just generally avocados and produce.
So during the winter seasons, grocers broadly tend to source south of the border, with the appreciation of the dollar relative to the peso, roughly 15% or so in the last month or so. Given kind of the more moderated gross margin erosion that's been observed in Q1, should we be reading into that, that you're maybe seeing some actual benefits as it relates to certain items that you're sourcing?
Or given the competitive dynamic within the industry, are you actually being forced to give that away?
A.C. Gallo - Whole Foods Market, Inc.
Well, we don't – I know there's been some speculation as to how much actual produce in Mexico we sell. It's really not that high as a percentage of our overall sales.
And again, a lot of the products that we sell are contracted. We right now get a lot of our Whole Trade peppers we're getting from Mexico and those are under long-term contracts.
So while we see a fluctuation, to some degree, when these things happen, it's fairly steady for us. So I don't think that it really has affected any of our numbers significantly during the quarter or will be going forward.
Christopher Mandeville - Jefferies LLC
Okay. Thanks very much.
Operator
Your next question comes from the line of Karen Short from Barclays. Your line is open.
Karen Short - Barclays Capital
Hi. Thanks.
So I just had a question. John, you made a comment about doubling down on your core customer and obviously you talked about metrics in terms of getting one more item in your core customer's basket.
So I guess the question I have is, does your core customer actually even care about price? Like at the end of the day, does it matter?
And do you actually need to invest in price if the reality is, is that you really just need to get greater basket with your core customer? So I'm wondering if you could talk about that.
Then I guess the second question would be, is that kind of the way to read your strategy going forward, especially with the help of dunnhumby that the focus will be – like 80/20 rule on the core customer? And maybe you just shouldn't necessarily need to draw the Millennials lower price points.
John P. Mackey - Whole Foods Market, Inc.
Well, you have to be price relevant, and nobody wants to feel like they're being cheated. And so Whole Foods – does Whole Foods need to be the cheapest or least expensive retailer out there?
No. But we also can't have too big of a gap or people will feel like we're trying to take advantage of them.
So we are very conscious of pricing and, in some cases, when we have particularly a strong quality advantage, the gap might be a little larger. But if they're selling the exact same items and exactly the same brands, we feel like we really need to be competitive on those prices.
Again, this is a big part of what a data-driven category management program's going to tell us: where we need to be; where we need to win; where we need to be really price competitive; where we need to have the biggest selection and other areas where we don't need to necessarily win or be the best but we just need to be competitive. So there's a whole strategy.
We have to think through every item, drive it through data and make the decisions. So I think we're in a – Whole Foods is in a very good position versus most other grocery stores that we can because of our brand and because of our quality differential, we are in a place that over the long-term, we should be able to generate superior gross margins, superior EBITDA percentages, and superior returns on invested capital.
But we have to manage our expenses better, and we need to do a better job of closing a gap in certain categories where we're too expensive. And that's why we want to accelerate all of this so that we can optimize our competitive position and maximize our long-term shareholders value.
Karen Short - Barclays Capital
Okay. That's helpful.
And just a quick follow up, can you give us a sense of maybe when you actually started working with dunnhumby? Because obviously a lot of us on the call know when it – the time lag of starting to work when Kroger started to work with dunnhumby and when that actually drove comps, I'm assuming the time lag will be much narrower now with you, but any sense of when we should start to think about when it will have an impact?
Jason J. Buechel - Whole Foods Market, Inc.
This is Jason. We've just begun the relationship with them.
But as we mentioned earlier, our key focus here is accelerating so we've – they've hit the ground running and we have a lot of things in motion right now.
Karen Short - Barclays Capital
Okay. Thanks.
Operator
Your last question comes from the line of Vincent Sinisi from Morgan Stanley. Your line is open.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Hey, guys. Thanks very much for getting me in here.
I appreciate it. My one question just back on the store growth but particularly for the 365, locations, I know you said you're opening three On Tap now for this year.
I just wondered if you could all give us on the line a sense of what are the learnings that you've been going through since it's been a little bit of a pause period here. What's working, what's not working?
And maybe any thoughts on kind of in relation and effects on your core stores as well, as you prepare to open the next few here? That would be great.
Thank you.
David Lannon - Whole Foods Market, Inc.
Hi. This is David.
I'll try to be helpful. We don't talk about the results of any individual stores, but what John talked about earlier we are taking the go slow to go fast strategy with the 365 stores.
We actually built in an eight-month deposit after the first three stores. So it's in the DNA Whole Foods to really innovate.
So I think the next generation you're going to see in Austin, Santa Monica, and Akron, Ohio, you're going to see a lot of improvements. So we're learning a lot.
The thing is that a lot of the elements that we're talking about putting in Whole Foods are in place at the 365 store. We have full category management.
We have electronic shelf tags. We have auto replenishment.
We have a great affinity loyalty program. So we're learning those lessons in the smaller environment that are applying to the bigger environment.
And then some of the things are working really well and some of the things we need to improve on. So some of the areas – one area I would say is customers definitely want a little bit wider product mix, so again, we're using the data that we have because it's completely category managed to add additional items.
So, for example, like bulk, we've added some additional bulk items, we've added some additional vitamin body care items and we're making adjustments as we go. So I really encourage folks end of April to come down to see Austin, the fourth 365 that opens there.
John P. Mackey - Whole Foods Market, Inc.
The Cedar Park store outside of Austin is going to be kind of 365 2.0. It's going to have all these new bells and whistles that we've learned from our first three stores.
And then of course – and David, when is – I think Santa Monica next? When will that store open?
David Lannon - Whole Foods Market, Inc.
Yeah. Santa Monica and then Akron.
So...
John P. Mackey - Whole Foods Market, Inc.
Yeah. And we expect that to open in the – so Santa Monica should open in the summer.
And, of course, that's a great location. We think that store is going to be a huge success for us.
So I think you'll like what we're doing. I just reviewed the 365 2.0 strategy and the look and feel of it, and the additions that we're making to it and got pretty excited.
I think you'll be excited when you see it too.
Vincent J. Sinisi - Morgan Stanley & Co. LLC
Okay, awesome. Thanks very much.
Good luck.
John P. Mackey - Whole Foods Market, Inc.
Thanks.
Operator
Thank you. At this time, I'll turn the call back over to John.
John P. Mackey - Whole Foods Market, Inc.
Hi, everyone. Thanks for listening in today.
We hope you'll join us in May for our second quarter earnings call, and have a wonderful evening. Take care.
Bye.
Operator
Thank you, ladies and gentlemen. This concludes today's conference call.
You may now disconnect.