. We offer our customers a broad selection of unique products that are natural and organic alternatives to those found in conventional supermarkets, as well as gourmet and ethnic foods. We generally do not offer conventional brands and focus instead on a comprehensive selection of natural and organic products within each category. Although the core merchandise assortment is similar at each of our stores, individual stores adapt the product mix to reflect local and regional preferences. We regularly introduce new natural, organic, gourmet and locally grown products in our stores to differentiate our merchandise selection from products carried by conventional supermarkets. We continue to evaluate our product selection based not just on taste and price, but also in relation to our mission and values, which emphasize sustainability and giving back to our communities as two key values of our business.

We intend to continue to expand and enhance our prepared foods, value-added items (such as marinated or stuffed meats and seafood) and in-store café environment. We believe consumers are increasingly seeking convenient, healthy, “ready-to-eat” meals and, by increasing our commitment to this category, we can provide an added service to our customers, broaden our customer base and further differentiate our stores from conventional supermarkets and traditional natural foods stores.

Quality standards. We strive to offer products that taste great and meet the following standards:
•  
foods free of hydrogenated oils and synthetic additives, such as artificial colors, flavors, and preservatives;
   
•  
meats that are humanely raised and contain no antibiotics or added growth hormones;
   
•  
locally and organically grown produce, unique regional products; and
   
•  
natural personal care and household items that are not tested on animals.

Corporate brands. The natural foods industry is highly fragmented and characterized by many small independent vendors. As a result, we believe that our customers do not have strong loyalty to particular brands of natural foods products. In contrast to conventional supermarkets whose private label products are intended to be low-cost alternatives to name-brand products, we developed our “Wild Oats® Organic”, “Wild Oats® Natural”, “Wild Oats® Living”, “Wild Oats® Food Origins”, “Wild Oats® Essentials”, and “Henry’s®” corporate brands programs around higher quality products in order to build brand loyalty to specific products based on the quality of the products, our relationship with our customers, and our reputation as a natural and organic foods authority.

This leadership position as a leading natural and organic brand has extended beyond our role as a retailer. Our Wild Oats branded products are being offered for sale through Peapod.com in Chicago and Washington DC, and in the Northeastern United States at Price Chopper supermarkets and Pathmark stores. We have also introduced Wild Oats brand products outside of the United States into Hong Kong, Singapore and Malaysia. We expect these relationships to grow in the future.

Through the corporate brands program, we have successfully introduced over 1400 high-quality natural and organic Wild Oats and Henry’s branded products, such as cereals, breads, salad dressings, cream cheese, chips, salsa, pretzels, cookies, juices, Italian sodas, French and Belgian chocolates, Italian pasta and pasta sauces, gourmet oils, vinegar tuna, and frozen products, such as pizza, veggie burgers and waffles. In fiscal 2006, we introduced almost 400 new and reformulated corporate branded products, including cheese, honey, detergent, popcorn, ice cream, lemonade, cultured dairy, frozen entrees, crackers, soymilk, canned vegetables, fruit bars, meatballs, Thai soups, veggie chips, chai tea, and paper products. We also developed lines of imported products including spices, chocolates, cookies, cereals, hard candy, and frozen organic beef burgers. We continue to expand our corporate branded product offerings, and we plan to introduce approximately 300 additional corporate branded products in 2007 including chicken wings and nuggets, frozen ethnic entrees, tea, and ice cream novelties.

Store Operations

Management and employees. Our stores are organized into three divisions. Each division has a general manager who is responsible for the results of the division and for providing feedback on market performance and ensuring adherence to our operating standards. In each of our eight regions, we maintain a regional director who has a staff of five department specialists, a human resource manager, a field marketing manager and a loss prevention manager reporting to them. These specialists formulate and supervise execution of store-level merchandising, pricing, customer shopping experience and staff development to ensure company-wide adherence to product standards and store concept service expectations.

Purchasing and Distribution

We have centralized merchandising departments for each major product category. These departments identify and approve products and negotiate volume purchase discount arrangements with distributors and vendors. The wholesale segment of the natural foods industry provides a large and growing array of product choices across the full range of grocery product categories.

