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 July 5, 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 July 5, 1998 was 26,360,000 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
July 5, 1998 and September 28, 1997
(In thousands, except share data)
1998 1997
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 31,196 $ 13,395
Marketable securities 26,285 1,089
Merchandise inventories 81,648 64,838
Accounts receivable and other 47,087 34,571
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Total current assets 186,216 113,893
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Net property and equipment 277,890 228,215
Excess of cost over net assets acquired, net 36,255 35,577
Other assets 31,721 21,993
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$ 532,082 $ 399,678
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 663 $ 1,171
Trade accounts payable 34,268 30,900
Accrued expenses and other 60,542 45,201
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Total current liabilities 95,473 77,272
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Long-term debt, less current installments 156,917 92,673
Other long-term liabilities 24,812 24,268
---------------------
Total liabilities 277,202 194,213
---------------------
Shareholders' equity:
Common stock, no par value, 100,000,000 shares
authorized; 26,360,000 and 24,453,000
shares issued and outstanding 208,136 192,514
Unrealized gain (loss) on securities available for sale 13 (125)
Retained earnings 46,731 13,076
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Total shareholders' equity 254,880 205,465
---------------------
$ 532,082 $ 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)
Twelve weeks ended Forty weeks ended
July 5 July 6 July 5 July 6
1998 1997 1998 1997
-------------------------- --------------------------
Sales $ 330,999 $ 274,510 $ 1,063,598 $ 846,894
Cost of goods sold and occupancy costs 220,167 182,489 706,075 570,142
-------------------------- --------------------------
Gross profit 110,832 92,021 357,523 276,752
Selling, general and administrative expenses 90,887 77,833 293,411 236,456
Pre-opening and relocation costs 1,024 -- 3,551 2,733
Merger expenses -- -- 1,699 --
-------------------------- --------------------------
Income from operations 18,921 14,188 58,862 37,563
Interest expense 2,079 1,410 5,611 4,691
Investment and other income (779) (144) (1,119) (424)
-------------------------- --------------------------
Income before income taxes 17,621 12,922 54,370 33,296
Income taxes 6,520 4,639 20,117 11,807
-------------------------- --------------------------
Net income $ 11,101 $ 8,283 $ 34,253 $ 21,489
-------------------------- --------------------------
Basic earnings per share $ 0.42 $ 0.34 $ 1.31 $ 0.89
-------------------------- --------------------------
Diluted earnings per share $ 0.40 $ 0.33 $ 1.24 $ 0.86
-------------------------- --------------------------
See accompanying notes to condensed consolidated financial statements.
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Forty weeks ended
July 5 July 6
1998 1997
----------------------
Net cash flow from operating activities $ 58,269 $ 40,777
Cash flow from investing activities:
Acquisition of property and equipment (71,064) (44,312)
Acquisition of leasehold rights (2,555) (8,066)
Proceeds from marketable securities available for sale -- 4,335
Purchase of marketable securities available for sale (26,446) --
Payments for purchase of acquired entities, net of cash acquired (2,154)
Other (2,641) (691)
-----------------------
Net cash flow used by investing activities (104,860) (48,734)
-----------------------
Cash flow from financing activities:
Net proceeds from bank borrowings 11,000 24,000
Net proceeds from sale of convertible debentures 111,749 --
Payments on long-term debt (73,744) (8,235)
Proceeds from issuance of common stock 15,333 3,286
Purchase of company stock -- (2,187)
Cash acquired in pooling-of-interests 54 --
-----------------------
Net cash flow from financing activities 64,392 16,864
-----------------------
Net increase in cash and cash equivalents 17,801 8,907
Cash and cash equivalents at beginning of period 13,395 3,997
-----------------------
Cash and cash equivalents at end of period $ 31,196 $ 12,904
-----------------------
See accompanying notes to condensed consolidated financial statements.
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 5, 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 Combinations
In July 1998, the Company acquired 82.5% of Australian Natural Care Products
("ANCP"), a direct marketer of nutritional supplements and organic products in
New Zealand, in exchange for approximately $2.3 million in cash. Adjustments to
the purchase price may be made based on certain agreed upon factors including
ANCP earnings for the fiscal year ended June 30, 1998 and asset balances at that
date. The agreement includes an option to purchase an additional 7.5% ownership
of ANCP for approximately $205,000 in cash. This transaction was accounted for
using the purchase method, and accordingly, the preliminary purchase price was
allocated to assets acquired based on their estimated fair values. Total costs
in excess of net assets acquired will be amortized on a straight line basis over
40 years. Pro forma results of operations are not presented due to the
immaterial effect on the Company's consolidated results of operation.
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
the financial statements of these acquired entities to the Company's
consolidated financial statements, financial information for the periods prior
to fiscal 1998 has not been restated. An adjustment to decrease retained
earnings by approximately $600,000 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. Long-Term Debt
During the second fiscal 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. These securities were subsequently
registered and are currently traded on the Nasdaq. This offering resulted in
gross proceeds to the Company of approximately $115 million including the
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 1,643,000 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 price
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. All amounts outstanding under the Company's line of credit
agreement were repaid during the second fiscal quarter with proceeds from the
issuance of the convertible subordinated debentures.
4. 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. Effective September 29,1997, the Company
adopted on a retroactive basis SFAS 128, which establishes standards for
computing and presenting earnings per share. 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.
