Whole Foods 2009 Annual Report Download

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2009 Annual Report

Table of contents

  • Page 1
    2009 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
    ... in natural and organic products. Our total private label sales accounted for approximately 11% of retail sales, up from 10% last year. Our Whole Trade Guarantee label, a buying initiative that expands our social responsibility to bring together FINANCIAL HIGHLIGHTS SALES (000s) NUMBER OF STORES AT...

  • Page 4
    ...team members at all levels of the company, we collectively found solutions and new approaches to running our business in a more frugal way. We continued to make important progress at the 52 continuing Wild Oats stores. Store contribution improved 150 basis points on a 5% increase in sales per square...

  • Page 5
    ... renewing our focus on our core customers. As a result, I believe we have emerged as a stronger company that is better positioned to fulfill our longer-term mission. GROWTH SINCE IPO NUMBER OF STORES SALES EARNINGS PER SHARE OPERATING CASH FLOW TEAM MEMBERS STOCK PRICE 9/27/09 284 $8.0 B $0.85 $587...

  • Page 6
    ...years to come. Our business model clearly has been highly successful, with our company ranked #324 on the Fortune 500 list of largest U.S. public corporations. In 2009, we were one of the top 20 best performing stocks in the S&P 500 Index. As the world moves out of this recession, our positive sales...

  • Page 7
    ..., 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 27, 2009 COMMISSION FILE NUMBER: 0-19797 WHOLE FOODS MARKET, INC. (Exact name of registrant as specified in its charter) Texas (State of incorporation) 74...

  • Page 8
    DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of the Stockholders to be held March 8, 2010. 2

  • Page 9
    .... Item 14. Directors and Executive Officers of the Registrant. Executive Compensation. Security Ownership of Certain Beneficial Owners and Management. Certain Relationships and Related Transactions. Principal Accounting Fees and Services. PART IV Item 15. Exhibits, Financial Statement Schedules. 71...

  • Page 10
    ...to Whole Foods Market or the Company in this Report include its consolidated subsidiaries. We have one operating segment, natural and organic foods supermarkets. We opened our first store in Austin, Texas in 1980 and completed our initial public offering in January 1992. As of September 27, 2009, we...

  • Page 11
    ...near to their whole, natural state as possible. Organic foods are grown through methods intended to support and enhance the earth's natural balance. Generally, organic food products are produced using agricultural management practices intended to promote and enhance ecosystem health; no genetically...

  • Page 12
    Business Strategy Whole Foods Market is the world's leading natural and organic foods supermarket. We believe that much of our success to date is because we remain a uniquely mission-driven Company. We are highly selective about what we sell. We believe in providing an empowering work environment ...

  • Page 13
    ..., more than one billion people are living on less than $1 a day. Whole Foods Market covers all operating costs and the overhead budget for Whole Planet Foundation, funded in part by the sale of products under the Company's Whole Trade Guarantee program. Join us in empowering entrepreneurs in the...

  • Page 14
    ... to educate customers and team members about healthy eating choices with the introduction of a seventh core value in fiscal year 2009. Our new Global Healthy Eating Education Team is in place, and we began the process of piloting this new education program across our regions and stores this past...

  • Page 15
    ... Welfare Standards In fiscal year 2009, Whole Foods Market was ranked the "most humane grocery store" in a survey conducted by the World Society for the Protection of Animals, scoring highest among the top 25 largest supermarkets in the United States for the number of humanely labeled food products...

  • Page 16
    ... Market's quality standards, and have a viable business plan and adequate cash flow to service the debt. Eligible products include agricultural crops, value-added food products, and other all-natural grocery items. Whole TradeTM Guarantee In March 2007, we launched our Whole Trade Guarantee program...

  • Page 17
    ... decentralized culture, where many decisions are made at the store level, close to the customer. We believe this is one of our strongest competitive advantages and that EVA is the best financial framework that team members can use to help make decisions that create sustainable shareholder value. We...

  • Page 18
    ... open stores that typically are located on premier real estate sites, often in urban, high-population locales. After we have selected a target site, our development group does a comprehensive site study and sales projection. Each project must meet an internal EVA hurdle return, which for new stores...

  • Page 19
    ... who want to be informed on important issues related to the environment, legislation, food safety and product quality that can directly affect our customers' health and well-being. In addition, some stores offer special services such as massage, valet parking, personal shopping and home delivery. We...

