Whole Foods 2008 Annual Report Download

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2008 Annual Report

Table of contents

  • Page 1
    2008 Annual Report

  • Page 2
    .... our core values selling the highest quality natural & organic products available satisfying & delighting our customers supporting team member happiness & excellence creating wealth through profits & growth caring about our communities & our environment creating ongoing win-win partnerships with...

  • Page 3
    ... rates of pay, and $33 million in remodeling efforts, all of which have benefited customers. We closed 19 stores, six in connection with the opening of new Whole Foods Market stores, and re-branded 45 stores to Whole Foods Market store fronts and signage. As sales and profits continue to improve...

  • Page 4
    ...current economy, customers are also focused on stretching their food dollars. Over the last several years we have successfully increased the range of lowerpriced items offered within our grocery and Whole Body departments, without sacrificing our quality standards. Our hard work is producing returns...

  • Page 5
    ... store leases to fall within a range of 35,000 to 50,000 square feet going forward, and WHERE DID THE MONEY GO? SALARIES/BENEFITS 25% INCOME TAXES/OTHER EXPENSES 10% NET INCOME 1% GROWTH SINCE IPO NUMBER OF STORES SALES EARNINGS PER SHARE OPERATING CASH FLOW TEAM MEMBERS STOCK PRICE COST OF GOODS...

  • Page 6
    we are actively working to drive down our average development cost per square foot. We believe we have disciplines in place for managing our cost of goods sold and direct store expenses in this challenging sales environment, and excluding estimated FTC-related legal costs, we expect G&A expenses of ...

  • Page 7
    UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2008 COMMISSION FILE NUMBER: 0-19797 WHOLE FOODS MARKET, INC. (Exact name of registrant as ...

  • Page 8
    Whole Foods Market, Inc. Annual Report on Form 10-K For the Fiscal Year Ended September 28, 2008 Table of Contents Page Number PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business. Risk Factors. Unresolved Staff Comments. Properties. Legal Proceedings. Submission of Matters to a Vote of...

  • Page 9
    ... are approximately 8.5 years old on average. Our stores are supported by 11 regional offices and our Austin headquarters, regional distribution centers, bakehouse facilities, commissary kitchens, seafood-processing facilities, produce procurement centers, a confectionary, and a specialty coffee, tea...

  • Page 10
    ...standards could work most effectively at the retail level. In fiscal year 2008, Ms. Wittenberg was selected to serve as one of four new members on the Board of Directors for The Organic Center, a nonprofit organization that advances peer-reviewed scientific research and information behind the health...

  • Page 11
    ...of cash or products to notfor-profit organizations. Whole Foods Market was recognized in March 2008 in FORTUNE magazine's "America's Most Admired Companies" list for the second year in a row. The "Most Admired" list is the "definitive report card on corporate reputations"; a list in which leaders of...

  • Page 12
    ...our customers; supporting team member happiness and excellence; creating wealth through profits and growth; caring about our communities and our environment; and creating ongoing win-win partnerships with our suppliers. These core values speak to our belief in a balanced way of doing business. They...

  • Page 13
    ... are living on less than $1 a day. Whole Foods Market covers all operating costs and the overhead budget for the Whole Planet Foundation, and directs $1 million annually, funded in part by the sale of products under the Company's Whole Trade Guarantee program, to its micro-lending projects. Join...

  • Page 14
    ... and gourmet shoppers. Most of our products are from natural and organic food vendors; however, we do sell certain conventional national brands that meet our quality standards. Quality Standards An integral part of our Company mission is to promote the vitality and well-being of all individuals by...

  • Page 15
    ...meat and poultry labeling program at our Kensington store in London based on this framework. Further standards development and implementation of the 5-Step Animal Welfare Rating system was transitioned to the Global Animal Partnership foundation when it was founded in the spring of 2008. Whole Foods...

  • Page 16
    ...developing countries. In a shrinking global marketplace, the Whole Trade program is a logical extension of our values that promote quality in everything we do, from products and business practices to caring for our team members, communities and the environment. The products in this program must meet...

  • Page 17
    ... Company's purchasing and information systems, transitioned all Wild Oats team members to the Company's payroll, benefits and incentive compensation plans, eliminated all corporate positions at the Wild Oats home office in Boulder, CO, and rebranded 45 Wild Oat stores with Whole Foods Market store...

