Nov. 20 (Bloomberg) -- Whole Foods Market Inc., the largest U.S. natural-foods grocer, said fourth-quarter profit fell because of costs related to its purchase of Wild Oats Markets Inc.

Net income dropped 15 percent to $33.9 million, or 24 cents a share, from $39.8 million, or 28 cents, a year earlier, Whole Foods said today in a statement. Sales rose 35 percent to $1.74 billion, exceeding analysts' estimates of $1.61 billion.

The retailer purchased Wild Oats Markets Inc. in August for $565 million to counter slowing growth and compete against Safeway Inc. and Trader Joe's, which sell organic and prepared food. Whole Foods benefited from increased prices it passed onto customers because of record costs for milk and cheese.

``Historically, food inflation has been good for the retailers,'' said Matt Patsky, portfolio manager at Boston- based Winslow Management Co., which owns Whole Foods shares. ``They have been able to pass along the increased costs, and it's resulted in increases in same-store sales.''

Sales at stores open at least a year climbed 8.2 percent, following a 7 percent gain in the third quarter. The company forecast same-store sales next year to increase 7.5 percent to 9.5 percent.

``The comparable-sales guidance was pretty solid,'' said Edward Aaron, a Denver-based analyst with RBC Capital Markets, who recommends investors buy the shares.

Whole Foods, based in Austin, Texas, rose 78 cents, or 1.8 percent, to $43.03 at 7:38 p.m. in extended U.S. trading. Earlier, the shares declined 1.9 percent to $42.25 in Nasdaq Stock Market composite trading. The stock has dropped 10 percent this year, compared with a 23 percent gain for Kroger Co., the biggest U.S. grocery chain.

Same-Store Sales

Whole Foods is seeing an increase in sales at Wild Oats stores after adding more perishable items and cutting prices on about 1,000 items, Chief Executive Officer John Mackey said on a call with analysts and investors.

``We expect to return to a more historical comp level, despite increasing competition, a greater degree of cannibalization, and the possible negative impact of any slowdown in consumer spending,'' Mackey said on a conference call with analysts and investors.

Fourth-quarter profit included 10 cents a share in pre- opening and relocation costs and 6 cents in Wild Oats-related expenses.

Analysts surveyed by Bloomberg had estimated profit of 30 cents a share, excluding some costs.

First-quarter same-store sales have gained 9.5 percent quarter-to-date, Whole Foods said. The company is doing ``extremely well'' in California.

`Murky' Outlook

``The underlying trends were positive,'' Aaron said. ``The near-term earnings outlook is a little bit murky because there are an unusual number of moving parts with the story now, given the Wild Oats transaction.''

Higher general and administrative costs and fewer store openings for the year that ends September 2008 may mean the company's profit trails analysts' estimates of $1.53 a share, Aaron said.

Whole Foods, which has more than 270 stores, bought Wild Oats after the U.S. Federal Trade Commission failed to block the acquisition in court over concerns the combination would lead to higher prices. The FTC has appealed the decision and believes the merger can still be undone.

The acquisition of Wild Oats lets Whole Foods enter cities such as Cincinnati and Tampa, Florida, which it wouldn't have reached for several years. Whole Foods has said it will take about two years to integrate the locations.

``We've barely done anything and the sales are ratcheting up at a rapid rate,'' Mackey said on the call. ``We are encouraged.''

Some stores will be renamed in 2008, Mackey said.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: November 20, 2007 19:55 EST