FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended January 18, 1998; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 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.)
601 N. Lamar
Suite 300
Austin, Texas 78703
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
512-477-4455
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
The number of shares of the registrant's common stock, no par value,
outstanding as of January 18, 1998 was 25,985,000 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
January 18, 1998 and September 28, 1997
(In thousands, except share data)
1998 1997
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,569 $ 13,395
Marketable securities -- 1,089
Merchandise inventories 73,690 64,838
Accounts receivable and other 47,351 34,571
----------------------
Total current assets 125,610 113,893
----------------------
Net property and equipment 248,891 228,215
Excess of cost over net assets acquired, net 35,219 35,577
Other assets 28,505 21,993
----------------------
$ 438,225 $ 399,678
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 779 $ 1,171
Trade accounts payable 36,073 30,900
Accrued expenses and other 55,101 45,201
----------------------
Total current liabilities 91,953 77,272
----------------------
Long-term debt, less current installments 90,475 92,673
Other long-term liabilities 29,477 24,268
----------------------
Total liabilities 211,905 194,213
----------------------
Shareholders' equity:
Common stock, no par value, 50,000,000 shares
authorized; 25,985,000 and 24,453,000
shares issued and outstanding 201,997 192,514
Unrealized loss on securities available for sale -- (125)
Retained earnings 24,323 13,076
----------------------
Total shareholders' equity 226,320 205,465
----------------------
$ 438,225 $ 399,678
======================
See accompanying notes to condensed consolidated financial statements.
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)
Sixteen weeks ended
January 18 January 19
1998 1997
------------------------
Sales $ 407,788 $ 312,584
Cost of goods sold and occupancy costs 272,036 213,137
------------------------
Gross profit 135,752 99,447
Selling, general and administrative expenses 111,904 87,065
Pre-opening and relocation costs 1,065 1,604
Merger expenses 1,699 --
------------------------
Income from operations 21,084 10,778
Interest expense 1,998 1,762
Investment and other income (6) (179)
------------------------
Income before income taxes 19,092 9,195
Income taxes 7,064 3,207
------------------------
Net income $ 12,028 $ 5,988
------------------------
Basic earnings per share $ 0.46 $ 0.25
------------------------
Weighted average common shares outstanding 25,913 24,085
------------------------
Diluted earnings per share $ 0.44 $ 0.24
------------------------
Shares applicable to diluted earnings 27,523 24,971
------------------------
See accompanying notes to condensed consolidated financial statements.
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Sixteen weeks ended
January 18 January 19
1998 1997
---------------------
Net cash flow from operating activities $ 22,022 $ 13,552
Cash flow from investing activities:
Acquisition of property and equipment (24,648) (19,852)
Acquisition of leasehold rights (2,555) (1,816)
Other (845) (501)
---------------------
Net cash flow used by investing activities (28,048) (22,169)
---------------------
Cash flow from financing activities:
Net proceeds from bank borrowings 9,000 15,000
Payments on long-term debt (21,048) (334)
Proceeds from issuance of common stock 9,194 757
Cash acquired in pooling-of-interests 54 --
---------------------
Net cash flow from (used by) financing activities (2,800) 15,423
---------------------
Net increase (decrease) in cash and cash equivalents (8,826) 6,806
Cash and cash equivalents at beginning of period 13,395 3,997
---------------------
Cash and cash equivalents at end of period $ 4,569 $ 10,803
=====================
See accompanying notes to condensed consolidated financial statements.
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 18, 1998
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements of Whole Foods Market,
Inc. and subsidiaries ("Company") have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Certain
information and footnote disclosure normally included in annual financial
statements prepared in conformity with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10K for the fiscal year ended September 28,
1997.
The Company's fiscal year ends 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
2. Business Combination
In December 1997, the Company acquired Allegro Coffee Company, a specialty
coffee roaster and distributor based in Boulder, Colorado for approximately
175,000 shares of Company stock. Also in December 1997, the Company acquired
Merchant of Vino, which operates four gourmet/natural food supermarkets and two
specialty wine and gourmet food shops in the greater Detroit metropolitan area,
for approximately 1.1 million shares of Company stock. The acquisitions were
accounted for using the pooling-of-interests method. Due to the immateriality of
these financial statements of these acquired entities to the Company's
consolidated financial statements, financial information for the periods prior
fiscal 1998 will not be restated. An adjustment to increase retained earnings by
approximately $2.1 million has been recorded to include results of operations of
these acquired entities prior to the combination in these financial statements.
Revenue and results of operations of these acquired entities for the period from
September 29, 1997 through the dates of acquisition are not material to the
combined results.
