Fall 2014 Accounting 501 Term Paper

Whole Foods Market, Inc.

Financial Analysis

Designed by Whole Foods Market, Inc. in Texas

Stephanie Simopoulos

December 2014

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Executive Summary

Whole Foods Market, Inc. has been in operation for over 30 years, and has since demonstrated a very successful business model that continues to benefit all stakeholders.

When the first Whole Foods Market store opened in 1980, business owners John Mackey and Walter Robb had no idea they would become the 8th largest public food and drug retailer in the U.S., nor did they know at the time that they would soon rank #232 on the Fortune 500. In 2005, the firm hit a major milestone reporting six stores averaging roughly $1 million per week. Now they have more than 50 stores averaging at least $1 million or more.

In 1985, the Declaration of Interdependence was crafted by 60 team members. The document was last updated in 1988, 1992, and 1997. The piece proclaims the party’s vision of instilling a clear sense of interdependence-ship among various stakeholders, and validating the contingency upon their efforts in communicating more often, more openly, and more compassionately. The idea behind this concept is the fact that better communication in turn equals a greater understanding, and therefore more trust. Today food retailing is more competitive than ever. There is an ever-growing demand for fresh, healthy foods. However, Whole Foods’ industry-leading metrics complement their ability toward innovation and display of high precedence in this volatile marketplace.

Although Whole Foods is not the industry leader, both long- and short-term growth and opportunities show promising future records and profits. Already their fiscal year for 2014 reflects yet another year of record store openings, as well as healthy comparable store sales growth. These same numbers also reveal marginal operating improvement, which will become the foundation for further enhancements. For the longer-term, the organization visualizes an estimated 1,200 domestic Whole Foods Market supplement stores, with additional international opportunities as well.

The corporation has established 367 stores within 40 U.S. states, Canada, and the U.K. Roughly seven million customers visit these stores each week. Historical strong identical store sales growth, acquisitions and new store openings have launched sales from $93 million beginning in 1991, to about $12.9 billion in fiscal year 2013, which is an astonishing 22-year compounded annual growth rate of approximately 25%.

In the up and coming years, Whole Foods hopes to continue expanding their valued offers, and anticipates a narrowed pricing gap as opposed to competing markets. During this past fiscal year, the Company returned $633 million to shareholders through share buybacks and dividends. Their impressive performance was measured by a subsequent 20% stock increase, outpacing the S&P 500 for the fifth consecutive year.

With an improved pricing image, the organization has consistently raised the bar. More recently they have achieved in becoming the only U.S. public food retailer to commit to labeling GMO products and are announcing a new rating system to improve value for fresh produce and organic nutrition. Whole Foods believes that by reinforcing their position as the authentic retailer of natural and organic foods, they can aspire to become customers’ preferred choice to a healthier lifestyle.

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Whole Foods’ Code of Conduct and Business Ethics

The Company’s overall goal is to balance the needs and desires of their customers, team members, shareholders, suppliers, communities and the environment, in addition to creating value for all. This entity believes in growing the “collective pie,” so-to-speak, and in doing so creating larger slices for all stakeholders. Whole Foods’ “bottom line,” essentially depends on their ability to satisfy stakeholders. Their core values include selling the highest quality of natural and organic products available, satisfying, delighting and nourishing customers, supporting team member happiness and excellence, creating wealth through profits and growth, serving and supporting local and global communities, practicing and advancing environmental stewardship, creating ongoing win-win partnerships with suppliers, and promoting the health of stakeholders through healthy eating education.

Mission Statement

Whole Foods Market’s motto – Whole Foods, Whole People, Whole Planet – emphasizes the organization’s aim is setting the standards of excellence for all food retailers. They are a mission-driven frontrunner in the quality food business, and the concept has grown to a state of mind for the dynamic market leader. The Company also believes in a vision of sustainability by creating a future for our children and grandchildren that will expectantly be living in a world that values human creativity, diversity, and individual choice. Their higher purpose is embracing responsibility in a co-existing world where each of us, our communities and our planet, can flourish. As a result, Whole Foods’ overall intention is that all can celebrate the sheer love and joy of food.

