UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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for the period ended July 3, 2011; | ||
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or | ||
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| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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for the transition period from to . |
Commission File Number: 0-19797
WHOLE FOODS MARKET, INC.
(Exact name of registrant as specified in its charter)
Texas |
| 74-1989366 |
(State of |
| (IRS employer |
incorporation) |
| identification no.) |
550 Bowie St.
Austin, Texas 78703
(Address of principal executive offices)
512-477-4455
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer x |
| Accelerated filer o |
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Non-accelerated filer o |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
The number of shares of the registrant’s common stock, no par value, outstanding as of July 3, 2011 was 177,185,926 shares.
Form 10-Q
Table of Contents
Whole Foods Market, Inc.
Consolidated Balance Sheets (unaudited)
July 3, 2011 and September 26, 2010
(In thousands)
|
| 2011 |
| 2010 |
| ||
Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 289,107 |
| $ | 131,996 |
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Short-term investments — available-for-sale securities |
| 247,803 |
| 329,738 |
| ||
Restricted cash |
| 86,819 |
| 86,802 |
| ||
Accounts receivable |
| 157,162 |
| 133,346 |
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Merchandise inventories |
| 348,293 |
| 323,487 |
| ||
Prepaid expenses and other current assets |
| 84,143 |
| 54,686 |
| ||
Deferred income taxes |
| 103,077 |
| 101,464 |
| ||
Total current assets |
| 1,316,404 |
| 1,161,519 |
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Property and equipment, net of accumulated depreciation and amortization |
| 1,968,247 |
| 1,886,130 |
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Long-term investments — available-for-sale securities |
| 40,255 |
| 96,146 |
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Goodwill |
| 662,938 |
| 665,224 |
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Intangible assets, net of accumulated amortization |
| 65,736 |
| 69,064 |
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Deferred income taxes |
| 51,525 |
| 99,156 |
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Other assets |
| 8,446 |
| 9,301 |
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Total assets |
| $ | 4,113,551 |
| $ | 3,986,540 |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Current installments of long-term debt and capital lease obligations |
| $ | 446 |
| $ | 410 |
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Accounts payable |
| 228,303 |
| 213,212 |
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Accrued payroll, bonus and other benefits due team members |
| 272,447 |
| 244,427 |
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Dividends payable |
| 17,700 |
| — |
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Other current liabilities |
| 337,225 |
| 289,823 |
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Total current liabilities |
| 856,121 |
| 747,872 |
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Long-term debt and capital lease obligations, less current installments |
| 17,595 |
| 508,288 |
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Deferred lease liabilities |
| 341,722 |
| 294,291 |
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Other long-term liabilities |
| 52,997 |
| 62,831 |
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Total liabilities |
| 1,268,435 |
| 1,613,282 |
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Shareholders’ equity: |
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Common stock, no par value, 300,000 shares authorized; 177,186 and 172,033 shares |
| 2,027,016 |
| 1,773,897 |
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Accumulated other comprehensive income |
| 5,251 |
| 791 |
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Retained earnings |
| 812,849 |
| 598,570 |
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Total shareholders’ equity |
| 2,845,116 |
| 2,373,258 |
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Commitments and contingencies |
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Total liabilities and shareholders’ equity |
| $ | 4,113,551 |
| $ | 3,986,540 |
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The accompanying notes are an integral part of these consolidated financial statements.
Whole Foods Market, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per share amounts)
|
| Twelve weeks ended |
| Forty weeks ended |
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| July 3, |
| July 4, |
| July 3, |
| July 4, |
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| 2011 |
| 2010 |
| 2011 |
| 2010 |
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Sales |
| $ | 2,399,781 |
| $ | 2,163,181 |
| $ | 7,753,954 |
| $ | 6,908,400 |
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Cost of goods sold and occupancy costs |
| 1,551,340 |
| 1,402,847 |
| 5,030,455 |
| 4,499,421 |
| ||||
Gross profit |
| 848,441 |
| 760,334 |
| 2,723,499 |
| 2,408,979 |
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Direct store expenses |
| 620,588 |
| 567,191 |
| 2,019,455 |
| 1,821,702 |
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General and administrative expenses |
| 73,073 |
| 68,153 |
| 237,245 |
| 206,629 |
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Pre-opening expenses |
| 11,784 |
| 8,692 |
| 29,967 |
| 33,137 |
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Relocation, store closure and lease termination costs |
| 2,371 |
| 728 |
| 6,520 |
| 10,452 |
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Operating income |
| 140,625 |
| 115,570 |
| 430,312 |
| 337,059 |
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Interest expense |
| (266 | ) | (7,421 | ) | (3,882 | ) | (25,757 | ) | ||||
Investment and other income |
| 1,938 |
| 1,543 |
| 6,531 |
| 5,236 |
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Income before income taxes |
| 142,297 |
| 109,692 |
| 432,961 |
| 316,538 |
| ||||
Provision for income taxes |
| 53,825 |
| 43,963 |
| 165,824 |
| 128,203 |
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Net income |
| 88,472 |
| 65,729 |
| 267,137 |
| 188,335 |
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Preferred stock dividends |
| — |
| — |
| — |
| 5,478 |
| ||||
Income available to common shareholders |
| $ | 88,472 |
| $ | 65,729 |
| $ | 267,137 |
| $ | 182,857 |
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Basic earnings per share |
| $ | 0.50 |
| $ | 0.38 |
| $ | 1.53 |
| $ | 1.11 |
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Weighted average shares outstanding |
| 176,444 |
| 171,653 |
| 174,457 |
| 164,529 |
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Diluted earnings per share |
| $ | 0.50 |
| $ | 0.38 |
| $ | 1.51 |
| $ | 1.10 |
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Weighted average shares outstanding, diluted basis |
| 178,610 |
| 172,601 |
| 176,513 |
| 171,395 |
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Dividends declared per common share |
| $ | 0.10 |
| $ | — |
| $ | 0.30 |
| $ | — |
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The accompanying notes are an integral part of these consolidated financial statements.
Whole Foods Market, Inc.
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (unaudited)
Forty weeks ended July 3, 2011 and fiscal year ended September 26, 2010
(In thousands)
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| Accumulated |
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| other |
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| Total |
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| Shares |
| Common |
| comprehensive |
| Retained |
| shareholders’ |
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| outstanding |
| stock |
| income (loss) |
| earnings |
| equity |
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Balances at September 27, 2009 |
| 140,542 |
| $ | 1,283,028 |
| $ | (13,367 | ) | $ | 358,215 |
| $ | 1,627,876 |
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Net income |
| — |
| — |
| — |
| 245,833 |
| 245,833 |
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Foreign currency translation adjustments |
| — |
| — |
| 1,564 |
| — |
| 1,564 |
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Reclassification adjustments for amounts included in income |
| — |
| — |
| 12,943 |
| — |
| 12,943 |
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Change in unrealized losses, net of income taxes |
| — |
| — |
| (349 | ) | — |
| (349 | ) | ||||
Comprehensive income |
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| 259,991 |
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Redeemable preferred stock dividends |
| 358 |
| 5,195 |
| — |
| (5,478 | ) | (283 | ) | ||||
Conversion of preferred stock |
| 29,311 |
| 413,052 |
| — |
| — |
| 413,052 |
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Issuance of common stock pursuant to team member stock plans |
| 1,822 |
| 47,020 |
| — |
| — |
| 47,020 |
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Excess tax benefit related to exercise of team member stock options |
| — |
| 2,708 |
| — |
| — |
| 2,708 |
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Share-based payment expense |
| — |
| 22,894 |
| — |
| — |
| 22,894 |
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Balances at September 26, 2010 |
| 172,033 |
| 1,773,897 |
| 791 |
| 598,570 |
| 2,373,258 |
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Net income |
| — |
| — |
| — |
| 267,137 |
| 267,137 |
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Foreign currency translation adjustments |
| — |
| — |
| 4,201 |
| — |
| 4,201 |
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Reclassification adjustments for amounts included in income |
| — |
| — |
| 245 |
| — |
| 245 |
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Change in unrealized gains, net of income taxes |
| — |
| — |
| 14 |
| — |
| 14 |
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Comprehensive income |
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| 271,597 |
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Dividends ($0.30 per common share) |
| — |
| — |
| — |
| (52,620 | ) | (52,620 | ) | ||||
Issuance of common stock pursuant to team member stock plans |
| 5,157 |
| 213,026 |
| — |
| — |
| 213,026 |
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Excess tax benefit related to exercise of team member stock options |
| — |
| 21,003 |
| — |
| — |
| 21,003 |
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Share-based payment expense |
| — |
| 19,090 |
| — |
| — |
| 19,090 |
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Other |
| (4 | ) | — |
| — |
| (238 | ) | (238 | ) | ||||
Balances at July 3, 2011 |
| 177,186 |
| $ | 2,027,016 |
| $ | 5,251 |
| $ | 812,849 |
| $ | 2,845,116 |
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The accompanying notes are an integral part of these consolidated financial statements.
