Whole Foods 2007 Annual Report Download

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2007 Annual Report

Table of contents

  • Page 1
    2007 Annual Report

  • Page 2
    ... fate and are the soul of our company. 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

  • Page 3
    ... smallest regions benefiting the most. At year end, we operated 276 stores totaling 9.3 million square feet with locations in 37 states and the District of Columbia, Canada and the U.K. We believe our merger with Wild Oats will create long-term value for our customers, vendors and shareholders, as...

  • Page 4
    ... in many of our store parking lots, working in concert with existing farmers' markets when possible, for local farmers to sell their products directly to our customers. In addition, we created a Local Producer Loan Program offering up to $10 million in annual financial assistance through which we...

  • Page 5
    ... date have generated close to $80,000 in donations to the Whole Planet Foundation. Our goal is to have over 50% of our imported products from the developing world meet our Whole Trade qualifications within 10 years. o Five-Step Animal Welfare Rating Program. With the opening of our new London store...

  • Page 6
    ... gross margin, direct store expenses, and G&A as a percentage of sales over time and believe that, over the long term, we will continue to deliver healthy earnings growth through strong sales growth rather than through significant operating leverage. We believe the investments we are making today in...

  • 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 30, 2007 COMMISSION FILE NUMBER: 0-19797 WHOLE FOODS MARKET, INC. (Exact name of registrant as ...

  • Page 8
    ... Equity Securities. Selected Financial Data. Management's Discussion and Analysis of Financial Condition and Results of Operations. Quantitative and Qualitative Disclosures About Market Risk. Financial Statements and Supplementary Data. Changes in and Disagreements with Accountants on Accounting and...

  • Page 9
    ...reportable 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 30, 2007, we operated 276 stores organized into 11 geographic operating regions, each with its own leadership team...

  • Page 10
    ... to a leading trade publication for the industry, sales of natural products across all retail and direct-to-consumer channels grew to approximately $57 billion in 2006, a 10% increase over the prior year. The natural and organic products we offer in our stores include food and beverages, dietary...

  • Page 11
    ... about our Company. Our five stated core values include selling the highest quality natural and organic products available; satisfying and delighting our customers; supporting team member happiness and excellence; creating wealth through profits and growth; and caring about our communities and our...

  • Page 12
    ... and Whole Planet FoundationTM, designed to reach our larger community stakeholders. The two private foundations were initially funded with seed money totaling over $1 million raised from two global "Five Percent Days," in which five percent of the amount of all customer purchases at our stores was...

  • Page 13
    ... retail sales at Whole Foods Market locations in fiscal year 2007. We believe our heavy emphasis on perishable products differentiates us from conventional supermarkets and helps us attract a broader customer base. We believe that all shoppers, not just natural and organic food shoppers, appreciate...

  • Page 14
    ... local producers in nine of our 11 regions. Loan recipients must use funds for expansion and not operating expenses, meet Whole Foods 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...

  • Page 15
    ... • At our Whole Foods Market locations, private label sales in grocery and nutrition accounted for approximately 18% of our total retail sales in those product categories in fiscal year 2007, up from 16% in fiscal year 2006. Total private label sales across all teams accounted for approximately...

  • Page 16
    ... the Whole Foods Market stores currently in development open in those areas. The following table provides additional information by region about the number of Wild Oats stores acquired, divested, closed and relocated, and the ending Wild Oats store count as of November 20, 2007. 11/20/07 Store Count...

  • Page 17
    ...Total gross square footage at end of fiscal year The following table provides additional information about the Company's store locations by region as of September 30, 2007: Stores at Beginning of Fiscal Year 8 28 21 27 13 20 5 10 14 24 16 186 Stores Stores at Relocated/ End of Closed Fiscal Year 14...

  • Page 18
    ...as the acceleration in our new store openings materializes, and a decrease in the average size of new leases signed during the year. Tender dates provide some visibility on the timing of our new store openings. For accounting purposes, a lease is considered tendered on the date we take possession of...

  • Page 19
    ... value on the purchase date. The shares are purchased for the plan participants on a quarterly basis. Approximately 2,000 team members currently participate in this plan. Team Member 401(k) Plan. Whole Foods Market stock is an investment option within the Company's 401(k) plan. • • Store...