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Corporate Overview

Whole Foods’ goal is to balance the needs and desires of customers, team members, shareholders, suppliers, communities and the environment, all while creating value for everyone else. Whole Foods is America’s first “Certified Organic” grocer, which was incorporated in 1978. The establishment is now the leading retailer of natural and organic foods, and has helped lead the industry to nationwide acceptance on the natural and organic foods movement throughout the United States over the last 35 years. Whole Foods Market store has excelled its growth in the most culturally, sustainable way possible. More than 78,000 team members are employed by the naissance, and are pleased to be only one of 13 companies ranked consecutively for 16 years by Fortune’s list of the 100 Best Companies to Work for in America.

Design and Innovation

Whole Foods Market believes the growth in sales of natural and organic foods is being driven by numerous factors including heightened awareness of the role that healthy eating plays in long-term wellness, a better-educated and wealthier populace whose median age is increasing each year, increasing consumer concern over the purity and safety of food, and environmental concerns. The organization produces, distributes, and advertises assortments of natural and organic products and produce to a developing well-informed public.

Differentiated Products – Whole Foods offers a variety of a broad and differentiated selection of high-quality, natural and organic products. They carry a strong emphasis on perishable foods and their product selection includes, but is not limited to, produce and floral, grocery, meat, seafood, bakery prepared foods and catering, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, and lifestyle products including books, pet supplies, and household products.

Store Operations – Utilizing a team approach to individual store operations is believed to distinctly empower team members than traditional supermarket practices. Whole Foods Market focuses on a decentralized methodology to store operations to ensure the store is operating as efficiently and profitably as possible. In this structure, decisions are made by teams at the individual store level. Here, store team leaders work closely with one or more associate store managers.

Purchasing and Distribution – United Natural Foods, Inc. (UNFI) is Whole Foods’ single largest third-party supplier. This long-term relationship as the primary supplier for the organization will be extended through 2020. UNFI accounts for roughly 32% of total purchases in the 2013 fiscal year. The produce procurement center facilitates the majority of products sold by Whole Foods. The industry also operates four seafood processing and distribution facilities, a specialty coffee and tea roasting operation, and 11 regional distribution centers. These centers mainly concentrate on perishable distribution to stores across the U.S., Canada, and the U.K.

Competition – Food retailing is a large, intensely competitive industry and varies across local, regional, national and international conventional and specialty supermarkets, natural foods

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stores, warehouse membership clubs, online retailers, smaller specialty stores, farmers’ markets and restaurants.

Team Members – Team member relations are considered to be very strong at Whole Foods. For the past 16 years, Whole Foods is only one of 13 companies to consecutively make Fortune magazine’s 100 Best Companies to Work for in America. The grocery chain believes in empowering its employees and encourages them to build a permanent career with the organization. Salary and benefits programs signify the company’s values on equal opportunity.

Marketing – Instead of incorporating traditional media activity, Whole Foods allocates more of their budget toward increasing nonprofit partnerships. The philosophy behind this centers around the concept of exposing new information and ideas by word-of-mouth. This has enabled the company and the surrounding community to grow simultaneously together. Social media also proves beneficial in generating a powerful style of effective communication utilized at both the local and global levels.

Global Responsibility – Corporate-social responsibility has become the altruistic pioneer of twenty-first century, enhancing a revolutionary approach that reinforces the conscientiousness of “shared fate.” Whole Foods feels deeply responsible in fostering goodwill, and retains a separate budget specifically set aside for making contributions to a variety of humanitarian institutions. The establishment is also committed to supporting their own foundations. One example in particular is the Healthy Eating Education program. This is a practical tool designed and instigated in an effort to improve the health and vitality of numerous Americans. Another noble foundation is the Whole Planet Foundation (www.wholeplanetfoundation.org), which is a non-for-profit organization initiated in 2005. The philosophy behind their mission is to enable the poor by creating or expanding home-based businesses through affluence.

The U.S. grocery industry includes supercenters, conventional supermarkets, and limited-assortment and natural/gourmet-positioned supermarkets, according to Nielsen’s TDLinx and the Progressive Grocer, and obtained a 3% increase in sales over the past year, totaling roughly $603 billion. Also in concurrence with the Progressive Grocer is the fact that Whole Foods is the largest retailer of natural and organic foods in the U.S., operating as the 12th largest food retailer overall. The Company aspires to being the highest quality food retailer within each surrounding store location.