Whole Foods Market, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
|
| Forty weeks ended |
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| July 3, |
| July 4, |
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| 2011 |
| 2010 |
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Cash flows from operating activities |
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Net income |
| $ | 267,137 |
| $ | 188,335 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 219,082 |
| 211,073 |
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Loss (gain) on disposition of fixed assets |
| 1,478 |
| (756 | ) | ||
Impairment of long-lived assets |
| 688 |
| 2,020 |
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Share-based payment expense |
| 19,090 |
| 15,371 |
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LIFO expense (benefit) |
| 6,500 |
| (6,519 | ) | ||
Deferred income tax expense (benefit) |
| 45,916 |
| (7,178 | ) | ||
Excess tax benefit related to exercise of team member stock options |
| (16,934 | ) | (2,817 | ) | ||
Deferred lease liabilities |
| 42,501 |
| 31,322 |
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Other |
| 4,052 |
| (1,679 | ) | ||
Net change in current assets and liabilities: |
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Accounts receivable |
| (20,692 | ) | (17,613 | ) | ||
Merchandise inventories |
| (30,483 | ) | (14,558 | ) | ||
Prepaid expenses and other current assets |
| (29,262 | ) | 7,610 |
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Accounts payable |
| 14,600 |
| 13,722 |
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Accrued payroll, bonus and other benefits due team members |
| 27,766 |
| 27,771 |
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Other current liabilities |
| 50,191 |
| 12,023 |
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Net change in other long-term liabilities |
| (6,427 | ) | 2,803 |
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Net cash provided by operating activities |
| 595,203 |
| 460,930 |
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Cash flows from investing activities |
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Development costs of new locations |
| (156,048 | ) | (143,379 | ) | ||
Other property and equipment expenditures |
| (115,530 | ) | (56,388 | ) | ||
Purchase of available-for-sale securities |
| (924,287 | ) | (888,947 | ) | ||
Sale of available-for-sale securities |
| 1,057,312 |
| 536,794 |
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Increase in restricted cash |
| (17 | ) | (15,791 | ) | ||
Payment for purchase of acquired entities, net of cash acquired |
| (1,972 | ) | (14,450 | ) | ||
Other investing activities |
| (2,369 | ) | (1,075 | ) | ||
Net cash used in investing activities |
| (142,911 | ) | (583,236 | ) | ||
Cash flows from financing activities |
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Common stock dividends paid |
| (34,920 | ) | — |
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Preferred stock dividends paid |
| — |
| (8,500 | ) | ||
Issuance of common stock |
| 210,927 |
| 43,896 |
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Excess tax benefit related to exercise of team member stock options |
| 16,934 |
| 2,817 |
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Payments on long-term debt and capital lease obligations |
| (490,258 | ) | (210,228 | ) | ||
Net cash used in financing activities |
| (297,317 | ) | (172,015 | ) | ||
Effect of exchange rate changes on cash and cash equivalents |
| 2,136 |
| 335 |
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Net change in cash and cash equivalents |
| 157,111 |
| (293,986 | ) | ||
Cash and cash equivalents at beginning of period |
| 131,996 |
| 430,130 |
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Cash and cash equivalents at end of period |
| $ | 289,107 |
| $ | 136,144 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
| $ | 15,060 |
| $ | 38,494 |
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Federal and state income taxes paid |
| $ | 144,347 |
| $ | 136,195 |
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Non-cash transaction: |
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Conversion of redeemable preferred stock into common stock |
| $ | — |
| $ | 418,247 |
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The accompanying notes are an integral part of these consolidated financial statements.
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (unaudited)
July 3, 2011
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Whole Foods Market, Inc. and its consolidated subsidiaries (collectively “Whole Foods Market,” “Company,” or “We”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis, the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 2010. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks, and the fourth quarter is twelve or thirteen weeks. Fiscal years 2011 and 2010 are fifty-two week fiscal years. We have one operating segment and a single reportable segment, natural and organic foods supermarkets. The following is a summary of percentage sales by geographic area for the periods indicated:
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| Twelve weeks ended |
| Forty weeks ended |
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| July 3, |
| July 4, |
| July 3, |
| July 4, |
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| 2011 |
| 2010 |
| 2011 |
| 2010 |
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Sales: |
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United States |
| 96.8 | % | 97.0 | % | 96.9 | % | 97.0 | % |
Canada and United Kingdom |
| 3.2 |
| 3.0 |
| 3.1 |
| 3.0 |
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Total sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The following is a summary of the percentage of net long-lived assets by geographic area as of the dates indicated:
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| July 3, |
| September 26, |
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| 2011 |
| 2010 |
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Long-lived assets, net: |
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United States |
| 96.0 | % | 96.6 | % |
Canada and United Kingdom |
| 4.0 |
| 3.4 |
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Total long-lived assets, net |
| 100.0 | % | 100.0 | % |
(2) Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance within Accounting Standards Codification (“ASC”) 805, “Business Combinations,” which updates previous guidance on this topic and applies to all material transactions. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) had occurred as of the beginning of the comparable prior annual reporting period only. Additional amendments expand supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The updated guidance is effective for fiscal years beginning after December 15, 2010 and is applied prospectively to business combinations completed on or after that date. The provisions are effective for the Company’s fiscal year ending September 30, 2012. We do not expect the adoption of these provisions to have a significant effect on our consolidated financial statements.
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s second quarter of fiscal year ending September 30, 2012. We do not expect the adoption of these provisions to have a significant effect on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” which amends ASC 220, “Comprehensive Income.” The amended guidance requires that all nonowner changes in stockholders’ equity be presented in
either a single statement of comprehensive income or two separate but consecutive statements. The objective of these amendments is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance provided in ASU No. 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The provisions are effective for the Company’s first quarter of the fiscal year ending September 29, 2013.
(3) Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
The Company holds money market fund investments that are classified as either cash equivalents or restricted cash and available-for-sale marketable securities generally consisting of state and local government obligations that are measured at fair value on a recurring basis, based on current market prices. Currently, the Company primarily holds variable rate demand notes. At July 3, 2011, the average effective maturity of the Company’s short and long-term investments was approximately six months and 16 months, respectively.