  • Page 20
    ... tenure increases. For the past 10 years, our team members have helped Whole Foods Market become one of Fortune magazine's "100 Best Companies to Work for in America." In scoring companies, Fortune places the greatest weight (two-thirds of the total) on responses to a random survey of 400 employees...

  • Page 21
    ... to the benefits of natural and organic products, we believe they are more likely to become Whole Foods Market customers since we are the category leader for natural and organic products, offering the largest selection and most informed customer service at competitive prices. Competition makes us...

  • Page 22
    ... Chief Operating Officer until February 2001. Mr. Sud served as a director of the Company from 1980 to 1997. Lee Valkenaar has served as Executive Vice President of Global Support since September 2004. Mr. Valkenaar has held various positions with the Company since 1987, including Store Team Leader...

  • Page 23
    ... cause our business, financial condition, operating results and cash flows to be materially adversely affected. The Company does not undertake any obligation to update forward-looking statements. Our Growth Is Significantly Dependent on New Store Openings and Acquisitions Our strategy is to expand...

  • Page 24
    ... timing of new store openings. Increased Competition May Have an Adverse Effect on Profitability Our competitors include but are not limited to local, regional, national and international conventional and specialty supermarkets, other natural food stores, warehouse membership clubs, small specialty...

  • Page 25
    ... 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 Our stores are subject to various international, federal, state and local...

  • Page 26
    ... supermarket stores. Perishable products accounted for approximately 67% of total retail sales at Whole Foods Market locations in fiscal year 2007. The Company's emphasis on perishable products may result in significant product inventory losses in the event of extended power outages, natural...

  • Page 27
    ... Directors. The continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depend on many factors, including the results of operations and the financial condition of the Company. There is no guarantee that the Company will pay dividends...

  • Page 28
    ... to date. In addition, the FTC is currently pursing an administrative proceeding concerning our recent acquisition of Wild Oats Markets and the Company has been contacted by the staff of the SEC regarding an inquiry related to online financial message board postings related to Whole Foods Market and...

  • Page 29
    ... the financial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis. On November 8, 2005, the Company's Board of Directors approved a stock repurchase program of up to $200 million over four years. During the fourth quarter of...

  • Page 30
    ...Shareholders received one additional share of Whole Foods Market common stock for each share owned. All shares reserved for issuance pursuant to the Company's stock option and stock purchase plans were automatically increased by the same proportion. In addition, shares subject to outstanding options...

  • Page 31
    ... basis Dividends declared per 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 (gross square footage) Average weekly sales per store...

  • Page 32
    ...Wild Oats") on August 28, 2007: 70 stores in 22 U.S. states and four stores in Canada. Effective August 28, 2007, the Company completed the acquisition of Wild Oats Markets, Inc. ("Wild Oats"), a leading natural and organic foods retailer in North America, in a cash tender offer of $18.50 per share...

  • Page 33
    ...'s Board of Directors approved an 11% increase in the Company's quarterly dividend to $0.20 per share payable January 22, 2008 to shareholders of record on January 11, 2008. During fiscal year 2007, the Company repurchased approximately 2.5 million shares of Company common stock on the open market...

  • Page 34
    ... product brands in grocery and Whole Body; however, our perishables may be priced at a premium to reflect the higher quality, broader selection, and better customer service available in our produce, meat, seafood, bakery, specialty and prepared foods departments. Direct Store Expenses Direct store...

  • Page 35
    ... effective tax rate for the fourth quarter and fiscal year 2005 was higher than its historical rate primarily due to the non-deductible portion of the expense recognized for the accelerated vesting of stock options. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement...

  • Page 36
    ...410.8 million in fiscal years 2007, 2006 and 2005, respectively. Cash flows from operating activities resulted primarily from our net income less non-cash expenses, income tax benefits that resulted from the exercise of team member stock options and changes in operating working capital. Prior to the...

  • Page 37
    ...) Number of relocations Number of lease acquisitions, ground leases and owned properties 1 New markets 4 Average store size (gross square feet) 50,200 As a percentage of existing store average size 147% Total square footage 653,000 As a percentage of existing square footage 10% Average pre-opening...