3. Earnings Per Share
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Earlier application is not permitted. Effective
September 29,1997, the Company has adopted on a retroactive basis SFAS 128,
which establishes standards for computing and presenting earnings per share
("EPS"). This statement requires dual presentation of basic and diluted EPS on
the face of the income statement for entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes the effect of potentially dilutive securities while diluted
EPS reflects the potential dilution that would have occurred if securities or
other contracts to issue common stock had been exercised, converted, or resulted
in the issuance of common stock. Earnings per share for all periods presented
has been restated to reflect the adoption of SFAS 128. The adoption of SFAS 128
did not have a material effect on the Company's financial statements. Income, or
the numerator in the calculation of earnings per share, was the same for both
the basic and diluted earnings per share in both periods presented.
(continued)
3. Earnings Per Share, continued
A reconciliation of the denominators of the basic and diluted earnings per share
calculations follows (in thousands):
Sixteen weeks ended
January 18 January 19
1998 1997
------------------------
Weighted average common shares outstanding applicable to
basic and diluted earnings per share 25,913 24,085
Additional shares deemed outstanding from the
assumed exercise of stock options 1,610 866
------------------------
Shares applicable to diluted earnings 27,523 24,971
========================
Options to purchase 125,000 shares of common stock were not included in the
computation of diluted earnings per share for the period ended January 18, 1998,
because to do so would be antidilutive. Subsequent to the end of the first
quarter, the Company issued a private offering of zero coupon convertible
subordinated debentures which resulted in gross proceeds to the Company of $100
million as discussed in Note 5.
4. Recent Pronouncement
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131), which is effective for financial statements
issued for periods beginning after December 15, 1997. The Company plans to adopt
SFAS 131 in fiscal year 1999. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Under SFAS
131, operating segments are to be determined consistent with the way that
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company has not determined
the impact of the adoption of this new accounting standard on its consolidated
financial statements.
5. Subsequent Event
Subsequent to the end of the first quarter, the Company issued a private
offering under Rule 144A of the Securities Act of 1933, as amended, of 5% zero
coupon convertible subordinated debentures with no sinking fund requirements and
a scheduled maturity date of March 2, 2018. This offering resulted in gross
proceeds to the Company of $100 million (excluding over-allotment option). The
debentures are convertible at the option of the holder, at anytime on or prior
to maturity, unless previously redeemed or otherwise purchased. The debentures
have a conversion rate of 5.320 shares per $1,000 principal amount at maturity
initially representing a conversion price of approximately $70 per share of
common stock, or approximately 1,429,000 shares. Debentures may be redeemed at
the option of the holder on March 2, 2003, March 2, 2008 or March 2, 2013 for
purchase price equal to issue price plus accrued original issue discount to such
dates. Subject to certain limitations, the Company, at its option, may elect to
pay this purchase price in cash, shares of common stock or any combination
thereof. Debentures may also be redeemed in cash at the option of the holder if
there is a change in control at purchase prices equal to issue price plus
original issue discount to the date of redemption. Subsequent to March 2, 2003,
the debentures are redeemable at the option of the Company for cash, in whole or
in part, at redemption prices equal to issue price plus accrued original issue
discount to date of redemption. The debentures are subordinated in the right of
payment to all existing and future senior indebtedness.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - Sixteen weeks ended January 18, 1998 compared to the
same periods of the prior year.
General
- -------
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. In December 1997, the Company
acquired Allegro Coffee and Merchant of Vino in transactions that have been
accounted for using the pooling-of-interests method. Results of operations for
the first fiscal quarter of 1998 include the results of these acquired companies
for the full quarter. Prior year results have not been restated due to the
immateriality of Allegro Coffee and Merchant of Vino financial statements to the
Company's consolidated financial statements.
Sales
- -----
Sales increased 30% for the first fiscal quarter compared to the same period of
the prior fiscal year due to new stores opened and acquired since last year,
same store sales increases of approximately 14.4% and an increase in net sales
at Amrion. Current comparable store sales increases have been greater than
historical levels due to such factors as increasing sales in stores acquired
from Fresh Fields, the comparison of sales from stores located in Southern
California which were negatively impacted in the prior year by the name change
from Mrs. Gooch's to Whole Foods Market, improvements in overall store execution
and increased sales of newly released private label products. Sales increases at
Amrion resulted from improved customer acquisition programs and expanded retail
and mass market distribution programs.