The Company held the following financial assets at fair value, based on the hierarchy input levels indicated, on a recurring basis (in thousands):
July 3, 2011 |
| Level 1 Inputs |
| Level 2 Inputs |
| Level 3 Inputs |
| Total |
| ||||
Assets: |
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|
|
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|
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Money market fund investments |
| $ | 240,341 |
| $ | — |
| $ | — |
| $ | 240,341 |
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Marketable securities — available-for-sale |
| 288,058 |
| — |
| — |
| 288,058 |
| ||||
Total |
| $ | 528,399 |
| $ | — |
| $ | — |
| $ | 528,399 |
|
September 26, 2010 |
| Level 1 Inputs |
| Level 2 Inputs |
| Level 3 Inputs |
| Total |
| ||||
Assets: |
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|
|
|
|
|
|
|
| ||||
Money market fund investments |
| $ | 112,363 |
| $ | — |
| $ | — |
| $ | 112,363 |
|
Marketable securities — available-for-sale |
| 425,884 |
| — |
| — |
| 425,884 |
| ||||
Total |
| $ | 538,247 |
| $ | — |
| $ | — |
| $ | 538,247 |
|
(4) Goodwill and Other Intangible Assets
The Company recorded goodwill totaling approximately $1.5 million during the twelve weeks ended July 3, 2011, related to the acquisition of a specialty store. During the same period of the prior fiscal year, the Company recorded goodwill totaling approximately $9.5 million related to the acquisition of two retail stores. The Company recorded goodwill adjustments of approximately $3.7 million and $2.6 million, related to actual exit costs of certain restructuring reserves, during the forty weeks ended July 3, 2011 and July 4, 2010, respectively. There were no impairments of goodwill during the forty weeks ended July 3, 2011 or July 4, 2010. The components of intangible assets were as follows (in thousands):
|
| July 3, 2011 |
| September 26, 2010 |
| ||||||||
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| Gross carrying |
| Accumulated |
| Gross carrying |
| Accumulated |
| ||||
|
| amount |
| amortization |
| amount |
| amortization |
| ||||
Indefinite-lived contract-based |
| $ | 1,748 |
| $ | — |
| $ | 1,643 |
| $ | — |
|
Definite-lived contract-based |
| 93,472 |
| (30,645 | ) | 96,821 |
| (30,706 | ) | ||||
Definite-lived marketing-related and other |
| 1,464 |
| (303 | ) | 1,574 |
| (268 | ) | ||||
|
| $ | 96,684 |
| $ | (30,948 | ) | $ | 100,038 |
| $ | (30,974 | ) |
Amortization associated with intangible assets totaled approximately $1.6 million and $5.4 million for the twelve and forty weeks ended July 3, 2011, respectively, and approximately $1.4 million and $4.6 million, respectively, for the same periods of the prior fiscal year. Future amortization associated with the net carrying amount of intangible assets is estimated to be approximately as follows (in thousands):
Remainder of fiscal year 2011 |
| $ | 1,356 |
|
Fiscal year 2012 |
| 5,196 |
| |
Fiscal year 2013 |
| 5,005 |
| |
Fiscal year 2014 |
| 4,893 |
| |
Fiscal year 2015 |
| 4,556 |
| |
Future fiscal years |
| 42,982 |
| |
|
| $ | 63,988 |
|
(5) Reserves for Closed Properties
Following is a summary of store closure reserve activity during the forty weeks ended July 3, 2011 and fiscal year ended September 26, 2010 (in thousands):
|
| July 3, |
| September 26, |
| ||
|
| 2011 |
| 2010 |
| ||
Beginning balance |
| $ | 59,298 |
| $ | 69,228 |
|
Additions |
| 3,937 |
| 5,236 |
| ||
Usage |
| (15,373 | ) | (19,431 | ) | ||
Adjustments |
| (2,754 | ) | 4,265 |
| ||
Ending balance |
| $ | 45,108 |
| $ | 59,298 |
|
Additions to store closure reserves relate to the accretion of interest on existing reserves and new closures. During the forty weeks ended July 3, 2011, the Company recorded reserves totaling approximately $1.1 million related to two new closures. There were no additions to store closure reserves related to new closures in fiscal year 2010. Usage included approximately $7.7 million and $6.6 million in termination fees related to certain idle properties, and approximately $7.7 million and $12.8 million in ongoing cash rental payments during the forty weeks ended July 3, 2011 and fiscal year ended September 26, 2010, respectively. Additionally, the Company recorded goodwill adjustments of approximately $3.7 million and $2.6 million during the forty weeks ended July 3, 2011 and fiscal year ended September 26, 2010.
(6) Long-Term Debt
The Company had a $700 million, five-year term loan agreement due in 2012, with an outstanding balance of $490 million at September 26, 2010. During the forty weeks ended July 3, 2011, the Company repaid the remaining balance on the term loan. The Company has outstanding a $350 million revolving line of credit that extends to 2012. The Company’s obligations under the facility are secured by liens on certain of the Company’s assets, including stock of our subsidiaries. At July 3, 2011 we were in compliance with all debt covenants. At July 3, 2011 and September 26, 2010 the Company had no amounts drawn under this agreement. The amount available to the Company under the agreement was effectively reduced to approximately $342.9 million by outstanding letters of credit totaling approximately $7.1 million at July 3, 2011 and September 26, 2010.
During fiscal year 2008, the Company entered into an interest rate swap agreement, which expired in October 2010, with a notional amount of $490 million to effectively fix the interest rate on $490 million of the term loan at 4.718%, excluding the applicable margin and associated fees, to help manage cash flow exposure related to interest rate fluctuations. The interest rate swap was designated as a cash flow hedge. The carrying amount of the Company’s interest rate swap totaled approximately $0.4 million at September 26, 2010 and was included in the “Long-term debt and capital lease obligations, less current installments” line item on the Consolidated Balance Sheets. During the first quarter of fiscal year 2011 the Company reclassified approximately $0.2 million from accumulated other comprehensive income related to ongoing interest payments that was included in the “Interest expense” line item on the Consolidated Statements of Operations. During the twelve and forty weeks ended July 4, 2010 the Company reclassified approximately $5.0 million and $16.9 million, respectively, from accumulated other comprehensive income related to ongoing interest payments.
(7) Income Taxes
Income taxes for the twelve and forty weeks ended July 3, 2011 resulted in an effective tax rate of approximately 37.8% and 38.3%, respectively, compared to approximately 40.1% and 40.5%, respectively, for the same periods of the prior fiscal year. The decline in the effective tax rate is primarily due to certain tax savings initiatives and investments. At July 3, 2011, prepaid income tax totaled approximately $32.5 million compared to an income tax payable of approximately $10.7 million at September 26, 2010.
(8) Shareholders’ Equity
Dividends per Common Share
During the twelve weeks ended July 3, 2011, the Company’s Board of Directors declared a cash dividend to shareholders of $0.10 per common share, payable on July 5, 2011 to shareholders of record on June 24, 2011. Approximately $17.7 million was included in the “Dividends payable” line item on the Consolidated Balance Sheets at July 3, 2011.
Comprehensive Income
Our comprehensive income was comprised of: net income; unrealized gains and losses on investments; unrealized gains and losses on cash flow hedge instruments, including reclassification adjustments of unrealized losses to net income related to ongoing interest payments; and foreign currency translation adjustments, net of income taxes.
Comprehensive income was as follows (in thousands):
|
| Twelve weeks ended |
| Forty weeks ended |
| ||||||||
|
| July 3, |
| July 4, |
| July 3, |
| July 4, |
| ||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
Net income |
| $ | 88,472 |
| $ | 65,729 |
| $ | 267,137 |
| $ | 188,335 |
|
Foreign currency translation adjustments |
| (1,188 | ) | (2,803 | ) | 4,201 |
| (1,009 | ) | ||||
Reclassification adjustments for amounts included in net income |
| — |
| 2,994 |
| 245 |
| 10,019 |
| ||||
Unrealized gains / (losses), net |
| 31 |
| 277 |
| 14 |
| (356 | ) | ||||
Comprehensive income |
| $ | 87,315 |
| $ | 66,197 |
| $ | 271,597 |
| $ | 196,989 |
|
At July 3, 2011, accumulated other comprehensive income primarily consisted of foreign currency translation adjustment gains of approximately $5.0 million. At July 3, 2011 and July 4, 2010 available-for-sale securities totaling approximately $55.9 million and $60.1 million, respectively, were in unrealized loss positions.
(9) Earnings per Share
The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share for the twelve and forty weeks ended July 3, 2011 and July 4, 2010 includes the dilutive effect of common stock equivalents consisting of incremental common shares deemed outstanding from the assumed exercise of stock options. Additionally, the computation of diluted earnings per share for the forty weeks ended July 4, 2010 includes the assumed conversion of Series A Preferred Stock. A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands, except per share amounts):
|
| Twelve weeks ended |
| Forty weeks ended |
| ||||||||
|
| July 3, |
| July 4, |
| July 3, |
| July 4, |
| ||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
Income available to common shareholders (numerator for basic earnings per share) |
| $ | 88,472 |
| $ | 65,729 |
| $ | 267,137 |
| $ | 182,857 |
|
Preferred stock dividends |
| — |
| — |
| — |
| 5,478 |
| ||||
Adjusted income available to common shareholders (numerator for diluted earnings per share) |
| $ | 88,472 |
| $ | 65,729 |
| $ | 267,137 |
| $ | 188,335 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding (denominator for basic earnings per share) |
| 176,444 |
| 171,653 |
| 174,457 |
| 164,529 |
| ||||
Potential common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Incremental shares from assumed exercise of stock options |
| 2,166 |
| 948 |
| 2,056 |
| 690 |
| ||||
Assumed conversion of redeemable preferred stock |
| — |
| — |
| — |
| 6,176 |
| ||||
Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share) |
| 178,610 |
| 172,601 |
| 176,513 |
| 171,395 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share |
| $ | 0.50 |
| $ | 0.38 |
| $ | 1.53 |
| $ | 1.11 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share |
| $ | 0.50 |
| $ | 0.38 |
| $ | 1.51 |
| $ | 1.10 |
|
The computation of diluted earnings per share for the twelve and forty weeks ended July 3, 2011 does not include options to purchase approximately 5.9 million shares and 6.5 million shares of common stock, respectively, due to their antidilutive effect. For the twelve and forty weeks ended July 4, 2010, the computation of diluted earnings per share does not include options to purchase approximately 13.6 million shares and 12.7 million shares of common stock, respectively, due to their antidilutive effect.
(10) Share-Based Payments
Total share-based payment expense before income taxes recognized during the twelve and forty weeks ended July 3, 2011 was approximately $6.2 million and $19.1 million, respectively, and approximately $6.2 million and $15.4 million, respectively, for the same periods of the prior fiscal year.