We entered into a primary distribution agreement with United Natural Foods, Inc (“UNFI”) in January 2004 that commenced effective April 1, 2004, and has a five-year term. Either party may terminate the agreement for defaults by the other party of certain provisions of the agreement. Under the terms of the UNFI agreement, we are obligated to purchase a majority of certain specified categories of goods for sale in our U.S. stores from UNFI, except in certain defined circumstances when such purchasing obligation is excused. We believe UNFI has sufficient warehouse capacity and distribution technology to service our existing stores’ distribution needs for natural foods and products, as well as the needs of new stores in the future. As part of our agreement with UNFI, we have received, and will continue to receive, a transition fee payable in certain years and subject to the Company meeting certain minimum purchase requirements, to offset a portion of the transition costs incurred during the transition of our primary distribution relationship to UNFI.

We operate a 241,000 square foot distribution center (“DC”) in Riverside, California to service our stores located in the western United States. We believe this facility improves the quality and freshness of the perishable products we sell in our stores by providing the appropriate ambient temperature from arrival at our docks to loading on outgoing trucks. We also distribute certain grocery items from the DC where cost effective. As we enter new markets, we will evaluate the need for additional warehouse and distribution facilities. The DC currently delivers produce, private label groceries, bulk foods, and selected other items to the majority of our stores west of the Mississippi River.

We operate commissary kitchens in Denver, Colorado and Vancouver, British Columbia. These facilities produce deli food, bakery products and certain fresh private label items for sale in our stores. Each kitchen can make deliveries to stores within a certain radius of the facility. For stores outside the delivery area of our commissary kitchens, the individual stores’ food service departments produce their own goods from proprietary recipes.

Marketing

As a leading retailer of specialty foods with an emphasis on health and wellness, Wild Oats continues to build brand awareness and drive consumer traffic through various marketing vehicles. Mass media advertising, together with grassroots marketing, special events, online and direct marketing, as well as alliance marketing with organizations and products in our industry are used to educate new and existing customers about what the brand has to offer in terms of experience, values and products. In 2006, we expanded print advertising in newspapers and radio, we continued to leverage the internet to reach niche audiences and we made increased investments in grass roots marketing and special events.

Our farmers market format stores, Henry’s and Sun Harvest, are specialty retailers targeted towards customers learning about and entering the health and wellness arena. In 2006, increased investment in mass media and weekly circulars, as well as new websites, were leveraged to build awareness, and communicate price and product benefits.

Management Information Systems

Our management information systems have been designed to provide detailed corporate, regional and store-level merchandising, financial, marketing and operating data to regional directors, store directors and management at headquarters on a timely basis. We employ state-of-the-art applications and infrastructure at our DC, including wireless networks and voice-activated stock picking. We believe that our ability to continue controlling costs would be enhanced by continuous capital improvements in technology and software. As a result, in fiscal 2006, we completed several major initiatives, including:
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implementation of a store-level perpetual inventory system;
   
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upgrade of our store data networks with additional bandwidth at reduced unit cost;
   
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implementation of thin client technology in store locations to reduce operating costs and improve data security;
   
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implementation of security infrastructure, policies and procedures to comply with Payment Card Industry mandate; and
   
•  
relocation to new corporate headquarters with no business interruption

The 2007 management information plans will have a continued focus on lowering operating costs and improving margins at the stores and the home office. Key 2007 initiatives include:
•  
implemention of store-level labor standards to increase labor efficiency;
   
•  
implementation of pricing and promotion optimization applications;
   
•  
completion of upgrades to our enterprise resource planning financial systems and data warehouse applications;
   
•  
rollout of electronic store ordering; and
   
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evaluation of a future replacement point of sale platform.

Competition

Our competitors currently include other independent and multi-unit natural foods supermarkets, smaller traditional natural foods stores, conventional supermarkets and specialty grocery stores. While certain conventional supermarkets, smaller traditional natural foods stores and small specialty stores do not offer as complete a range of products as we do, they compete with us in one or more product categories. In recent years, several of the larger conventional grocers have significantly expanded their natural and organic foods and body care products, and have expanded their offerings of vitamins and supplements. We believe that the principal competitive factors in offering natural foods include customer service, quality and variety of selection, store location and convenience, price and store atmosphere. One of our more significant competitors is Whole Foods Markets, Inc. Our stores are smaller in size and less expensive to build, which gives us access to markets that may not have the diversity believed necessary to support large stores.