  • Page 18
    ... 1,342,000 10.2 Total stores acquired Average size (gross square feet) Total gross square footage Average age (in years) Stores Relocated (6) Growth Strategy Whole Foods Market's growth strategy is to expand through a combination of new store openings and acquisitions of existing stores. We have...

  • Page 19
    ... supermarket. Our domestic Whole Foods Market stores each employs between 25 and 600 team members who comprise up to 13 teams per store, each led by a team leader. Each team within a store is responsible for a different product offerings or aspect of store operations such as customer service...

  • Page 20
    ..., all U.S.-based non-seasonal team members with at least 400 service hours may elect to purchase unrestricted shares of our stock at 95% of market value on the purchase date. The shares are purchased for the plan participants on a quarterly basis. Team Member 401(k) Plan. Whole Foods Market stock is...

  • Page 21
    ... customers by educating them about natural and organic foods, health, nutrition and the environment through our in-store "Take Action" centers, The Whole Deal newsletter, Value Tours, as well as on our corporate website. Team Members As of September 28, 2008, we had approximately 52,900 team members...

  • Page 22
    ... to the benefits of natural and organic products, we believe they are more likely to become Whole Foods Market customers since we are a category leader for natural and organic products, offering one of the largest selections and most informed customer service at competitive prices. Competition makes...

  • Page 23
    ... 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...

  • Page 24
    ... costs such as marketing. Our Results Are Subject to the Risks of Doing Business in Other Countries In fiscal year 2008, sales at our stores in Canada and the U.K. accounted for approximately 3% of our total sales. Though small as a percentage of total sales, the Company's international operations...

  • Page 25
    ...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 Government Regulation Could Harm Our Business Our stores are subject to various international, federal, state and local laws, regulations and...

  • Page 26
    ... of goods sold. Perishable Foods Product Losses Could Materially Impact Our Results We believe our stores more heavily emphasize perishable products than other supermarket stores. Perishable products accounted for approximately 67% of total sales at Whole Foods Market locations in fiscal year 2008...

  • Page 27
    ...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 employee health care benefits. Liabilities associated with...

  • Page 28
    ... of Our Internal Control over Financial Reporting Could Materially Impact Our Business and Results 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...

  • Page 29
    ... on the Company's results of operations, cash flows or financial condition. The Federal Trade Commission ("FTC") has resumed its administrative action challenging the Company's August 28, 2007 acquisition of Wild Oats Markets. On July 29, 2008, the United States Court of Appeals for the District of...

  • Page 30
    ...any Wild Oats stores into the Whole Foods system to the extent such consolidation has not occurred at the time of the Commission's decision; (ii) an order preventing Whole Foods from selling or disposing of any owned or leased property that had been used as a Wild Oats store in any geographic market...

  • Page 31
    ... Foods Market's common stock is traded on the NASDAQ Global Select Market under the symbol "WFMI." The Company was added to Standard & Poor's S&P 500 index in December 2005. The following sets forth the intra-day quarterly high and low sale prices of the Company's common stock for fiscal years 2008...

  • Page 32
    ... type as of September 28, 2008 (in thousands, except per share amounts): Options Available for Future Issuance 4,537 4,537 Plan Category Approved by security holders Not approved by security holders Total Options Outstanding 17,430 17,430 Weighted Average Exercise Price $48.64 $48.64 On November...

  • Page 33
    ... Financial Statements and Supplementary Data." Sept. 28, 2008 Consolidated Statements of Operations Data (1) Sales Cost of goods sold and occupancy costs Gross profit Direct store expenses General and administrative expenses Pre-opening expenses Relocation, store closure, and lease termination costs...

  • Page 34
    ... three stores as existing Whole Foods Market sites in development open through fiscal year 2010. The Company has made investments to raise the Wild Oats stores up to our high standards, including investments in repairs and maintenance of the stores, lower prices, an expanded perishables offering and...

  • Page 35
    ... for a preliminary injunction against the acquisition of Wild Oats Markets by Whole Foods Market, and remanded the case to the District Court for further proceedings consistent with the appellate decision. On the same day, the Court of Appeals issued an Order directing the Clerk of the Court of...