Gross Profit
- ------------
Gross profit consists of retail sales less retail cost of goods sold and
occupancy costs, plus the net contribution from non-retail grocery distribution
and food preparation operations. The Company's gross profit as a percentage of
sales for the sixteen weeks ended January 18, 1998 was 33.3% compared to 31.8%
for the same period of the prior year. This increase reflects improved gross
margins as stores mature, increased national buying and private label
initiatives and continued improvement by new stores. Additionally, gross profit
is positively affected by continued reductions in product cost as a percentage
of sales at Amrion resulting from increased in-house manufacturing and improved
materials procurement.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses in the first quarter as a
percentage of sales decreased to 27.4% from 27.9% for the same period of the
prior year. Direct store expenses decreased as a percentage of sales due to
reduced store expenses for new stores as compared to historical new store
expenses and reductions in store labor costs. Other decreases in general and
administrative expenses as a percentage of sales reflect increases in Company
sales without comparable increases in administrative staff.
Pre-Opening and Relocation Costs
- --------------------------------
Pre-opening and relocation costs for the sixteen weeks ended January 18, 1998
relate to the opening of one new Company store in Brentwood, California and the
relocation of two stores, San Antonio, Texas and Evanston, Illinois. In the
prior fiscal year, there were three new store openings in the first fiscal
quarter. Subsequent to the end of the first quarter, two new Company stores have
opened in Boulder, Colorado and Tempe, Arizona. Four new store openings and one
store relocation are scheduled for the remainder of the current fiscal year.
Interest Expense
- ----------------
Interest expense for the first quarter was approximately $1,998,000 compared to
approximately $1,762,000 for the first quarter of the prior year, net of
capitalized interest. Interest expense consists of costs related to the bank
line of credit and senior notes payable, net of capitalized interest associated
with new store development. Interest expense related to the second quarter
issuance of $100 million in convertible subordinated debentures will be
partially offset by interest income generated from investment of the excess
proceeds and the elimination of interest expense related to the bank line of
credit during the remainder of the fiscal year.
LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
The Company has maintained a bank credit agreement, which provides for a
revolving line of credit of up to $100 million. The amounts borrowed under this
agreement are convertible into a four year term loan upon the expiration of the
revolving credit term on June 30, 1999. At January 18, 1998, approximately $50
million was drawn under this agreement. Subsequent to the end of the first
quarter all amounts outstanding under the bank line of credit agreement were
repaid with proceeds from the issuance of convertible subordinated debentures.
The Company intends to modify its bank line of credit facility to reduce the
amount available for borrowing and delete or modify certain restrictive
covenants. During the first fiscal quarter, the Company paid approximately $8.8
million to retire all outstanding debt of Allegro and Merchant of Vino in
connection with those acquisitions.
Whole Foods Market's principal historical capital requirements have been the
funding of the development or acquisition of the new stores and, to lesser
extent, the resultant increase in the working capital requirements. The Company
estimates that cash requirements to open a new store will range from $3 million
to $12 million (after giving effect to any landlord construction allowance).
This excludes new store inventory of approximately $400,000, a substantial
portion of which is financed by the vendors of Whole Foods Market. Subsequent to
the end of the first fiscal quarter the Company has opened two new stores in
Boulder, Colorado and Tempe, Arizona. Four new store openings and one store
relocation are scheduled for the remainder of the current fiscal year. The
Company has sixteen stores currently under development that are expected to open
during the next two fiscal years. The Company expects that cash generated from
operations, proceeds from the issuance of convertible subordinated debentures
and amounts available under its bank line of credit will be sufficient to
finance this expansion and other anticipated working capital and capital
expenditure requirements.
YEAR 2000 COMPLIANCE
Currently, there is a significant uncertainty in the software industry and among
software users regarding the impact of the year 2000 on installed software.
Software database modifications and/or implementation modifications will be
required to enable such software to distinguish between 21st and 20th century
dates. The Company uses third-party system software, some of which will need to
be modified or replaced in order to address year 2000 compliance. The Company is
continuing to evaluate the activities necessary to become year 2000 compliant
and, although the evaluation is ongoing, currently does not anticipate the
associated costs to be material.
RISK FACTORS
The Company wishes to caution readers that inherent risks and uncertainties
including those listed in the Company's Annual Report on Form 10-K for the year
ended September 28, 1997, among others, could cause the actual results of Whole
Foods Market to differ materially from those indicated by forward-looking
statements made in this Quarterly Report on Form 10-Q and other written
communications, as well as oral forward-looking statements made from time to
time by representatives of the Company. Except for historical information, the
matters discussed in such oral and written communications are forward looking
statements that involve risks and uncertainties, including but not limited to
general business conditions, the timely and successful development and opening
of new or relocated stores, the impact of competition and other factors which
are often beyond the control of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed with this report:
Exhibit 27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the fiscal quarter
ended January 18, 1998.
SIGNATURE
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.
Whole Foods Market, Inc.
------------------------
Registrant
Date: March 4, 1998 /s/ Glenda Flanagan
------------------------
By: Glenda Flanagan
Glenda Flanagan
Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)