Organic foods are grown through the conservation of soil and water, which is aimed toward enhancing overall environmental quality, and as well as methods that focus on the use of renewable resources. On average, each store carries about 21,000 SKU’s. Of those products, approximately 30% of sales were generated from organic products in fiscal year 2013. Traditionally, sales have grown exponentially due to a simultaneous rise in store sales. Over the last 15 fiscal years, store sales growth has averaged 8.2% and store sales growth has retained 7.3% on average.

New store openings have increased drastically resulting in 22-year compounded annual growth rate of approximately 25%. Beginning in fiscal year 1991 with $93 million invested in recent acquisitions, increasing well over $12.9 billion in to 2013 fiscal year. Whole Foods’ growth strategy is to expand

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through new store openings, continue to pursue smaller chains in desirable geographic locations that are saturated with experienced team members, and to preserve a disciplined, opportunistic real estate strategy that targets premium sites both in existing trade and new areas. New stores range anywhere from 35,000-45,000 square feet on average; however, some stores may open as small as 15,000 square feet or as large as 75,000 square feet. The Company accommodates each store size, design, product selection and pricing strategy to reflect the surrounding community.

During fiscal years 2013 and 2012, gross profit totaled approximately $4.6 billion and $4.2 billion, respectively. Whole Foods expects sales growth to primarily be focused on capital expenditures for the upcoming 2014 fiscal year. These novel prospects include the opening of generally 33 to 38 new stores, and the budget will allocate anywhere from $600 million to $650 million to fund the growth processes. In the past, the organization has produced $1.0 billion in cash flow from operations. From that, Whole Foods invested $537 million into capital expenditures, and $339 million went directly to new locations.

Whole Foods is a member of the Standard & Poor’s S&P 500 Index, the NASDAQ-100® Index, and the Dow Jones Sustainability ™ North America Index under the symbol “WFM,” and its common stock is traded on the NASDAQ Global Select Market. Previously, Whole Foods repurchased $125 million of common stock and compiled a total of $1.4 billion in cash, restricted cash, and investments at the end of the fiscal year. This fiscal year, as of November 15, 2013, approximately, 1,384 shareholders summarized the establishment’s record, and declared a closing stock price at $58.84. One particular incentive WFM’s shareholders were jubilant about concerned the 20% increase in the Company’s quarterly dividend, authorized by the Whole Foods’ Board of Directors on November 1st, 2013. This $0.12 rise was made payable on January 28th, 2014. The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period.

Key ExecutivesName, Age & Position Pay ExercisedMr. John P. Mackey, 61Co-Founder, Co-Chief Exec. Officer and Director

$1* ∞**

Mr. Walter E. Robb III, 60Co-Chief Exec. Officer and Director

813.00K 1.42M

Mr. A. C. Gallo, 61Pres. and Chief Operating Officer

808.00K 692.00K

Ms. Glenda Jane Flanagan, 60Chief Financial Officer, Exec. VP and Sec.

765.00K 1.34M

Mr. James P. Sud, 62Exec. VP of Growth and Bus. Development

804.00K 1.07M

Amounts are as of Dec 31, 2013 and compensation values are for the last fiscal year ending on that date. Pay is salary, bonuses, etc. Exercised is the value of options exercised during the fiscal year. Currency is in USD.*On November 2nd, 2007, Mackey stated that he would “no longer work for money” and reduced his compensation down to $1 per day.**All future stock options Mackey receives are to be donated back into the two company foundations, creating an infinite contribution cycle threading directly from the CEO (http://www.fastcompany.com/58514/i-no-longer-want-work-money).

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Financial Analysis – Market Summary

Whole Foods Market, Inc. As of 9-30-2013 through 12-31-2013

Copyright 2014 Morningstar, Inc. http://quote.morningstar.com

As market trends are examined over the previous fiscal year, we find similar recordings in our present quarter as well. WFM’s numbers remain consistent, demonstrating strong stock activity with invested trust and aptitude from shareholders.