Share-based payment expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):
|
| Twelve weeks ended |
| Forty weeks ended |
| ||||||||
|
| July 3, |
| July 4, |
| July 3, |
| July 4, |
| ||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
Cost of goods sold and occupancy costs |
| $ | 308 |
| $ | 194 |
| $ | 966 |
| $ | 579 |
|
Direct store expenses |
| 3,086 |
| 2,047 |
| 9,705 |
| 7,342 |
| ||||
General and administrative expenses |
| 2,848 |
| 3,957 |
| 8,419 |
| 7,450 |
| ||||
Share-based payment expense before income taxes |
| 6,242 |
| 6,198 |
| 19,090 |
| 15,371 |
| ||||
Income tax benefit |
| (2,322 | ) | (2,547 | ) | (7,198 | ) | (6,202 | ) | ||||
Net share-based payment expense |
| $ | 3,920 |
| $ | 3,651 |
| $ | 11,892 |
| $ | 9,169 |
|
At July 3, 2011 and September 26, 2010, approximately 11.6 million shares and 12.7 million shares of our common stock, respectively, were available for future stock incentive grants.
On May 13, 2011, the Company issued its annual grant of options to team members and directors. The following table summarizes option activity during the forty weeks ended July 3, 2011 (in thousands, except per share amounts and contractual lives in years):
|
|
|
|
|
| Weighted |
|
|
| ||
|
| Number |
| Weighted |
| average |
| Aggregate |
| ||
|
| of options |
| average |
| remaining |
| intrinsic |
| ||
|
| outstanding |
| exercise price |
| contractual life |
| value |
| ||
Outstanding options at September 26, 2010 |
| 18,946 |
| $ | 46.00 |
|
|
|
|
| |
Options granted |
| 3,220 |
| 62.49 |
|
|
|
|
| ||
Options exercised |
| (5,097 | ) | 41.21 |
|
|
|
|
| ||
Options expired |
| (1,362 | ) | 66.87 |
|
|
|
|
| ||
Options forfeited |
| (227 | ) | 33.91 |
|
|
|
|
| ||
Outstanding options at July 3, 2011 |
| 15,480 |
| $ | 49.34 |
| 3.74 |
| $ | 242,223 |
|
Vested/expected to vest at July 3, 2011 |
| 14,844 |
| $ | 49.15 |
| 3.62 |
| $ | 181,410 |
|
Exercisable options at July 3, 2011 |
| 8,308 |
| $ | 52.32 |
| 1.77 |
| $ | 109,396 |
|
The weighted average fair value per option granted during the forty weeks ended July 3, 2011 was $21.84. The aggregate intrinsic value of stock options at exercise, represented in the table above, was approximately $79.4 million. At July 3, 2011 and September 26, 2010, there was approximately $105.2 million and $62.2 million of unrecognized share-based payment expense, respectively, related to nonvested stock options, net of estimated forfeitures, related to approximately 6.5 million shares and 5.8 million shares, respectively. We anticipate this expense to be recognized over a weighted average period of approximately three years.
A summary of options outstanding and exercisable at July 3, 2011 follows (share amounts in thousands):
|
| Options Outstanding |
| Options Exercisable |
| ||||||||||||
|
|
|
|
|
| Weighted |
| Weighted average |
|
|
| Weighted |
| ||||
Range of Exercise Prices |
| Number |
| average |
| remaining |
| Number |
| average |
| ||||||
From |
| To |
| outstanding |
| exercise price |
| life (in years) |
| exercisable |
| exercise price |
| ||||
$ | 11.12 |
| $ | 27.62 |
| 3,123 |
| $ | 22.02 |
| 3.70 |
| 1,452 |
| $ | 23.04 |
|
28.03 |
| 40.83 |
| 3,521 |
| 40.52 |
| 5.22 |
| 1,227 |
| 40.14 |
| ||||
41.05 |
| 60.43 |
| 1,908 |
| 54.14 |
| 0.84 |
| 1,904 |
| 54.14 |
| ||||
62.49 |
| 62.49 |
| 3,203 |
| 62.49 |
| 6.86 |
| — |
| — |
| ||||
66.81 |
| 66.81 |
| 3,725 |
| 66.81 |
| 1.19 |
| 3,725 |
| 66.81 |
| ||||
Total |
|
|
| 15,480 |
| $ | 49.34 |
| 3.74 |
| 8,308 |
| $ | 52.32 |
| ||
The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
|
| 2011 |
| 2010 |
|
Expected dividend yield |
| 0.698 | % | 0.000 | % |
Risk-free interest rate |
| 1.76 | % | 2.26 | % |
Expected volatility |
| 43.84 | % | 46.19 | % |
Expected life, in years |
| 4.18 |
| 4.56 |
|
Risk-free interest rate is based on the U.S. Treasury yield curve on the date of the grant for the time period equal to the expected term of the grant. Expected volatility is calculated using a ratio of implied volatility based on the Newton-Raphson method of bisection, and four or six year historical volatilities based on the expected life of each tranche of options. The Company determined the use of implied volatility versus historical volatility represents a more accurate calculation of option fair value. Expected life is calculated in two tranches based on weighted average percentage of unexpired options and exercise-after-vesting information over the last five or seven years. Unvested options are included in the term calculation using the “mid-point scenario” which assumes that unvested options will be exercised halfway between vest and expiration date. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. In addition to the above valuation assumptions, the Company estimates an annual forfeiture rate for unvested options and adjusts fair value expense accordingly. The Company monitors actual forfeiture experience and adjusts the rate from time to time as necessary.
(11) Commitments and Contingencies
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that we believe best serves the interests of our stakeholders. Our primary contingencies are associated with insurance and self-insurance obligations and litigation matters. Estimation of our insurance and self-insurance liabilities requires significant judgments, and actual claim settlements and associated expenses may differ from our current provisions for loss. We have exposures to loss contingencies arising from pending or threatened litigation for which assessing and estimating the outcomes of these matters involve substantial uncertainties.
On October 27, 2008, Whole Foods Market was served with the complaint in Kottaras v. Whole Foods Market, Inc., a putative class action filed in the United States District Court for the District of Columbia, seeking treble damages, equitable, injunctive, and declaratory relief and alleging that the acquisition and merger between Whole Foods Market and Wild Oats violates various provisions of the federal antitrust laws. This case continues to be in the early stages of litigation. Whole Foods Market cannot at this time predict the likely outcome of this judicial proceeding or estimate the amount or range of loss or possible loss that may arise from it. The Company has not accrued any loss related to the outcome of this case as of July 3, 2011.
The Company evaluates contingencies on an ongoing basis and has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated. Insurance and legal settlement liabilities are included in the “Other current liabilities” line item on the Consolidated Balance Sheets. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our current expectations, assumptions, estimates and projections about the future. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to risks and uncertainties that could cause our actual results to differ materially from those indicated in the forward-looking statements. See “Part II, Item 1A. Risk Factors” for a discussion of risks and uncertainties that may affect our business. This management discussion should be read in conjunction with the management discussion included in our fiscal year 2010 Annual Report on Form 10-K, previously filed with the Securities and Exchange Commission. The Company does not undertake any obligation to update forward-looking statements.
General
Whole Foods Market, Inc. is the leading natural and organic foods supermarket and America’s first national “Certified Organic” grocer. Our Company mission is to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance. As of July 3, 2011, we operated 308 stores: 297 stores in 38 U.S. states and the District of Columbia; six stores in Canada; and five stores in the United Kingdom. We have one operating segment, natural and organic foods supermarkets.
Our results of operations have been and may continue to be materially affected by the timing and number of new store openings. New stores generally become profitable during their first year of operation; although some new stores may incur operating losses for the first several years of operation. The Company’s average weekly sales are typically highest in the second and third fiscal quarters, and lowest in the fourth fiscal quarter. Gross profit is typically lower in the first fiscal quarter due to the product mix of holiday sales, and in the fourth fiscal quarter due to the seasonally slower sales in the summer months. Our gross profit may increase or decrease slightly depending on the mix of sales from new stores, seasonality, the impact of weather or a host of other factors, including our ability to pass through inflation in product costs.
Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Stores acquired in purchase acquisitions enter the comparable store sales base effective the fifty-third full week following the date of the merger. Identical store sales exclude sales from relocated stores and remodeled stores with changes in square footage greater than 20% from the comparable calculation to reduce the impact of square footage growth on the comparison. Stores closed for eight or more days are excluded from the comparable and identical store base from the first fiscal week of closure until re-opened for a full fiscal week.
The Company reports its results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. Fiscal years 2011 and 2010 are fifty-two week years.