  • Page 20
    ..., and to improve our service levels. On our website, customers can create a personalized profile that keeps track of their favorite parts of the site and a "home" store; rate and review recipes; share value shopping tips; contribute to forums and interact with other Whole Foods Market stakeholders...

  • Page 21
    ... the direction of our Company and their future are empowered to make Whole Foods Market not only a great place to shop but a great place to build a career. All of our full-time and part-time team members are eligible to receive stock options through annual leadership grants or through service hour...

  • Page 22
    ... programs, including those for our executive officers, are based on years of service, not on title or position. We also have a salary cap that limits the total cash compensation paid to any team member in a calendar year to 19 times the average annual wage of all team members. In addition, our chief...

  • Page 23
    ... 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. New...

  • Page 24
    ...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...

  • Page 25
    ...other supermarket stores. Perishable products accounted for approximately 66% of total sales at Whole Foods Market locations in fiscal year 2009. The Company's emphasis on perishable products may result in significant product inventory losses in the event of extended power outages, natural disasters...

  • Page 26
    ... 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 Government Regulation Could Harm Our Business The Company is subject to various international, federal, state and local...

  • Page 27
    ... 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...

  • Page 28
    ... Wild Oats stores, and the appointment of a trustee or special master to establish an independent management team for the former Wild Oats assets and oversee Whole Foods Market's compliance with the order. The administrative proceeding was scheduled to commence on April 6, 2009. On January 28, 2009...

  • Page 29
    ...Purchases of Equity Securities. Whole 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...

  • Page 30
    ... summarizes information about the Company's equity compensation plans by type as of September 27, 2009 (in thousands, except per share amounts): Options Available for Future Issuance 15,448 15,448 Plan Category Approved by security holders Not approved by security holders Total Options Outstanding...

  • Page 31
    ... share Weighted average shares outstanding, diluted basis Dividends declared per common share Consolidated Balance Sheets Data Net working capital Total assets Long-term debt (including current maturities) Shareholders' equity Operating Data Number of stores at end of fiscal year Average store size...

  • Page 32
    ... 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview 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 vitality and well-being...

  • Page 33
    ... fiscal year 2009. The Company expects to produce cash flows from operations in excess of its capital expenditure requirements on an annual basis. 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...

  • Page 34
    ... in fiscal years 2009 and 2008 reflect higher depreciation and health care costs as a percentage of sales. Direct store expenses as a percentage of sales tends to be higher for new stores and decrease as stores mature, reflecting increasing operational productivity of the store teams. General and...

  • Page 35
    ... costs Direct store expenses General and administrative expenses Share-based payment expense before income taxes Income tax benefit Net share-based payment expense $ $ $ $ $ $ The Company intends to keep its broad-based stock option program in place, but also intends to limit the number...

  • Page 36
    ...at seven locations, two of which opened in fiscal year 2009. We currently operate 12 stores in excess of 65,000 gross square feet and have an additional five stores of that size in development, two of which are relocations. The Company has opened three stores and closed one store in fiscal year 2010...

  • Page 37
    ... $700 million, five-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 in our subsidiaries, bears interest at our option of the alternative base rate ("ABR") plus an applicable margin, currently 0.75%, or...

  • Page 38
    ...the Company's stock repurchase program expired in accordance with its terms. The effect of exchange rate changes on cash included in the Consolidated Statements of Cash Flows resulted in decreases in cash and cash equivalents totaling approximately $1.3 million and $1.6 million for fiscal years 2009...

  • Page 39
    ...in "Item 8. Financial Statements and Supplementary Data." 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. Critical Accounting Policies The preparation...

  • Page 40
    ... as part of the Wild Oats Markets acquisition will be applied against goodwill and will not impact earnings. Share-Based Payments The Company maintains several share-based incentive plans. We grant options to purchase common stock under our Whole Foods Market 2009 Stock Incentive Plan, which was...

  • Page 41
    ... of the fair value of share-based payment expense and consequently, the related amounts recognized in the Consolidated Statements of Operations. 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...

  • Page 42
    ...the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risks and uncertainties, including but not limited to general business conditions, the timely development and opening of new stores, the integration of acquired stores, the...

