Whole Foods 2010 Annual Report Download - page 43

37
Inventories
We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (“LIFO”) method for
approximately 93.9% and 93.6% of inventories in fiscal years 2010 and 2009, respectively. Under the LIFO method, the cost
assigned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items
purchased remain in inventory and are used to value ending inventory. The excess of estimated current costs over LIFO
carrying value, or LIFO reserve, was approximately $19.4 million and $27.1 million at September 26, 2010 and September
27, 2009, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method.
Cost is determined using the item cost method and the retail method for inventories. The item cost method involves counting
each item in inventory, assigning costs to each of these items based on the actual purchase cost (net of vendor allowances) of
each item and recording the actual cost of items sold. The item cost method of accounting enables management to more
precisely manage inventory and purchasing levels when compared to the retail method of accounting. Under the retail
method, the valuation of inventories at cost and the resulting gross margins are determined by counting each item in
inventory, then applying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent
in the retail inventory method calculations are certain management judgments and estimates which could impact the ending
inventory valuation at cost as well as the resulting gross margins.
Our largest supplier, United Natural Foods, Inc., accounted for approximately 27%, 28% and 32% of our total purchases in
fiscal years 2010, 2009 and 2008, respectively.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. We provide depreciation of
equipment over the estimated useful lives (generally 3 to 15 years) using the straight-line method. We provide amortization
of leasehold improvements and real estate assets under capital leases on a straight-line basis over the shorter of the estimated
useful lives of the improvements or the terms of the related leases. Terms of leases used in the determination of estimated
useful lives may include renewal periods at the Company’s option if exercise of the option is determined to be reasonably
assured. We provide depreciation of buildings over the estimated useful lives (generally 20 to 30 years) using the straight-
line method. Costs related to a projected site determined to be unsatisfactory and general site selection costs that cannot be
identified with a specific store location are charged to operations currently. The Company recognizes a liability for the fair
value of a conditional asset retirement obligation when the obligation is incurred. Repair and maintenance costs are expensed
as incurred. Interest costs on significant projects constructed or developed for the Company’s own use are capitalized as a
separate component of the asset. Upon retirement or disposal of assets, the cost and related accumulated depreciation are
removed from the balance sheet and any gain or loss is reflected in earnings.
Operating Leases
The Company leases stores, non-retail facilities and administrative offices under operating leases. Store lease agreements
generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess of
specified levels. Most of our lease agreements include renewal periods at the Company’s option. We recognize rent holiday
periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes
possession of the leased space for construction and other purposes. We record tenant improvement allowances and rent
holidays as deferred rent liabilities, and amortize the deferred rent over the terms of the lease to rent. We record rent
liabilities for contingent percentage of sales lease provisions when we determine that it is probable that the specified levels as
defined by the lease will be reached.
Goodwill and Intangible Assets
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed. Goodwill is reviewed for impairment annually at the beginning of the Company’s fourth
fiscal quarter, or more frequently if impairment indicators arise, on a reporting unit level. We allocate goodwill to one
reporting unit for goodwill impairment testing. We compare our fair value, which is determined utilizing both a market value
method and discounted projected future cash flows, to our carrying value for the purpose of identifying impairment. Our
annual impairment review requires extensive use of accounting judgment and financial estimates.
Intangible assets include acquired leasehold rights, favorable lease assets, trade names, brand names, liquor licenses, license
agreements, non-competition agreements, and debt issuance costs. Indefinite-lived intangible assets are reviewed for
impairment quarterly, or whenever events or changes in circumstances indicate the carrying amount of an intangible asset
may not be recoverable. We amortize definite-lived intangible assets on a straight-line basis over the life of the related
agreement. Currently, the weighted average life is approximately 16 years for contract-based intangible assets, and
approximately 4 years for marketing-related and other identifiable intangible assets.