Employees

As of February 26, 2007, we employed approximately 4,872 full-time and 3,745 part-time employees. Approximately 8,239 of our employees are engaged at the store-level and 378 are devoted to regional and corporate activities. We believe that we maintain a good relationship with our employees. And, while we are not unionized at any operating unit, based on past union organizing attempts, we anticipate that in the future, one or more of our stores or support facilities may be the subject of attempted organizational campaigns by labor unions representing grocery industry workers.

All of our managerial employees participate in an incentive program that provides payment based on achieving certain performance targets and operations standards. In addition, we also seek to attract and retain enthusiastic and dedicated staff members through comprehensive benefits packages, including discounts on purchases, health and disability insurance, adoption assistance, an employee stock purchase plan and an employer-matching 401(k) plan.

Available Information

Our corporate Internet Web site is http://www.wildoats.com , (“Internet Web site”), where we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities Exchange Commission (“SEC”). These reports are also maintained by the SEC on their Web site at http://www.sec.gov . Additionally, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Charters of the Board of Directors’ Audit, Compensation and Nominating Committees, respectively, and our Code of Business Conduct and Ethics are also posted on our Internet Web site. We will post on our Internet Web site any waivers granted to the principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, that relate to any element of the Code of Ethics enumerated in Item 406(b) of Regulation S-K.

Item 1A.

RISK FACTORS

You are cautioned that there are risks and uncertainties that could cause our actual results to be materially different from those suggested by forward-looking statements that we make from time to time, both verbally and in writing. You should carefully consider the risk factors discussed below and recognize that other risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. The cautionary statements below discuss important factors that could cause our business, financial condition, operating results and cash flows to be materially adversely affected. The Company does not undertake any obligation to update forward-looking statements.

Our results of operations have been, and will continue to be affected by, among other things:
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the successful opening and operating of new stores, and remodels/remerchandising of existing stores,
   
•  
fluctuations in quarterly results of operations and stock price,
   
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economic conditions,
   
•  
competition,
   
•  
labor issues,
   
•  
loss of key management,
   
•  
government regulations, and
   
•  
changes in and performance by suppliers, distributors and manufacturers.

The successful opening and operating of new stores, and remodels/remerchandising of existing stores . We plan to continue growing primarily through the opening of new stores. Achieving this goal is contingent on various conditions, and there is no assurance that our growth strategy will result in greater sales and profitability. New stores build their sales volumes and refine their merchandise selection gradually and, as a result, generally have lower gross margins and higher operating expenses as a percentage of sales than more mature stores. New stores opened experience operating losses for the first 12 to 18 months of operation, or possibly longer, in accordance with historical trends; although certain stores are projected to incur operating losses for six to 12 months.

Our plan is to continue to complete significant remodels and remerchandising of existing stores. Remodels and remerchandising typically cause short-term disruption in sales volume and related increases in certain expenses as a percentage of sales, such as payroll. We cannot predict whether sales disruptions and the related impact on earnings may be greater than projected in future remodeled or remerchandised stores. Changes in merchandising and marketing strategies may also impact an individual store and overall Company results.

The construction or acquisition of new stores, remodeling/remerchandising of existing stores, as well as completion of capital purchases of new technology systems required for efficient operation of our business require substantial capital expenditures. In the past, cash generated from operations, debt and equity financing proceeds have funded our capital expenditures. These sources of capital may not be available to us in the future. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources .

Fluctuations in quarterly results of operations and stock price. Our quarterly results of operations may differ materially from quarter to quarter for a variety of reasons, including the timing and success of new store openings, overall store performance, changes in the economy, seasonality, uninsured losses, including loss of sales caused by natural disasters, the timing of holidays, significant increases or decreases in prices for, or availability of, goods and services, competitive pressure, labor disturbances, shrink and spoilage, fluctuations in profit margins for discontinued items, as well as other factors mentioned in this section.