  • Page 38
    ...may elect to pay this purchase price in cash, shares of common stock or any combination thereof. The debentures may also be redeemed in cash at the option of the holder if there is a change in control at the issue price plus accrued original discount to the date of redemption. The Company may redeem...

  • Page 39
    ... the financial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis. On November 8, 2005, the Company's Board of Directors approved a stock repurchase program of up to $200 million over four years. During the fourth quarter of...

  • Page 40
    ... assets' carrying value. The Company estimates net future cash flows based on its experience and knowledge of the market in which the closed property is located and, when necessary, utilizes local real estate brokers. Adjustments to closed property reserves primarily relate to changes in subtenant...

  • Page 41
    ... price on the grant date. Stock option grant terms and conditions are communicated to team members within a relatively short period of time. Our Company generally approves one primary stock option grant annually, occurring during a trading window. Our Company offers a team member stock purchase...

  • Page 42
    ... Company's fiscal year ending September 27, 2009, with early adoption permitted. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial...

  • Page 43
    ... related to these investments was included as a component of shareholders' equity. During fiscal year 2007, the Company entered into a $700 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...

  • Page 44
    ... Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Consolidated Balance Sheets at September 30, 2007 and September 24, 2006 Consolidated Statements of Operations for the fiscal years ended September 30, 2007...

  • Page 45
    ...of Whole Foods Market, Inc. (the "Company") as of September 24, 2006 and September 30, 2007, 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 30, 2007. These financial...

  • Page 46
    ...statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the three fiscal years in the period ended September 30, 2007 of Whole Foods Market, Inc. and our report dated November 27, 2007 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Austin...

  • Page 47
    Whole Foods Market, Inc. Consolidated Balance Sheets (In thousands) September 30, 2007 and September 24, 2006 Assets Current assets: Cash and cash equivalents Short-term investments - available-for-sale securities Restricted cash Accounts receivable Proceeds receivable for divestiture Merchandise ...

  • Page 48
    ... Gross profit Direct store expenses General and administrative expenses Pre-opening and relocation costs Operating income Interest expense Investment and other income Income before income taxes Provision for income taxes Net income Basic earnings per share Weighted average shares outstanding Diluted...

  • Page 49
    Whole Foods Market, Inc. Consolidated Statements of Shareholders' Equity and Comprehensive Income (In thousands) Fiscal years ended September 30, 2007, September 24, 2006 and September 25, 2005 Accumulated Common Other Total Shares Common Stock in Comprehensive Retained Shareholders' Outstanding ...

  • Page 50
    ... Cash flows from financing activities Dividends paid Issuance of common stock Purchase of treasury stock Excess tax benefit related to exercise of team member stock options Proceeds from long-term borrowings Payments on long-term debt and capital lease obligations Net cash provided by (used...

  • Page 51
    ...; seven stores in Canada; and six stores in the United Kingdom. Effective August 28, 2007, the Company completed the acquisition of Wild Oats Markets, Inc. ("Wild Oats"), a leading natural and organic foods retailer in North America, in a cash tender offer of $18.50 per share, or approximately...

  • Page 52
    ... 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...

  • Page 53
    ... assets' carrying value. The Company estimates net future cash flows based on its experience and knowledge of the market in which the closed property is located and, when necessary, utilizes local real estate brokers. Adjustments to closed property reserves primarily relate to changes in subtenant...

  • Page 54
    ... price on the grant date. Stock option grant terms and conditions are communicated to team members within a relatively short period of time. Our Company generally approves one primary stock option grant annually, occurring during a trading window. Our Company offers a team member stock purchase...

  • Page 55
    ...average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income. Segment Information We operate in one reportable segment, natural and organic foods supermarkets. We currently have seven stores in Canada...

  • Page 56
    ... Company's fiscal year ending September 27, 2009, with early adoption permitted. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial...

  • Page 57
    ... natural and organic foods retailer in North America, in a cash tender offer of $18.50 per share, or approximately $565 million plus the assumption of approximately $148 million in existing debt. At the date of acquisition, Wild Oats had 109 stores in 23 states and British Columbia, Canada operating...

  • Page 58
    ...fair value of the debt assumed by the Company was approximately $134 million. The estimated values of operating leases with unfavorable terms compared with current market conditions totaled approximately $1.5 million. These leases have an estimated weighted average life of approximately 14 years and...

