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Whole Foods Remains Bullish on Store Expansions

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AUSTIN, TexasOver the long haul, Whole Foods Market, Inc. hopes to operate 1,000 stores in the United States.

Although the organic food retailer is years away from reaching its long-term goalas of Jan. 20, Whole Foods operated 329 stores in the United Statesit continues to report profits and strong demand to justify its aggressive store expansion. In the second quarter, net income rose 21% to $142 million on sales of $3 billion, and Whole Foods (Nasdaq: WFM) raised its fiscal year earnings per share guidance (to $2.86-$2.89 from a previous forecast of $2.83-$2.87).

"We believe Whole Foods is arguably the best operated, best positioned grocer in the U.S., with a brand that resonates with consumers seeking better-for-you eating," J.P. Morgan analyst Ken Goldman wrote in an equity research note Wednesday.

Profitsand the dividends that shareholders continue to receivelikely give investors fewer reasons to question Whole Foods' investment in new stores. Over the last four quarters, Whole Foods has opened a record 32 new stores, co-founder and co-chief executive officer John Mackey said Tuesday in a statement, "demonstrating our ability to internally fund and execute our accelerated growth plans."

According to Mackey, nearly seven million customers visit Whole Foods' stores each week in 349 stores in 40 states and three countries: the United States, Canada and the United Kingdom.

In the second quarter ending April 14, $61 million of its $109 million in capital expenditures was related to new stores. In a regulatory filing, Whole Foods reports that its new stores generally become profitable within the first year, although the company cautioned some stores may bleed money for several years.

The most recent quarter was one in which Whole Foods opened six new stores. One of those establishments in South Bend, Ind. yielded more than 16,000 "likes" on Facebook when it opened, Mackey said.

The grocer estimates opening 32 new stores in fiscal year 2013 and roughly the same number in the following year: 33 to 38.

J.P. Morgan expressed some reservations about Whole Foods opening stores with larger square footage.

"Clearly management knows more than we do about which stores are doing well and why. But part of our constructive thesis on WFM has been that smaller store sizes allow the company to benefit from cheaper rent (as anchor tenants in shopping centers, e.g.) as well as faster average turnover (because fewer lower-turning items can be stocked)," Goldman said.

Such increased growth in square footage "adds risk to earnings and capital position," Scott Van Winkle, an analyst with Canaccord Genuity, a global investment bank, wrote Wednesday in a daily letter to investors.

In a regulatory filing earlier this year, Whole Foods said it perceives an opportunity for growth in Canada and the UK. For now, however, the food retail giant appears to be mostly focused on U.S. expansion. On Tuesday it revealed recently signing 10 new leases in Mobile; Ala.; Burbank and Los Angeles, Calif.; Longmont and Westminster, Colo., Olathe, Kan.; Portland, Ore.; Draper, Utah; and Arlington and Ashburn, Va.

At least some of the stores are expected to begin opening in fiscal year 2014.

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