Whole Foods 2007 Annual Report Download - page 52

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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 $20.0 million and $13.2 million at September 30, 2007 and September
24, 2006, respectively. Costs for remaining inventories are determined by the first-in, first-out (“FIFO”) method.
Cost was determined using the retail method and the item cost method for inventories in fiscal years 2007 and 2006. 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. The item cost method involves counting each item in
inventory, assigning costs to each of these items based on the actual purchase costs (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.
Our largest supplier, United Natural Foods, Inc., accounted for approximately 24%, 22% and 22% of our total purchases in
fiscal years 2007, 2006 and 2005, 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 three to 15 years) using the straight-line method. We provide
amortization of leasehold improvements and real estate assets under capital lease on the straight-line method 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 at the inception of the lease. 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, distribution centers, bakehouses and administrative facilities 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 will be
reached during the fiscal year.
Goodwill
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, or more frequently if impairment indicators
arise, on a reporting unit level. We allocate goodwill to one reporting unit for goodwill impairment testing. 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 alternative assumptions and definitions, such as reviewing goodwill for impairment at a
different organizational level, could produce significantly different results.
Intangible Assets
Intangible assets include acquired leasehold rights, trade names, brand names, liquor licenses, license agreements, non-
competition agreements and debt issuance costs. Indefinite-lived intangible assets are reviewed for impairment annually, or
more frequently if impairment indicators arise. We amortize definite-lived intangible assets on a straight-line basis over the
life of the related agreement, currently one to 48 years for contract-based intangible assets and one to five years for
marketing-related and other identifiable intangible assets.