Stock Activity November 7th, 2014

Last Trade: 46.81 Volume: 22,490,000

Trade Time: November 7 Average Volume: 6,040,000

Change: +1.96 (4.37%) Market Cap: 16.91B

52 wk high: 59.70 P/E: 29.94

52 wk low: 36.08 EPS: 1.56

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Direct Competitor Comparison

ttm = Trailing Twelve Months (as of September 28, 2014)yoy = Year Over Year (as of September 28, 2014)

WFM = Whole Foods Market, Inc.

KR = The Kroger Co.

SFM = Sprouts Farmers Market, Inc.

PVT1 = Trader Joe’s Company (privately held)

Whole Foods is not the leader in market capitalization, but the company displays many other strong capabilities, such as increased robustness in operating margins, and relatively resilient, stable EPS and P/E ratios, comparative to the inclusive industry.

P/E Ratio (Market Price Per Share/Earnings Per Share)

WFM = 29.79%Industry = 23.32%S&P 500 = 9.89%

For those interested in purchasing stock in Whole Foods, the price-earnings ratio will compare the earnings per share of the Company to the market price. This is a good indicator for potential growth, as seen in the eyes of the market as a whole. The market price of an organization’s stock reflects assessments both the concerning company’s current stature as well as expectations for future results. The P/E ratio essentially shows the demand investors are willing to pay per dollar of earnings, and because of this is sometimes referred to as the “multiple.” Compared to the industry, Whole Foods are

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achieved almost three times the value over market percentages. This preference validates the Company’s capabilities in the public sector, generally creating a more promising future for investors.

Competitors Ranked by Sales

Financial Analysis – Highlights and Key Ratios

Financial Highlights for the last 12 months

Sales 12.917MIncome 551,000Net Profit Margin 4.08%Return on Equity 15.06%Debt/Equity Ratio 1.63Revenue/Share 38.59Earnings/Share 1.56Book Value/Share 10.58Dividend Rate 0.52Payout Ratio 31.00%

Net Profit Margin

WFM = 4.08%Industry = 2.40%

This statistic has several names including gross margin, profit margin, operating margin, and return on sales. After subtracting out cost of goods sold and other expenses, the remaining percentage describes

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of each sales dollar to income. Net margin is achieved by dividing net income by net sales. Analyzing and describing this proportion requires profound interpretation, and may involve some extensive research on both the company’s history and industry it resides in.

Net profit margin is one of the most analyzed numbers in the finance world. For shareholders, a higher profit margin typically suggests an establishment is exchanging revenue for profits available to guarantors at a quick pace. The figure is a percentage of sales, not an absolute number. A low profit margin is caused either by a pricing strategy error or increased competition on company scopes.

Net Profit Margin= Net ProfitTotal Revenue

=Total Revenue−Total ExpensesTotal Revenue

Whole Foods profit margin is almost double the industry’s statistic, challenging competitors to increase sales, profits, and liquidity transferals.

Financial Condition – Key Ratios Compared to Industry and S&P 500 Averages

Financial Condition Whole Foods Industry S&P 500Debt/Equity Ratio 1.63 1.13 1.33Current Ratio 1.40 1.18 1.30Quick Ratio 0.71 0.21 0.38Interest Coverage 8.51 8.88 12.64Leverage Ratio 2.86 2.52 3.87Book Value/Share 10.58 5.20 717.81Return on Equity 15.06 20.50 14.60Return on Assets 10.30 7.30 3.35EPS 1.56 1.14 27.14P/E Ratio 29.79 23.32 19.52Net Profit Margin 4.08 2.40 8.98

Return on Equity (Income/Owners Equity)/ROE

WFM = 15.06%Industry = 20.50%

The guarantor will earn a higher return on investment as long as an organization’s ROI exceeds its cost of borrowing, or interest expense, by use of borrowed money. Therefore, ROE is typically higher than ROI. The return on equity is often used to measure the profitability of the stockholders’ investment. There are three main differences one may observe in process of calculating ROE:

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1.) To comprehend return on common equity, simply subtract preferred dividends from net income, and subtract preferred equity from shareholders’ equity: R

OCE=Net Income−Preferred DividendsCommonEquity

2.) ROE may also be calculated by dividing net income by average shareholders’ equity.3.) Determining the shareholders’ equity figure from the beginning of the period as a

denominator to assess beginning ROE, and the shareholders’ equity figure from the end-of-period as the denominator to determine the ending ROE, investors can calculate the change in ROE for a specified period.