  • Page 59
    ...cost of providing the support. Unaudited Pro Forma Financial Information The following pro forma financial information presents 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...

  • Page 60
    ... and 2005, respectively. Development costs of new store locations totaled approximately $389.3 million, $208.6 million and $207.8 million in fiscal years 2007, 2006 and 2005, respectively. The Company's acquisition of Wild Oats Markets during fiscal year 2007 included approximately $77.1 million of...

  • Page 61
    .... Associated with the term loan, the Company also recorded approximately $3.4 million related to debt origination fees, which are being amortized on a straight-line basis over the life of the loan. Subsequent to the end of fiscal year 2007, the Company entered into a three-year interest rate swap...

  • Page 62
    ...may elect to pay this purchase price in cash, shares of common stock or any combination thereof. The debentures may also be redeemed in cash at the option of the holder if there is a change in control at the issue price plus accrued original discount to the date of redemption. The Company may redeem...

  • Page 63
    ... as follows (in thousands): 2007 Deferred tax assets: Compensation-related costs Insurance-related costs Inventories Lease and other termination accruals Rent differential Tax basis of fixed assets in excess of financial basis Net domestic and international operating loss carryforwards Capital loss...

  • Page 64
    ... operations and the financial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis. Treasury Stock On November 8, 2005, the Company's Board of Directors approved a stock repurchase program of up to $200 million over four years...

  • Page 65
    ... to $200 million. During the third quarter of fiscal year 2007, the Company repurchased approximately 2.5 million additional shares of Company common stock on the open market for a total of approximately $100 million. The average price per share paid for shares held in treasury at September 30...

  • Page 66
    ... to purchase common stock under our 1992 Stock Option Plans, as amended. At our annual shareholder's meeting on March 5, 2007, our shareholders approved a new plan, the Whole Foods Market 2007 Stock Incentive Plan. The fiscal year 2007 options were granted pursuant to this new plan. Our Company has...

  • Page 67
    ... value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2007 1.80% 4.75% 31.22% 3.29 2006 1.26% 5.04% 29.40% 3.22 2005 0.84% 4.14% 48.30% 2.10 Expected dividend yield Risk-free interest rate...

  • Page 68
    ... years 2007 and 2006 are not presented because the amounts are recognized in the Consolidated Statement of Operations. Team Member Stock Purchase Plan Our Company offers a team member stock purchase plan to all full-time team members with a minimum of 400 hours of service. Participating team members...

  • Page 69
    ... selected quarterly unaudited consolidated statements of operations information for the fiscal years ended September 30, 2007 and September 24, 2006 (in thousands except per share amounts): First Quarter Fiscal Year 2007 Sales Cost of goods sold and occupancy costs Gross profit Direct store expenses...

  • Page 70
    ...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 71
    .... Management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Wild Oats Markets, Inc. ("Wild Oats"), which is included in our 2007 consolidated financial statements. The Company completed the acquisition of Wild...

  • Page 72
    ...our Web site is not incorporated by reference into this Report on Form 10-K. Item 11. Executive Compensation. The information required by this item is incorporated herein by reference from the registrant's definitive Proxy Statement for the Annual Meeting of Shareholders. Item 12. Security Ownership...

  • Page 73
    ... 1992 Stock Option Plan for Team Members, as amended (1) 1992 Stock Option Plan for Outside Directors (1) 2007 Stock Incentive Plan (7) 2007 Team Member Stock Purchase Plan (8) Agreement for Distribution of Products by and between Whole Foods Market Distribution, Inc. and United Natural Foods, Inc...

  • Page 74
    ... hereunto duly authorized. WHOLE FOODS MARKET, INC. Date: November 29, 2007 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 following...

  • Page 75
    ... LLP TRADING INFORMATION The common stock of Whole Foods Market is traded on the Nasdaq Global Select Stock Market (symbol: WFMI). If you wish to become a shareholder, please contact a stockbroker. Dividends Paid Per Share Adjusted for Stock Splits Comparison of Five-Year Cumulative Total Return...

  • Page 76
    ... 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 ©2008 Whole e Foods Market IP, L.P. All rights reserved. Printed on 100% recycled paper using...