  • Page 43
    ... and operate six stores in Canada and five stores in the United Kingdom. Sales made from the Canadian and United Kingdom stores are made in exchange for Canadian dollars and Great Britain pounds, respectively. The Company does not currently hedge against the risk of exchange rate fluctuations. 37

  • Page 44
    ... Data. Whole Foods Market, Inc. Index to Consolidated Financial Statements Page Number 39 40 41 42 43 44 45 Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Consolidated Balance Sheets...

  • Page 45
    ... balance sheets of Whole Foods Market, Inc. as of September 27, 2009 and September 28, 2008, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the three fiscal years in the period ended September 27, 2009. These financial...

  • Page 46
    ...of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Whole Foods Market, Inc. as of September 27, 2009 and September 28, 2008, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each...

  • Page 47
    Whole Foods Market, Inc. Consolidated Balance Sheets (In thousands) September 27, 2009 and September 28, 2008 Assets Current assets: Cash and cash equivalents Restricted cash Accounts receivable Merchandise inventories Prepaid expenses and other current assets Deferred income taxes Total current ...

  • Page 48
    ..., store closure and lease termination costs Operating income Interest expense Investment and other income Income before income taxes Provision for income taxes Net income Preferred stock dividends Income available to common shareholders Basic earnings per share Weighted average shares outstanding...

  • Page 49
    ... member stock plans 256 4,286 Excess tax benefit related to exercise of team member stock options 54 Share-based payment expense 12,795 Other (248) Balances at September 27, 2009 140,542 $1,283,028 $ - $ (13,367) The accompanying notes are an integral part of these consolidated financial statements...

  • Page 50
    ...of long-lived assets Share-based payment expense LIFO expense (benefit) Deferred income tax expense (benefit) Excess tax benefit related to exercise of team member stock options Deferred lease liabilities Other Net change in current assets and liabilities: Accounts receivable Merchandise inventories...

  • Page 51
    ... of Business Whole Foods Market, Inc. and its consolidated subsidiaries (collectively "Whole Foods Market," "Company," or "We") own and operate the largest chain of natural and organic food supermarkets. Our Company mission is to promote vitality and well-being for all individuals by supplying the...

  • Page 52
    ... or fair value less costs to sell. When the Company impairs assets related to an operating location, a charge to write down the related assets is included in the "Direct store expenses" line item on the Consolidated Statements of Operations. When the Company commits to relocate, close, or dispose...

  • Page 53
    ... on the fair value of the Company's interest rate swap agreement are included in Note 9 to the consolidated financial statements, "Derivatives." The carrying amounts of trade and other accounts receivable, trade accounts payable, accrued payroll, bonuses and team member benefits, and other accrued...

  • Page 54
    ... 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. Revenue Recognition We recognize revenue for sales of our products at the point...

  • Page 55
    ...value of share-based payment expense and consequently, the related amounts recognized in the Consolidated Statements of Operations. Income Taxes We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book...

  • Page 56
    ..., natural and organic foods supermarkets. We currently have six stores in Canada and five stores in the United Kingdom. All of our remaining operations are domestic. The following is a summary of annual percentage sales and net long-lived assets by geographic area: 2009 Sales: United States Canada...

  • Page 57
    ... value. The Company has made a corresponding adjustment to its consolidated statements of shareholders' equity and comprehensive income to reflect the reclassification. There was no impact on previously reported statements of operations, earning per share amounts, statements of cash flows or total...

  • Page 58
    ...as an existing Whole Foods Market site in development opens in fiscal year 2011. 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 59
    ... as part of the Wild Oats acquisition was fully repaid during fiscal year 2008. Debt is discussed further in Note 8 to the consolidated financial statements, "LongTerm Debt." The estimated values of operating leases with unfavorable terms compared with current market conditions totaled approximately...

  • Page 60
    ... This sale was completed effective September 30, 2007. During the first quarter of fiscal year 2008, the Company received proceeds totaling approximately $165 million. As part of purchase accounting for the Wild Oats acquisition, the Henry's and Sun Harvest net assets were adjusted to fair value and...

  • Page 61
    ... Wild Oats stores, and the appointment of a trustee or special master to establish an independent management team for the former Wild Oats assets and oversee Whole Foods Market's compliance with the order. The administrative proceeding was scheduled to commence on April 6, 2009. On January 28, 2009...

  • Page 62
    ... certain tax liabilities. During fiscal year 2007, we acquired goodwill totaling approximately $546.0 million in connection with the acquisition of Wild Oats, including purchase price adjustments during fiscal year 2008. Indefinite-lived intangible assets are evaluated for impairment quarterly, or...