Whole Foods’ current net income is significantly greater than 2012, the previous year, from $466M to $551M. Financial data suggest positive growth trending, and even though affirmative figures indicate continued development, the industry still displays a clear advantage with a 5% additional gain.

Return on Assets (Income/Assets)/ROA

WFM = 10.30%Industry = 7.30%

Earning power, or return on investment, is the ratio net income to the amount invested, average total assets. This percentage will surmise shareholder sovereignty, and demonstrate the overall wealth of the company. Better performance is suggested by a higher ROI ratio. Whole Foods exhibits great earning power, and, for the 2013 fiscal year, has achieved a more pronounced conclusion than the overall industry. From this we gather that, relative to their total assets, Whole Foods yields increasingly more efficient returns.

Debt/Equity Ratio (Liabilities/Owners Equity)

WFM = 1.63Industry = 1.13

In this ratio, the term equity refers specifically to stockholders’ equity, and compares creditor financing to owner investment. The quotient is expressed as the amount of liabilities for each dollar of stockholders’ equity. The Company’s debt-to-equity ratio is comparatively larger than the overall market as well as the S&P value. This means Whole Foods recognizes the value of its investors, and has taken the necessary precautions and decisions directed toward protecting owner backings.

EPS (Earnings Per Share)

WFM = 1.56Industry = 1.14

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EPS calculations are among the most complex in accounting, but also the most regularly practiced in measuring performance. This estimate is obtained by dividing the net earnings available for common stock purposes by the average number of outstanding common share. The amount of outstanding common shares is acquired by dividing the book value of the common stock by its par value per share.

EPS= Net Income−Dividends on Preferred StockAverageOutstanding Shares

Currently, Whole Foods EPS statistic is remarkably elevated compared to that of the entire industry, and has exponentially climbed by 16.5% over the 53-week prior year. Several variables could affect this indicator, but more than likely its satisfactory standing is mainly due to increased sales, reaching amounts of nearly $12.9 billion.

Whole Foods’ Net Y/Y growth ranking overall is #3, with the overall industry trailing at #20 and the S&P 500 statistic down at 239. Last year they reported an impressive 7.89% in net growth, which is lower than their recent improvement average of 36.46%.

Current Ratio (Current Assets/Current Liabilities)

WFM = 1.40Industry = 1.18

The current ratio is also known as the working capital ratio, and is an absolute amount. It is expressed as the number of current assets for each dollar of current liabilities. By conveying the association between

Quarter IQuarter II

Quarter IIIQuarter IV

00.05

0.10.15

0.20.25

0.30.35

0.40.45

20112012

20132014

Whole Foods Market, Inc. Net EPS (Y/Y)

2011201220132014

Yearly Quarters

Net

EPS

Gro

wth

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current assets and current liabilities, other companies can relatively gauge the imminent corporation’s debt-paying ability. The higher the ratio, the more capable the Company is of paying back its short-term obligations, such as debt, payables, inventory and receivables. Compared to the overall industry, Whole Foods has a higher ratio, demonstrating greater security for both its’ share and stockholders. Whole Foods currently possess enough assets to cover any probable liabilities.

Quick Ratio (Quick Assets/Current Liabilities)

WFM = 0.71Industry = 0.21

The quick ratio, more commonly known as the acid-test ratio, measures a company’s immediate debt-paying ability. The statistic does so by dividing the “quick assets” by current liabilities. Quick assets include cash, receivables, and current market securities. The more liquid the asset, the more likely it will be omitted from this calculation. The quick ratio must be analyzed over a period of time, and must also be considered in the context of which the Whole Foods’ industry operates. It is an indicator of solvency of an entity.

The current ratio does not include assets that are readily convertible to cash. Quick ratio comprises mainly of cash, ETF transfers, receivables, and market securities. These categories of assets are more liquid that variables taken in the current ratio. Quick ratios can alternatively be calculated as follows:

Quick Ratio= (Current Assets−Inventory−Advances−Prepayments )Current Liabilities

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Appendix A

Annual Income Statement

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Annual Balance Sheet

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Cash Flow Statement