Our stock price has been, and continues to be, fairly volatile. Our stock price is affected by our quarterly and year-end results, whether those results are consistent with the expectations of financial analysts and investors, financial results of our major competitors and suppliers, general market and economic conditions and publicity about our competitors, our vendors, our industry, or us. Volatility in our stock price may affect our future ability to renegotiate our existing credit agreement or enter into a new borrowing relationship, or affect our ability to obtain new store sites on favorable economic terms.

Economic conditions. Downturns in general economic conditions in communities, states, regions or the nation as a whole can affect our results of operations. While purchases of food generally do not decrease in a slower economy, consumers may choose less expensive alternative sources for food purchases. Increases in fuel commodity prices may change consumer shopping habits and also increase the costs that we pay for construction and remodels, products, supplies, utilities and distribution, decreasing our net profits. In addition, downturns in the economy may make the disposition of excess properties, for which we continue to pay rent and other carrying costs, substantially more difficult as the markets become saturated with vacant space and market rents decrease below our contractual rent obligations.

Competition . We compete with multi-unit and independent natural foods, specialty and conventional grocers. As competition in certain markets intensifies, our results of operations may be negatively impacted through loss of sales, reduction in margin from competitive price modifications, competition for qualified employees and disruptions in our employee base.

Loss of key management. Our future direction and success is dependent in large part on our ability to attract and retain qualified executives to meet our future growth needs and on the continued services of certain key executive officers. Loss of any key officer may have an adverse affect on current operations and future growth programs. We face intense competition for qualified executives, many of whom are subject to offers from competing employers. Our compensation package for key management includes long-term equity incentives, such as stock options and restricted stock. Fluctuations in quarterly results of operations and stock price could diminish the value of our equity awards, putting us at a competitive disadvantage in recruiting and retention, or forcing us to use more cash compensation. We may not be able to attract and retain key executive personnel as necessary to operate our business.

Government regulations . We are subject to a myriad of laws, regulations and ordinances at the local, state and national level governing the operation of our stores and support facilities, and our ability to comply with these laws could negatively affect our store sales and operations, or could delay the opening of a new store. Such laws include the following: state and federal wage and hour laws, which may result in increased minimum wage levels, required payment of overtime to employees classified as salaried employees and increased benefit costs; National Organic Program regulations promulgated by the United States Department of Agriculture (“USDA”), which may require different handling of certain products or the exclusion of certain products from the definition of “organic”, each of which could limit product supply, increase costs or reduce revenues; state and federal health and sanitation regulations, which may require substantial equipment or tenant improvement modifications at added expense or increase labor costs and costs of food handling or impact the ability to supply from commissaries across state lines; local and state laws restricting the availability of liquor licenses and liquor sales, which may reduce some stores’ sales; and land use and zoning regulations, which may impact hours of operation, hours when shipments may be received and the ability to provide certain services or products, which may reduce revenues or increase direct store operating costs. Implementation of and changes to such laws can have a material impact on our sales volume, costs of goods and direct store expenses. In addition, from time to time we are audited by various governmental agencies for compliance with existing laws, and we could be subject to fines or operational modifications as a result of noncompliance.

Changes in and performance by suppliers, distributors and manufacturers . In January of 2004, we executed a five-year primary distribution agreement with UNFI. We purchase approximately 30% of our total products from UNFI, and the remainder from small vendors and secondary and tertiary distributors. In addition, in 2004 we opened a DC in Riverside, California. At the end of fiscal 2006, the majority of our stores west of the Mississippi River were receiving substantially all of their produce, bulk items, private label groceries, and selected other items from our DC. Significant disruptions in operations of our distributors or at our DC could materially impact our operations by disrupting store-level merchandise selection, resulting in reduced sales. Also, from time to time, we may experience product shortages due to the impact of adverse weather conditions, such as drought or flood, or disruptions in the supply chain from competition for products from other retailers, product shortages and transportation disruptions. These shortages may result in decreased product selection and increased out-of-stock conditions, as well as higher product costs, which result in decreased sales or margins.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.