  • Page 63
    ... related to the continued depression in the commercial real estate market, which are included on the accompanying Consolidated Statements of Operations under the caption "Relocation, store closure and lease termination costs." During fiscal year 2008, the Company's initial estimates of Wild Oats...

  • Page 64
    ... acquisition of Wild Oats Markets. Lease agreements are discussed further in Note 10 to the consolidated financial statements, "Leases." (9) Derivatives During fiscal year 2008, the Company entered into a three-year interest rate swap agreement with a notional amount of $490 million to effectively...

  • Page 65
    ... lease provides for an aggregate annual minimum rent of approximately $0.5 million, $0.5 million, and $0.4 million which the Company received in rental income in fiscal years 2009, 2008 and 2007, respectively. (11) Income Taxes Components of income tax expense attributable to continuing operations...

  • Page 66
    ...taxes receivable totaling approximately $24.0 million. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for continuing operations are as follows (in thousands): 2009 Deferred tax assets: Compensation-related costs...

  • Page 67
    ...-term liabilities" line item on the Consolidated Balance Sheets. If the Company were to prevail on all unrecognized tax benefits recorded at September 27, 2009, the total gross unrecognized tax benefit totaling approximately $13.2 million would benefit the Company's effective tax rate if recognized...

  • Page 68
    ... day of each calendar quarter in cash. Beginning three years after issuance, the dividend would be reduced to (i) 6% if at any time the Company's common stock closes at or above $17.75 per share for at least 20 consecutive trading days, or (ii) 4% if at any time the Company's common stock closes...

  • Page 69
    ... the quarterly cash dividend on common shares for the foreseeable future. Treasury Stock During fiscal year 2008, the Company's Board of Directors approved a $100 million increase in the Company's stock repurchase program, bringing the total authorization to $400 million through November 8, 2009...

  • Page 70
    ... costs Direct store expenses General and administrative expenses Share-based payment expense before income taxes Income tax benefit Net share-based payment expense $ $ $ $ $ $ Stock Option Plan We grant options to purchase common stock under our Whole Foods Market 2009 Stock Incentive...

  • Page 71
    ....14 Share-based payment expense related to vesting stock options recognized during fiscal years 2009, 2008 and 2007 totaled approximately $13.3 million, $10.5 million, and $8.1 million, respectively. During fiscal years 2009 and 2007, to adjust for actual experience, the Company recognized a credit...

  • Page 72
    ... year 2009, the Company recorded store closure reserve adjustments totaling approximately $9.7 million related to changes in certain subtenant income estimated driven by the outlook for the commercial real estate market, which was included in "Relocation, store closure and lease termination costs...

  • Page 73
    ... selected quarterly unaudited consolidated statements of operations information for the fiscal years ended September 27, 2009 and September 28, 2008 (in thousands except per share amounts): First Quarter Fiscal Year 2009 Sales Cost of goods sold and occupancy costs Gross profit Direct store expenses...

  • Page 74
    ... of any outstanding stock options granted to such executive officer. (20) Subsequent Event During fiscal year 2009, the Company adopted FASB guidance that establishes general standards for the disclosure of events that occur after the balance sheet date but before the financial statements are issued...

  • Page 75
    ... executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations...

  • Page 76
    ...in Part I, "Item 1. Business" of this Report on Form 10-K under the caption "Executive Officers of the Registrant." All other information required by this item is incorporated herein by reference from the registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held March...

  • Page 77
    ...(7) 2009 Stock Incentive Plan (12) 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...

  • Page 78
    ... Proxy Statement for the Annual Meeting of Stockholders held March 5, 2007 filed January 22, 2007 and incorporated herein by reference. Filed as Appendix A to Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders held March 16, 2009 filed January 26, 2009 and incorporated...

  • Page 79
    ... the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WHOLE FOODS MARKET, INC. Date: November 27, 2009 By: /s/ Glenda Chamberlain Glenda Chamberlain Executive Vice President and Chief Financial Officer Pursuant to the requirements of the...

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  • Page 83
    ... Mason Director Emeritus 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 ANNUAL MEETING March 8, 2010 9:00 a.m. local time The Westin...

  • Page 84
    ...are passionate about great tasting food & the pleasure of 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 ©2010 Whole Foods Market IP, L.P. All rights...