  • Page 36
    ... year 2008, the Company's Board of Directors suspended the quarterly cash dividend for the foreseeable future. Results of Operations The following table sets forth the statements of operations data of Whole Foods Market expressed as a percentage of total sales for the fiscal years indicated: 2008...

  • Page 37
    ... customer service available in our produce, meat, seafood, bakery, specialty and prepared foods departments. Direct Store Expenses Direct store expenses totaled approximately $2.11 billion, $1.71 billion and $1.42 billion in fiscal years 2008, 2007 and 2006, respectively. Direct store expenses...

  • Page 38
    ... Cost of goods sold and occupancy costs Direct store expenses General and administrative expenses Share-based payment expense before income taxes Income tax benefit Net share-based payment expense $ $ $ $ $ $ Liquidity and Capital Resources We generated cash flows from operating activities...

  • Page 39
    ... fiscal year 2009 through November 5, 2008, based on the Company's current development pipeline. These openings reflect estimated tender dates which are subject to change and do not incorporate any potential new leases, terminations or square footage reductions: Total New Store Square Footage 200...

  • Page 40
    ...year term loan agreement to finance the acquisition of Wild Oats Markets. The loan, which is secured by a pledge of substantially all of the stock of our subsidiaries, bears interest at our option of the alternative base rate ("ABR") plus an applicable margin or LIBOR plus an applicable margin based...

  • Page 41
    ... an initial conversion rate of $68.9655 per $1,000 of the liquidation preference, or an initial conversion price of $14.50 per common share. After three years, the dividend will be reduced to: (i) 6% if the common stock closes at or above $17.75 per share for at least 20 consecutive trading days, or...

  • Page 42
    ... Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48") on October 1, 2007, the first day of fiscal year 2008. The amount of gross unrecognized tax benefits and related...

  • Page 43
    ... date, net of estimated subtenant income. The closed property lease liabilities are expected to be paid over the remaining lease terms, which generally range from one to 16 years. The Company estimates subtenant income and future cash flows based on the Company's experience and knowledge of the area...

  • Page 44
    .... We determine fair value utilizing both a market value method and discounted projected future cash flows compared to our carrying value for the purpose of identifying impairment. Our annual impairment review requires extensive use of accounting judgment and financial estimates. Application of...

  • Page 45
    ...date market value which meets the "Safe Harbor" provisions of SFAS No. 123R, "Share-Based Payment," as amended, and therefore is non-compensatory. As a result, no future compensation expense will be recognized for our employee stock purchase plan. Under the previous plans, participating team members...

  • Page 46
    ... of the Effective Date of FASB Statement No. 161," which clarifies that the effective date applies to any reporting period beginning after November 15, 2008. SFAS No. 161 is effective for the Company's second quarter of fiscal year ending September 27, 2009. We are currently evaluating the impact...

  • Page 47
    ... million, five-year term loan agreement to finance the acquisition of Wild Oats Markets. The loan bears interest at our option of the alternative base rate ("ABR") plus an applicable margin or LIBOR plus an applicable margin, based on the Company's Moody's and S&P ratings. At September 28, 2008, the...

  • Page 48
    ... have requested that the Company execute related security agreements and the Company intends to comply timely with this request. Foreign Currency Risk The Company is exposed to foreign currency exchange risk. We own and operate six supermarkets emphasizing natural and organic foods in Canada and...

  • Page 49
    ... 8. Financial Statements and Supplementary Data. Whole Foods Market, Inc. Index to Consolidated Financial Statements Page Number 44 45 46 47 48 49 50 Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial...

  • Page 50
    ... of accounting for income tax uncertainties. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Whole Foods Market, Inc.'s internal control over financial reporting as of September 28, 2008, based on criteria...

  • Page 51
    Whole Foods Market, Inc. Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting To the Board of Directors Whole Foods Market, Inc. We have audited Whole Foods Market, Inc.'s internal control over financial reporting as of September 28, 2008, based on ...

  • Page 52
    ... due team members Dividends payable Other current liabilities Total current liabilities Long-term debt and capital lease obligations, less current installments Deferred lease liabilities Other long-term liabilities Total liabilities Shareholders' equity: Common stock, no par value, 300,000 shares...