Economic and Industry Factors
Food retailing is a large, intensely competitive industry. Our competition varies across the Company and includes but is not limited to local, regional, national and international conventional and specialty supermarkets, natural foods stores, warehouse membership clubs, smaller specialty stores, farmers’ markets, and restaurants, each of which competes with us on the basis of store ambiance and experience, product selection, quality, customer service, price or a combination of these factors. Natural and organic food continues to be one of the fastest growing segments of food retailing today.
We have worked very hard over the last couple of years to successfully improve our price image, particularly in perishables, and we remain focused on maintaining our relative price positioning in the marketplace. We are hopeful we can continue to strike the right balance between rising product costs and our retail pricing based on our contracts, distribution, and tools to manage value. We anticipate incremental increases in inflation during the fourth quarter of fiscal year 2011. Our pricing studies show that our competitors have been passing through product cost increases, and we currently expect this practice to continue for the foreseeable future.
Updated Outlook for Fiscal Year 2011 and Initial Outlook for Fiscal Year 2012
The following table provides additional information on the Company’s results through July 3, 2011, expectations for the remainder of fiscal year 2011, and expectations for fiscal year 2012. Fiscal year 2012 is a fifty-three week year.
|
|
|
| Implied fourth |
|
|
|
|
|
|
| Forty weeks ended |
| quarter of |
| Estimated |
| Estimated |
|
|
| July 3, 2011 |
| fiscal year 2011 |
| fiscal year 2011 |
| fiscal year 2012 |
|
Sales growth |
| 12.2% |
| 11.9% – 12.9% |
| 12.2% – 12.4% |
| 13.0% – 15.0% |
|
Comparable store sales growth |
| 8.5% |
| 8.5% – 9.5% |
| 8.5% – 8.7% |
| 6.8% – 8.8% |
|
Identical store sales growth |
| 8.4% |
| 8.2% – 9.2% |
| 8.3% – 8.6% |
| 6.5% – 8.5% |
|
General and administrative expenses |
| 3.1% |
| 3.1% |
| 3.1% |
| 3.0% |
|
Pre-opening and relocation costs |
| $36.5 million |
| $12.0 – $13.5 million |
| $48.5 – $50.0 million |
| $51.0 – $56.0 million |
|
Tax rate |
| 38.3% |
| 38.3% |
| 38.3% |
| 38.5% – 39.0% |
|
Diluted earnings per share |
| $1.51 |
| $0.40 – $0.41 |
| $1.91 – $1.92 |
| $2.21 – $2.26 |
|
Capital expenditures |
| $272 million |
| $103 – $113 million |
| $375 – $385 million |
| $410 – $460 million |
|
Number of new stores |
| 13 |
| 5 |
| 18 |
| 24 – 27 |
|
Ending square footage growth |
| 4% |
| 5% |
| 5% |
| 7% – 8% |
|
Results of Operations
The following table sets forth the Company’s statements of operations data expressed as a percentage of sales:
|
| Twelve weeks ended |
| Forty weeks ended |
| ||||
|
| July 3, |
| July 4, |
| July 3, |
| July 4, |
|
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
Sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of goods sold and occupancy costs |
| 64.6 |
| 64.9 |
| 64.9 |
| 65.1 |
|
Gross profit |
| 35.4 |
| 35.1 |
| 35.1 |
| 34.9 |
|
Direct store expenses |
| 25.9 |
| 26.2 |
| 26.0 |
| 26.4 |
|
General and administrative expenses |
| 3.0 |
| 3.2 |
| 3.1 |
| 3.0 |
|
Pre-opening expenses |
| 0.5 |
| 0.4 |
| 0.4 |
| 0.5 |
|
Relocation, store closure and lease termination costs |
| 0.1 |
| — |
| 0.1 |
| 0.2 |
|
Operating income |
| 5.9 |
| 5.3 |
| 5.5 |
| 4.9 |
|
Interest expense |
| — |
| (0.3 | ) | (0.1 | ) | (0.4 | ) |
Investment and other income |
| 0.1 |
| 0.1 |
| 0.1 |
| 0.1 |
|
Income before income taxes |
| 5.9 |
| 5.1 |
| 5.6 |
| 4.6 |
|
Provision for income taxes |
| 2.2 |
| 2.0 |
| 2.1 |
| 1.9 |
|
Net income |
| 3.7 |
| 3.0 |
| 3.4 |
| 2.7 |
|
Preferred stock dividends |
| — |
| — |
| — |
| 0.1 |
|
Income available to common shareholders |
| 3.7 | % | 3.0 | % | 3.4 | % | 2.6 | % |
Figures may not sum due to rounding.
Sales increased approximately 10.9% and 12.2% for the twelve and forty weeks ended July 3, 2011, respectively, over the same periods of the prior fiscal year. Comparable store sales increased 8.4% and 8.5% for the twelve and forty weeks ended July 3, 2011, respectively, and identical store sales increased 8.1% and 8.4%, respectively. Comparable and identical store sales growth for the third quarter of fiscal year 2011 include a positive impact of 60 basis points resulting from the shift of Easter from the second fiscal quarter last year to the third fiscal quarter this year. As of July 3, 2011, there were 298 locations in the comparable store base. Identical store sales for the twelve and forty weeks ended July 3, 2011 exclude four relocated stores and one major expansion from the comparable calculation to reduce the impact of square footage growth on the comparison. The number of stores open or acquired fifty-two weeks or less equaled 15 at July 3, 2011. The sales increase contributed by stores open or acquired fifty-two weeks or less totaled approximately $74.0 million and $134.4 million for the twelve and forty weeks ended July 3, 2011, respectively. With the return of inflation, we are seeing our comparable store sales breakout move toward our historical pattern of 60% transaction count and 40% basket size. During the twelve weeks ended July 3, 2011, our transaction count in comparable stores increased 5.0%, a slight moderation from the 6.2% increase we experienced in the twelve weeks ended April 10, 2011. We continue to experience the impact of inflation on our basket size. During the twelve weeks ended July 3, 2011, our basket size increased 2.9% compared to the 1.5% increase for the twelve weeks ended April 10, 2011, driven by higher average prices per item as we selectively passed through some product cost increases and continued to see signs of customers trading up.
The Company’s gross profit as a percentage of sales for the twelve and forty weeks ended July 3, 2011 was approximately 35.4% and 35.1%, respectively, compared to approximately 35.1% and 34.9%, respectively, for the same periods of the prior fiscal year. For the twelve and forty weeks ended July 3, 2011, the Company recognized LIFO charges totaling approximately $3.5 million and $6.5 million, respectively, compared to credits totaling approximately $3.7 million and $6.5 million, respectively, for the same periods of the prior fiscal year. Excluding the impact of LIFO, gross margin increased 52 basis points for the twelve weeks ended July 3, 2011 compared to the same period of the prior fiscal year due to improvements in both cost of goods sold and occupancy costs as a percentage of sales.
Direct store expenses as a percentage of sales for the twelve and forty weeks ended July 3, 2011 were approximately 25.9% and 26.0%, respectively, compared to approximately 26.2% and 26.4%, respectively, for the same periods of the prior fiscal year. The decrease in direct store expenses as a percentage of sales for the twelve weeks ended July 3, 2011 was driven primarily by reductions in wages and depreciation expense as a percentage of sales.
General and administrative expenses as a percentage of sales for the twelve and forty weeks ended July 3, 2011 were approximately 3.0% and 3.1%, respectively, compared to approximately 3.2% and 3.0%, respectively, for the same periods of the prior fiscal year. The decrease in general and administrative expenses as a percentage of sales for the twelve weeks ended July 3, 2011 was primarily related to certain legal costs in the prior year associated with the Company’s acquisition of Wild Oats Markets.
Share-based payment expense was included in the following line items on the Consolidated Statements of Operations for the periods indicated (in thousands):
|
| Twelve weeks ended |
| Forty weeks ended |
| ||||||||
|
| July 3, |
| July 4, |
| July 3, |
| July 4, |
| ||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
Cost of goods sold and occupancy costs |
| $ | 308 |
| $ | 194 |
| $ | 966 |
| $ | 579 |
|
Direct store expenses |
| 3,086 |
| 2,047 |
| 9,705 |
| 7,342 |
| ||||
General and administrative expenses |
| 2,848 |
| 3,957 |
| 8,419 |
| 7,450 |
| ||||
Share-based payment expense before income taxes |
| 6,242 |
| 6,198 |
| 19,090 |
| 15,371 |
| ||||
Income tax benefit |
| (2,322 | ) | (2,547 | ) | (7,198 | ) | (6,202 | ) | ||||
Net share-based payment expense |
| $ | 3,920 |
| $ | 3,651 |
| $ | 11,892 |
| $ | 9,169 |
|
Pre-opening expenses as a percentage of sales for the twelve and forty weeks ended July 3, 2011 were approximately 0.5% and 0.4%, respectively, compared to approximately 0.4% and 0.5%, respectively, for the same periods of the prior fiscal year.