A reconciliation of the denominators of the basic and diluted earnings per share
calculations follows (in thousands):
Twelve weeks ended Forty weeks ended
July 5 July 6 July 5 July 6
1998 1997 1998 1997
----------------------- --------------------
Denominator for basic earnings per
share - weighted average shares 26,279 24,188 26,077 24,137
Additional shares deemed outstanding from the
assumed exercise of stock options 1,601 1,106 1,643 870
------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 27,880 25,294 27,720 25,007
================================================
The computation of diluted earnings per share does not include approximtely
1,643,000 shares of common stock related to the zero coupon convertible
subordinated debentures and options to purchase approximately 1,500,000 shares
of common stock for both the twelve and forty week period ended July 5, 1998
because to do so would be antidilutive.
5. Recent Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
is effective for financial statements issued for periods beginning after
December 15, 1997. The Company plans to adopt SFAS 130 in fiscal year 1999. This
statement establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements.
The Company does not expect the adoption of SFAS 130 to result in significant
additional disclosures.
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. The Company
has not determined the impact of the adoption of this new accounting standard on
its consolidated financial statements.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" in March, 1998. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998 and establishes criteria for
capitalizing certain internal use software costs. The Company plans to adopt SOP
98-1 in fiscal year 2000. The adoption of SOP 98-1 will not have a material
impact on the Company's financial statements.
The AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities" in
April, 1998. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company plans to adopt SOP
98-5 in fiscal year 2000. The adoption of SOP 98-5 will not have a material
impact on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - Twelve and forty weeks ended July 5, 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
fiscal 1998 include the results of these acquired companies for the full year.
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. During the third quarter, the Company acquired Australian
Natural Care Products in a transaction that has been accounted for as a
purchase. Results of operations for Australian Natural Care Products from date
of acquisition through the end of the third fiscal quarter were not significant.
Sales
Sales increased 21% for the third fiscal quarter and 26% for the forty weeks
compared to the same periods of the prior fiscal year due to new stores opened
and acquired since last year, same store sales increases of approximately 9.5%
for the quarter and 11.8% for the forty weeks, and an increase in net sales at
Amrion. The Company believes that current comparable store sales increases have
been greater than historical averages 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 distribution and food
preparation operations. The Company's gross profit as a percentage of sales for
the twelve and forty weeks ended July 5, 1998 was 33.5% and 33.6% respectively,
compared to 33.5% and 32.7% for the same periods of the prior year. These trends
reflect improved gross margins as stores mature, increased national buying and
private label initiatives and continued improvement in the operating performance
at new stores. Improvements in retail gross profit in the current fiscal quarter
were offset by increased expenses related to Amrion's retail and mass market
distribution programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
twelve and forty weeks ended July 5, 1998 was 27.5% and 27.6%, respectively,
compared to 28.4% and 27.9% for the same periods 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 stores expenses and reductions in store
labor costs. Generally, the Company experiences decreases in general and
administrative expenses as a percentage of sales, reflecting increases in
Company sales without comparable increases in administrative staff.
Pre-Opening and Relocation Costs
Pre-opening and relocation costs for the twelve and forty weeks ended July 5,
1998 relate to the openings of new Company stores in Marlton, New Jersey and
Winter Park, Florida and relocation of one store in Monterey, California in the
third quarter, the opening of two new stores in the second quarter, and the
opening of one new store and relocations of two stores in the first quarter.
Pre-opening and relocation costs normally range from $250,000 to $600,000 and
are generally higher in locations which are some distance from an existing base
of operations due to higher training, travel and moving costs. In the prior
fiscal year, there were no store openings or relocations in the third quarter,
two new store openings and one store relocation in the second quarter and three
new store openings in the first quarter. One new store opening is scheduled for
the remainder of the current fiscal year.
Interest Expense
Current year-to-date interest expense consists of costs related to the
convertible subordinated debentures, senior notes payable and bank line of
credit, net of capitalized interest associated with new store development. Net
interest expense for the third quarter was approximately $2,079,000 compared to
approximately $1,410,000 for the third quarter of the prior year. Current
year-to-date net interest expense was approximately $5,611,000 compared to
approximately $4,691,000 for the same period of the prior year. The Company
expects to incur greater interest expense in the remainder of fiscal 1998
compared to the same periods of the prior year due to increased total borrowings
outstanding after the issuance of the convertible subordinated debentures.
Investment and Other Income
Investment and other income for the current fiscal year consists primarily of
interest income related to the investment of a portion of the net proceeds from
the issuance of the convertible subordinated debentures. These excess proceeds
are invested in two separate investment accounts: a short-term corporate bond
portfolio, which invests in short-term high quality corporate bonds, and a prime
money market portfolio, which invests in certificates of deposit, bankers'
acceptances, commercial paper and U.S. government securities. These funds seek
to provide high income while maintaining a high degree of stability of
principal.
LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
During the second fiscal quarter, Whole Foods Market issued 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 approximately $115 million including over-allotment
option. The Company used approximately $52 million of the net proceeds to repay
all amounts outstanding under its line of credit agreement during the second
quarter. The Company's bank credit agreement currently provides for a revolving
line of credit of up to $10 million. 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 new stores, expansions and
improvements in existing stores and increases in overall 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. One new store opening is scheduled for the remainder of the
current fiscal year. The Company has twenty stores currently under development
that are expected to open during the next two fiscal years. During the third
fiscal quarter, the Company signed a contract to purchase a manufacturing and
distribution facility in Thornton, Colorado. This facility will enable the
Company to consolidate its Boulder manufacturing, distribution and
administrative functions into one location at a total estimated cost of $25 to
$30 million. The Company expects that cash on hand plus cash generated from
operations 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 have a material impact on its financial statements.
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 July 5, 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: August 17, 1998 By: /s/ Glenda Flanagan
------------------------
Glenda Flanagan
Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)