  • Page 53
    ...139,328 1.41 145,082 2.45 Sales Cost of goods sold and occupancy costs Gross profit Direct store expenses General and administrative expenses Pre-opening expenses Relocation, store closure and lease termination costs Operating income Interest expense Investment and other income Income before income...

  • Page 54
    ... net of income taxes Comprehensive income Dividends ($0.87 per share) Issuance of common stock pursuant to team member stock plans 1,961 52,925 Purchase of treasury stock (2,542) - (99,997) Excess tax benefit related to exercise of team member stock options 13,187 Share-based payments expense 13,175...

  • Page 55
    ...by operating activities: Depreciation and amortization Loss on disposal of fixed assets Share-based payments expense Deferred income tax benefit Excess tax benefit related to exercise of team member stock options Deferred lease liabilities Other Net change in current assets and liabilities: Accounts...

  • Page 56
    ... Financial Statements Fiscal years ended September 28, 2008, September 30, 2007 and September 24, 2006 (1) Description of Business Whole Foods Market, Inc. and its consolidated subsidiaries (collectively "Whole Foods Market," "Company," or "We") own and operate the largest chain of supermarkets...

  • Page 57
    ..., store closure and lease termination costs" line item in the Consolidated Statements of Operations. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, trade and other accounts receivable, trade accounts payable, accrued payroll, bonuses and team member benefits...

  • Page 58
    ... net future cash flows are less than the assets' carrying value. The Company estimates net future cash flows based on its experience and knowledge of the area in which the closed property is located and, when necessary, utilizes local real estate brokers. Adjustments to closed property reserves...

  • Page 59
    ...date market value which meets the "Safe Harbor" provisions of SFAS No. 123R, "Share-Based Payment," as amended, and therefore is non-compensatory. As a result, no future compensation expense will be recognized for our employee stock purchase plan. Under the previous plans, participating team members...

  • Page 60
    ... the fair value method and expense these amounts in the income statement over the stock option's remaining vesting period. 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 per...

  • Page 61
    ... at the date of the financial statements and revenues and expenses during the period reported. Actual amounts could differ from those estimates. Reclassifications Where appropriate, we have reclassified prior years' financial statements to conform to current year presentation. Recent Accounting...

  • Page 62
    ... existing Whole Foods Market sites in development open through fiscal year 2010. The Company believes the synergies gained from this business combination will create long term value for our customers, vendors and shareholders as well as exciting opportunities for our new and existing team members by...

  • Page 63
    ... for a preliminary injunction against the acquisition of Wild Oats Markets by Whole Foods Market, and remanded the case to the District Court for further proceedings consistent with the appellate decision. On the same day, the Court of Appeals issued an Order directing the Clerk of the Court of...

  • Page 64
    ...): Cash payment to Wild Oats shareholders Direct costs of the acquisition Total purchase price $ $ 564,726 36,992 601,718 The acquisition was accounted for under the purchase method of accounting with Whole Foods Market treated as the acquiring entity in accordance with SFAS No. 141, "Business...

  • Page 65
    ... receivable for divestiture." As part of purchase accounting for the Wild Oats acquisition, the Henry's and Sun Harvest net assets were adjusted to fair value and therefore no gain or loss was recognized related to this divestiture. During fiscal year 2008, the Company finalized the sale price...

  • Page 66
    ... Pro Forma Financial Information The following pro forma financial information for fiscal years 2007 and 2006, present the combined historical results of the operations of Whole Foods Market and Wild Oats as if the Wild Oats acquisition and the sale of the Henry's and Sun Harvest stores had occurred...

  • Page 67
    ... Statements of Operations under the caption "Relocation, store closure and lease termination costs." The Company's initial estimates of Wild Oats store closure reserves were reduced by approximately $28.8 million as part of the final purchase price allocation. These purchase price adjustments relate...

  • Page 68
    ...year term loan agreement to finance the acquisition of Wild Oats Markets. The loan, which is secured by a pledge of substantially all of the stock of our subsidiaries, bears interest at our option of the alternative base rate ("ABR") plus an applicable margin or LIBOR plus an applicable margin based...