Relocation, store closure and lease termination costs totaled approximately $2.4 million and $6.5 million for the twelve and forty weeks ended July 3, 2011, respectively, compared to approximately $0.7 million and $10.5 million, respectively, for the same periods of the prior fiscal year. During the forty weeks ended July 4, 2010, the Company recorded net adjustments to lease termination costs totaling approximately $7.6 million, reduced store closure reserve liabilities approximately $2.5 million related to two sold stores and one early lease termination, and recognized a gain of approximately $3.2 million from the sale of a non-operating property. The Company continues to evaluate store closure reserve adjustments primarily related to changes in certain subtenant income estimates driven by the outlook for the commercial real estate market.
The number of stores opened and relocated were as follows:
|
| Twelve weeks ended |
| Forty weeks ended |
| ||||
|
| July 3, |
| July 4, |
| July 3, |
| July 4, |
|
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
New stores |
| 4 |
| 6 |
| 9 |
| 15 |
|
Relocated stores |
| 3 |
| — |
| 4 |
| — |
|
Interest expense for the twelve and forty weeks ended July 3, 2011 decreased to approximately $0.3 million and $3.9 million, respectively, from approximately $7.4 million and $25.8 million, respectively, for the same periods of the prior fiscal year. The decrease in interest expense is due primarily to the paydown of the term loan and lower effective interest rates.
Investment and other income, which includes interest income, investment gains and losses, rental income and other income, totaled approximately $1.9 million and $6.5 million for the twelve and forty weeks ended July 3, 2011, respectively, compared to approximately $1.5 million and $5.2 million, respectively, for the same periods of the prior fiscal year. The
increase in investment and other income during the forty weeks ended July 3, 2011 compared to the same period of the prior year is due principally to higher invested balances.
Income taxes for the twelve and forty weeks ended July 3, 2011 resulted in an effective tax rate of approximately 37.8% and 38.3%, respectively, compared to approximately 40.1% and 40.5%, respectively, for the same periods of the prior fiscal year. The decline in the effective tax rate is primarily due to certain tax savings initiatives and investments.
Liquidity and Capital Resources and Changes in Financial Condition
The following table summarizes the Company’s cash and short-term investments as of the dates indicated (in thousands):
|
| July 3, |
| September 26, |
| ||
|
| 2011 |
| 2010 |
| ||
Cash and cash equivalents |
| $ | 289,107 |
| $ | 131,996 |
|
Short-term investments — available-for-sale securities |
| 247,803 |
| 329,738 |
| ||
Total |
| $ | 536,910 |
| $ | 461,734 |
|
Additionally, the Company had restricted cash balances totaling approximately $86.8 million at July 3, 2011 and September 26, 2010 and long-term investments in available-for-sale securities totaling approximately $40.3 million and $96.1 million at July 3, 2011 and September 26, 2010, respectively.
We generated cash flows from operating activities totaling approximately $595.2 million during the forty weeks ended July 3, 2011 compared to approximately $460.9 million during the same period of the prior fiscal year. Cash flows from operating activities resulted primarily from our net income plus non-cash expenses and changes in operating working capital and deferred income taxes.
Net cash used in investing activities totaled approximately $142.9 million for the forty weeks ended July 3, 2011 compared to approximately $583.2 million for the same period of the prior fiscal year. Net purchases of available-for-sale securities totaled approximately $352.1 million during the forty weeks ended July 4, 2010, as compared to a net sale of available-for-sale securities totaling approximately $133.0 million in the same period of the current fiscal year. Our principal historical capital requirements have been the funding of the development or acquisition of new stores and acquisition of property and equipment for existing stores. The required cash investment for new stores varies depending on the size of the new store, geographic location, degree of work performed by the landlord and complexity of site development issues. Capital expenditures for the forty weeks ended July 3, 2011 totaled approximately $271.6 million, of which approximately $156.0 million was for new store development and approximately $115.5 million was for remodels and other additions. Capital expenditures for the forty weeks ended July 4, 2010 totaled approximately $199.8 million, of which approximately $143.4 million was for new store development and approximately $56.4 million was for remodels and other additions.
The following table provides information about the Company’s store development activities during fiscal year 2010 and fiscal year-to-date through July 27, 2011:
|
|
|
|
|
| Properties |
| Total |
|
|
| Stores opened |
| Stores opened |
| tendered |
| leases signed |
|
|
| during fiscal |
| during fiscal |
| as of |
| as of |
|
|
| year 2010 |
| year 2011 |
| July 27, 2011 |
| July 27, 2011(1) |
|
Number of stores (including relocations) |
| 16 |
| 15 |
| 16 |
| 61 |
|
Number of relocations |
| — |
| 5 |
| 2 |
| 5 |
|
New areas |
| 4 |
| — |
| 2 |
| 12 |
|
Average store size (gross square feet) |
| 42,600 |
| 37,700 |
| 38,000 |
| 36,100 |
|
Total square footage |
| 682,200 |
| 564,800 |
| 607,700 |
| 2,214,200 |
|
Average tender period in months |
| 10.9 |
|
|
|
|
|
|
|
Average pre-opening expense per store(2) |
| $2.6 million |
|
|
|
|
|
|
|
Average pre-opening rent per store |
| $1.2 million |
|
|
|
|
|
|
|
Average development costs(3) |
| $11.1 million |
|
|
|
|
|
|
|
Average development cost per square foot |
| $261 |
|
|
|
|
|
|
|
(1) Includes leases for properties tendered
(2) Includes rent
(3) Excludes pre-opening costs
The Company expects to open three additional stores, including one relocation, during the remainder of fiscal year 2011. We believe we will produce operating cash flows in excess of the capital expenditures needed to open the 61 stores in our store development pipeline. The following table provides information about the Company’s estimated store openings for the next two fiscal years:
|
| Estimated |
|
|
| Average new store |
| Ending square |
|
|
| openings |
| Relocations |
| square footage |
| footage growth |
|
Fiscal year 2012 |
| 24 – 27 |
| 1 – 2 |
| 35,000 |
| 7% – 8% |
|
Fiscal year 2013 |
| 28 – 32 |
| 2 – 3 |
| 35,000 |
| 7% – 8% |
|
Over the long term, the Company considers 1,000 stores to be a reasonable indication of its market opportunity in the United States as the Whole Foods Market brand continues to strengthen, consumer demand for natural and organic products continues to increase, and the Company’s flexibility on new store size opens up additional market opportunities. The Company believes significant opportunities exist in Canada and the United Kingdom as well.
Net cash used in financing activities was approximately $297.3 million for the forty weeks ended July 3, 2011 compared to approximately $172.0 million for the same period of the prior fiscal year.
The Company had outstanding a $700 million, five-year term loan agreement due in 2012. During the forty weeks ended July 3, 2011, the Company repaid the remaining $490 million balance on the term loan. The Company has outstanding a $350 million revolving line of credit that extends to 2012. At July 3, 2011 and September 26, 2010 the Company had no amounts drawn under this agreement. The amount available to the Company under the agreement was effectively reduced to approximately $342.9 million by outstanding letters of credit totaling approximately $7.1 million at July 3, 2011 and September 26, 2010. The Company’s obligations under the revolving line of credit are secured by liens on certain of the Company’s assets, including stock of our subsidiaries. The revolving line of credit contains certain affirmative covenants including maintenance of certain financial ratios and certain negative covenants including limitations on additional indebtedness and payments as defined in the agreement. At July 3, 2011 we were in compliance with all applicable debt covenants.
Net proceeds to the Company from team members’ stock plans for the forty weeks ended July 3, 2011 totaled approximately $210.9 million compared to approximately $43.9 million for the same period of the prior fiscal year. The Company intends to keep its broad-based stock option program in place, but also intends to limit the number of shares granted in any one year so that annual earnings dilution from share-based payment expense will not exceed 10%. The Company believes this strategy is best aligned with its stakeholder philosophy because it limits future earnings dilution from options and at the same time retains the broad-based stock option plan, which the Company believes is important to team member morale, its unique corporate culture and its success. At July 3, 2011 and September 26, 2010, approximately 11.6 million shares and 12.7 million shares of our common stock, respectively, were available for future stock incentive grants.