  • Page 69
    ... in the Wild Oats acquisition, of which approximately $94.2 million was paid off during fiscal year 2007 and approximately $21.8 million, which included a related conversion premium totaling approximately $0.9 million, was paid off during fiscal year 2008. The remaining Whole Foods Market debentures...

  • Page 70
    ... (reduction) in income taxes resulting from: Change in valuation allowance Tax exempt interest Share-based compensation Deductible state income taxes Tax rate differential relating to foreign operations Other, net Total federal taxes State income taxes Foreign income taxes Total income tax expense

  • Page 71
    ... fiscal year 2008 related to the recognition of deferred differences as a purchase price adjustment associated with the acquisition of Wild Oats Markets. At September 28, 2008, we had international operating loss carryforwards totaling approximately $18.6 million, all of which has an indefinite life...

  • Page 72
    ... of fiscal year 2008, the Company's Board of Directors suspended the quarterly cash dividend for the foreseeable future. Treasury Stock On July 31, 2008, the Company's Board of Directors approved a $100 million increase in the Company's stock repurchase program, bringing the total authorization to...

  • Page 73
    ... of fiscal year 2008, the Company retired all shares held in treasury. The specific timing and repurchase of future amounts will vary based on market conditions, securities law limitations and other factors and will be made using the Company's available resources. The repurchase program may be...

  • Page 74
    ... taxes Income tax benefit Net share-based payment expense $ $ $ $ $ $ Stock Option Plan We historically granted options to purchase common stock under our 1992 Stock Option Plans, as amended. At our 2007 annual shareholders' meeting, our shareholders approved the Whole Foods Market 2007 Stock...

  • Page 75
    ... on the shares purchase date market value which meets the "Safe Harbor" provisions of SFAS No. 123R and therefore is non-compensatory. As a result, no future compensation expense will be recognized for our employee stock purchase plan. Under the previous plans, participating team members could elect...

  • Page 76
    ... we recognized approximately $0.3 million and $0.6 million, respectively, of share-based payments expense related to team member stock purchase plan discounts. Under the TMSPP, we issued approximately 68,000, 83,000 and 51,000 shares in fiscal years 2008, 2007 and 2006, respectively. At September 28...

  • Page 77
    ... selected quarterly unaudited consolidated statements of operations information for the fiscal years ended September 28, 2008 and September 30, 2007 (in thousands except per share amounts): First Quarter Fiscal Year 2008 Sales Cost of goods sold and occupancy costs Gross profit Direct store expenses...

  • Page 78
    ...message board postings related to Whole Foods Market and Wild Oats Markets and retained the firm of Munger, Tolles & Olson LLP to advise it during its investigation. The result of the Company's internal investigation had no impact on the Company's consolidated financial statements for the year ended...

  • Page 79
    ... - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company's management concluded that its internal control over financial reporting was effective as of September 28, 2008. The Company's independent registered public...

  • Page 80
    ... Proxy Statement for the Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item about our Company's securities authorized for issuance under equity compensation plans as of September 28, 2008 is included...

  • Page 81
    ... Plan (7) 2007 Team Member Stock Purchase Plan (11) Agreement for Distribution of Products by and between Whole Foods Market Distribution, Inc. and United Natural Foods, Inc. (Portions of this agreement have been omitted pursuant to a request for confidential treatment filed with the Securities...

  • Page 82
    ...as Appendix B to Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 5, 2007 filed January 22, 2007 and incorporated herein by reference. Filed as Appendix C to Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held March...

  • Page 83
    ...the undersigned hereunto duly authorized. WHOLE FOODS MARKET, INC. Date: November 26, 2008 By: /s/ Glenda Chamberlain Glenda Chamberlain Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the...

  • Page 84
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  • Page 87
    ... contact a stockbroker. ORDERING FINANCIAL STATEMENTS A copy of our Annual Report and Form 10-K may be obtained by written or phone request to: Shareholder Services Whole Foods Market, Inc. 550 Bowie Street Austin, TX 78703 512.542.0801 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young...

  • Page 88
    ...sharing it with others we are committed to foods that are fresh, wholesome & safe to eat we seek out & promote organically grown foods we provide food & nutritional products that support health & well-being ©2009 Whole Foods Market IP, L.P. All rights reserved. Printed on 100% recycled paper using...