During the first quarter of fiscal year 2011, the Company’s Board of Directors reinstated a quarterly cash dividend to shareholders. Following is a summary of dividends declared per common share during fiscal year 2011 (in thousands, except per share amounts):
Date of |
| Dividend per |
| Date of |
| Date of |
| Total |
| ||
declaration |
| common share |
| record |
| payment |
| amount |
| ||
December 8, 2010 |
| $ | 0.10 |
| January 10, 2011 |
| January 20, 2011 |
| $ | 17,348 |
|
February 27, 2011 |
| 0.10 |
| April 12, 2011 |
| April 22, 2011 |
| 17,572 |
| ||
June 7, 2011 |
| 0.10 |
| June 24, 2011 |
| July 5, 2011 |
| 17,700 | (1) | ||
(1) Dividend accrued at July 3, 2011
The Company is committed under certain capital leases for rental of certain equipment, buildings and land. These leases expire or become subject to renewal clauses at various dates through 2054.
The effect of exchange rate changes on cash included in the Consolidated Statements of Cash Flows resulted in an increase in cash and cash equivalents totaling approximately $2.1 million for the forty weeks ended July 3, 2011 compared to approximately $0.3 million for the same period of the prior fiscal year. These changes principally reflect the relative strengthening of the Canadian dollar compared to the U.S. dollar during these periods.
Our principal historical sources of liquidity have been cash generated by operations, available cash and cash equivalents, short-term investments, and amounts available under our revolving line of credit. Absent any significant change in market
condition, we expect planned expansion and other anticipated working capital and capital expenditure requirements for the next twelve months will be funded by these sources. There can be no assurance, however, that the Company will continue to generate cash flows at or above current levels or that our revolving line of credit and other sources of capital will be available to us in the future.
Contractual Obligations
The following table shows payments due by period on contractual obligations as of July 3, 2011 (in thousands):
|
|
|
| Less than 1 |
| 1-3 |
| 3-5 |
| More than 5 |
| |||||
|
| Total |
| year |
| years |
| years |
| years |
| |||||
Capital lease obligations (including interest) |
| $ | 35,480 |
| $ | 2,059 |
| $ | 4,202 |
| $ | 4,196 |
| $ | 25,023 |
|
Operating lease obligations(1) |
| 6,165,143 |
| 295,811 |
| 680,232 |
| 709,119 |
| 4,479,981 |
| |||||
Total |
| $ | 6,200,623 |
| $ | 297,870 |
| $ | 684,434 |
| $ | 713,315 |
| $ | 4,505,004 |
|
(1) Amounts exclude taxes, insurance and other related expense
Gross unrecognized tax benefits and related interest and penalties at July 3, 2011 were approximately $13.4 million. These amounts have been excluded from the contractual obligations table because a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities cannot be determined due to the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities.
We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements at July 3, 2011 consist of operating leases disclosed in the above contractual obligations table and outstanding letters of credit discussed in Note 6 to the consolidated financial statements, “Long-Term Debt.” We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial condition.
Recent Accounting Pronouncements
Recent accounting pronouncements are included in Note 2 to the consolidated financial statements, “Recent Accounting Pronouncements.”
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers (principal executive officers) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Co-Chief Executive Officers and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Co-Chief Executive Officers and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective of the end of the period covered by this report.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters in a manner that we believe best serves the interests of our stakeholders. We have exposures to loss contingencies arising from pending or threatened litigation for which assessing and estimating the outcomes of these matters involve substantial uncertainties.
On October 27, 2008, Whole Foods Market was served with the complaint in Kottaras v. Whole Foods Market, Inc., a putative class action filed in the United States District Court for the District of Columbia, seeking treble damages, equitable, injunctive, and declaratory relief and alleging that the acquisition and merger between Whole Foods Market and Wild Oats violates various provisions of the federal antitrust laws. This case continues to be in the early stages of litigation. Whole Foods Market cannot at this time predict the likely outcome of this judicial proceeding or estimate the amount or range of loss or possible loss that may arise from it. The Company has not accrued any loss related to the outcome of this case as of July 3, 2011.
The Company evaluates contingencies on an ongoing basis and has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated. Legal settlement liabilities are included in the “Other current liabilities” line item on the Consolidated Balance Sheets. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. However, resolution of contingencies resulting in amounts that vary materially from the Company’s current estimates could have a material adverse effect on the Company’s results of operations, cash flows, or financial condition.
We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications, as well as oral forward-looking statements made from time to time by representatives of the Company. These risks and uncertainties include the risk factors described below. 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.
Economic conditions that adversely impact consumer spending could materially impact our business.
Our results of operations may be materially impacted by changes in overall economic conditions that impact consumer confidence and spending, including discretionary spending. There can be no assurance that various governmental activities to stabilize the markets and stimulate the economy will restore consumer confidence or change spending habits. Future economic conditions affecting disposable consumer income such as employment levels, business conditions, changes in housing market conditions, the availability of credit, interest rates, tax rates, fuel and energy costs, the impact of natural disasters or acts of terrorism, and other matters could reduce consumer spending or cause consumers to shift their spending to lower-priced competitors.
Our growth depends on increasing sales in identical stores and on new store openings, and our failure to achieve these goals could negatively impact our results of operations and financial condition.
Our continued growth depends on our ability to increase sales in our identical stores and our ability to open new stores. Our results of operations may be materially impacted by fluctuations in our identical store sales. Our identical store sales growth could be lower than our historical average for many reasons including the impact of new and acquired stores entering into the identical store base, the opening of new stores that cannibalize store sales in existing areas, general economic conditions, increased competition, price changes in response to competitive factors, possible supply shortages, and cycling against any year of above-average sales results.
Our growth strategy includes opening new stores in existing and new areas and operating those stores successfully. Successful implementation of this strategy is dependent on finding suitable locations, and we face competition from other retailers for such sites. There can be no assurance that we will continue to grow through new store openings. We may not be able to timely open new stores or operate them successfully. Also, we may not be able to successfully hire and train new team members or integrate those team members into the programs and policies of the Company. We may not be able to adapt our distribution, management information and other operating systems to adequately supply products to new stores at competitive prices so that we can operate the stores in a successful and profitable manner.
Increased competition may adversely affect our revenues and profitability.
Our competitors include but are not limited to local, regional, national and international supermarkets, natural food stores, warehouse membership clubs, small specialty stores and restaurants. Their businesses compete with us for products, customers and locations. In addition, some are expanding more aggressively in marketing a range of natural and organic foods. Some of these potential competitors may have been in business longer or may have greater financial or marketing resources than we do and may be able to devote greater resources to sourcing, promoting and selling their products. As competition in certain areas intensifies, our results of operations may be negatively impacted through a loss of sales, reduction in margin from competitive price changes, and/or greater operating costs such as marketing.
We may experience fluctuations in our quarterly operating results, which may adversely affect our stock price.
Our quarterly operating results could fluctuate for many reasons, including losses from new stores, variations in the mix of product sales, price changes in response to competitive factors and a potential lack of customer acceptance, foreign currency exchange rate fluctuations, increases in store operating costs, including commodity costs, that are either wholly or partially beyond our control, possible supply shortages, general economic conditions, health care costs, legal costs, insurance costs, extreme weather-related disruptions, including hurricanes and earthquakes, and potential uninsured casualty losses or other losses. In addition, our quarterly operating results and quarter-to-quarter comparisons have been and may be impacted by the timing of new store openings, construction and pre-opening expenses, the timing of acquisitions, store closures and relocations, seasonality, and the range of operating results generated from newly opened stores. Significant fluctuation in our quarterly operating results may negatively affect our stock price.
Our stock price has been volatile and may be negatively affected by reasons unrelated to our operating performance.
During the forty weeks ended July 3, 2011, the closing market price per share of our common stock ranged from $34.57 to $66.73. The market price of our common stock could be subject to significant fluctuation in response to various market factors and events. These market factors and events include variations in our sales and earnings results and any failure to meet market expectations; changes in ratings and earnings estimates by securities analysts; publicity regarding us, our competitors, or the natural products industry generally; new statutes or regulations or changes in the interpretation of existing statutes or regulations affecting the natural products industry specifically; and sales of substantial amounts of common stock in the public market or the perception that such sales could occur and other factors. In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the operating performance of particular companies. These market fluctuations also may adversely affect the market price of our common stock. Our cash flow from the exercise of team member stock options may be adversely affected in the future by fluctuations in the market price of our common stock.
Claims under our self-insurance program may differ from our estimates, which could materially impact our results of operations.
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability, and team member health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Our results of operations could be materially impacted by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and historical trends.
Actual or perceived food safety concerns may adversely affect our sales.
There is increasing governmental scrutiny of and public awareness regarding food safety. We believe that many customers choose to shop our stores because of their interest in health, nutrition and food safety. We believe that our customers hold us to a higher food safety standard than other supermarkets. The real or perceived sale of contaminated food products by us could result in government enforcement action, private litigation, product recalls and other liabilities, the settlement or outcome of which might have a material adverse effect on our sales and results of operations.
Adverse publicity may reduce our brand value and negatively impact our business.
We believe our Company has built an excellent reputation as a food retailer, socially responsible corporation and employer. We believe our continued success depends on our ability to preserve, grow and leverage the value of our brand. Brand value is based in large part on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation, which can have an adverse impact on these perceptions and lead to adverse affects on our business or team members.
Changes in the availability of quality natural and organic products could impact our business.
There is no assurance that quality natural and organic products will be available to meet our future needs. If other supermarkets significantly increase their natural and organic product offerings or if new laws require the reformulation of certain products to meet tougher standards, the supply of these products may be constrained.
Future events could result in impairment of long-lived assets, which may result in charges that adversely affect our results of operations and capitalization.
Our total assets included long-lived assets totaling approximately $2.03 billion at July 3, 2011. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our impairment evaluations require use of financial estimates of future cash flows. Application of alternative assumptions could produce significantly different results. We may be required to recognize impairments of long-lived assets based on future economic factors such as unfavorable changes in estimated future undiscounted cash flows of an asset group. Long-lived asset impairments could result in material charges that would adversely affect our results of operations and capitalization.
We have significant lease obligations, which may require us to continue paying rent for store locations that we no longer operate.
The majority of our stores, distribution centers, bakehouses and administrative facilities are leased, with expiration dates ranging from 7 months to 33 years. We are subject to risks associated with our current and future real estate leases. Our costs could increase because of changes in the real estate markets and supply or demand for real estate sites. We generally cannot cancel our leases, so if we decide to close a location, we may nonetheless be committed to perform our obligations under the applicable lease including paying the base rent for the remaining lease term. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all. As of July 3, 2011, we had 26 leased properties that are not being utilized in current operations, with expiration dates ranging from 9 months to 19 years. The 26 leased properties represent acquired dormant locations, stores closed post-acquisition, and stores closed due to relocation.
Perishable foods product losses could materially impact our results of operations.
We believe our stores more heavily emphasize perishable products than other supermarket stores. Perishable products accounted for approximately 66.7% of total sales at Whole Foods Market locations during the forty weeks ended July 3, 2011. The Company’s emphasis on perishable products may result in significant product inventory losses in the event of extended power outages, natural disasters or other catastrophic occurrences.
Pending or future legal proceedings could materially impact our results of operations.
From time to time, we are party to legal proceedings, including matters involving personnel and employment issues, personal injury, intellectual property, acquisitions, and other proceedings arising in the ordinary course of business. Our results of operations could be materially impacted by the decisions and expenses related to pending or future proceedings.
Changes in accounting standards and estimates could materially impact our results of operations.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations for many aspects of our business, such as accounting for insurance and self-insurance, inventories, goodwill and intangible assets, derivatives, store closures, leases, income taxes and share-based payments, are highly complex and involve subjective judgments. Changes in these rules or their interpretation or changes in underlying estimates, assumptions or judgments by our management could significantly change or add significant volatility to our reported earnings without a comparable underlying change in cash flow from operations.
The loss of key management could negatively affect our business.
We are dependent upon a number of key management and other team members. If we were to lose the services of a significant number of key team members within a short period of time, this could have a material adverse effect on our operations. We do not maintain key person insurance on any team member. Our continued success also is dependent upon our ability to attract and retain qualified team members to meet our future growth needs. We face intense competition for qualified team members, many of whom are subject to offers from competing employers. We may not be able to attract and retain necessary team members to operate our business.
Disruption of significant supplier relationships could negatively affect our business.
United Natural Foods, Inc. (“UNFI”) is our single largest third-party supplier, accounting for approximately 14% of our total purchases during the forty weeks ended July 3, 2011. During fiscal year 2010, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products through 2020 and added two of our regions to our distribution arrangement beginning in fiscal year 2011. Due to this concentration of purchases from a single third-party supplier, the cancellation of our distribution arrangement or the disruption, delay or inability of UNFI to deliver product to
our stores may materially and adversely affect our business, financial condition or results of operations while we establish alternative distribution channels.
A widespread health epidemic could materially impact our business.
The Company’s business could be severely impacted by a widespread regional, national or global health epidemic. Our stores are a place where customers come together, interact and learn while at the same time discovering the many joys of eating and sharing food. A widespread health epidemic may cause customers to avoid public gathering places or otherwise change their shopping behaviors. Additionally, a widespread health epidemic could also adversely impact our business by disrupting production and delivery of products to our stores and by impacting our ability to appropriately staff our stores.
Unions may attempt to organize our team members, which could harm our business.
All of our team members are non-union, and we consider our team member relations to be very good. From time to time, however, unions have attempted to organize all or part of our team member base at certain stores and non-retail facilities. Responding to such organization attempts is distracting to management and team members and may have a negative financial impact on a store, facility or the Company as a whole.
Unfavorable changes in governmental regulation could harm our business.
The Company is subject to various international, federal, state and local laws, regulations and administrative practices affecting our business, and we must comply with provisions regulating health and sanitation standards, food labeling, equal employment, minimum wages, and licensing for the sale of food and, in some stores, alcoholic beverages. Our new store openings could be delayed or prevented or our existing stores could be impacted by difficulties or failures in our ability to obtain or maintain required approvals or licenses. Changes in existing laws or implementation of new laws, regulations and practices (e.g., health care reform and/or card check legislation) could have a significant impact on our business.
The USDA’s Organic Rule facilitates interstate commerce and the marketing of organically produced food and provides assurance to our customers that such products meet consistent, uniform standards. Compliance with this rule could pose a significant burden on some of our suppliers, which may cause a disruption in some of our product offerings.
We cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on our results of operations and financial condition.
The risk associated with doing business in other countries could materially impact our results of operations.
Though only 3.1% of our total sales during the forty weeks ended July 3, 2011, the Company’s international operations are subject to certain risks of conducting business abroad, including fluctuations in foreign currency exchange rates, changes in regulatory requirements, and changes or uncertainties in the economic, social and political conditions in the Company’s geographic areas, among other things.
We may be unable to adequately protect our intellectual property rights, which could harm our business.
We rely on a combination of trademark, trade secret and copyright law and internal procedures and nondisclosure agreements to protect our intellectual property. There can be no assurance that our intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. In addition, the laws of certain foreign countries in which our products may be produced or sold do not protect our intellectual property rights to the same extent as the laws of the United States. Failure to protect our proprietary information could have a material adverse effect on our business, results of operations and financial condition.
Effective tax rate changes and results of examinations by taxing authorities could materially impact our results of operations.
Our future effective tax rates could be adversely affected by the earnings mix being lower than historical results in states or countries where we have lower statutory rates and higher than historical results in states or countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations thereof. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service (“IRS”) and other state and local taxing authorities. The Company is currently under audit by the IRS for fiscal years 2008 and 2007. With limited exceptions, the Company is no longer subject to federal income tax examinations for fiscal years prior to 2007, or to state and local examinations for fiscal years prior to 2001. Our results could be materially impacted by the determinations and expenses related to these and other proceedings by the IRS and other state and local taxing authorities.
Disruptions in our information systems could harm our ability to run our business.
We rely extensively on information systems for point-of-sale processing in our stores, supply chain, financial reporting, human resources and various other processes and transactions. Our information systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, including breaches of our transaction processing or other systems that could result in the compromise of confidential customer data, catastrophic events, and usage errors by our team members. If our systems are breached, damaged or cease to function properly, we may have to make significant investments to fix or replace them, suffer interruptions in our operations, face costly litigation, and our reputation with our customers may be harmed. Any material interruption in our information systems may have a material adverse effect on our business or results of operations.
A failure of our internal control over financial reporting could materially impact our business or stock price.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, internal control over financial reporting may not prevent or detect misstatements. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud, and could expose us to litigation or adversely affect the market price of our common stock. The Company’s management concluded that its internal control over financial reporting was effective as of July 3, 2011. See “Part I, Item 4. Controls and Procedures.”
Exhibit 31.1 |
| Certification of Co-Chief Executive Officer Pursuant to 17 CFR 240.13a — 14(a) |
Exhibit 31.2 |
| Certification of Co-Chief Executive Officer Pursuant to 17 CFR 240.13a — 14(a) |
Exhibit 31.3 |
| Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a — 14(a) |
Exhibit 32.1 |
| Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
Exhibit 32.2 |
| Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
Exhibit 32.3 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
Exhibit 101 |
| The following financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended July 3, 2011, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial Statements (1) |
(1) |
| Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| WHOLE FOODS MARKET, INC. | |
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Date: | August 12, 2011 |
| By: | /s/ Glenda Flanagan |
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| Glenda Flanagan | |
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| Executive Vice President and Chief Financial Officer | |
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| (Duly authorized officer and principal financial officer) |