Whole Foods 2007 Annual Report Download - page 54

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Cost of Goods Sold and Occupancy Costs
Cost of goods sold includes cost of inventory sold during the period, net of discounts and allowances, contribution from non-
retail distribution and food preparation operations, shipping and handling costs and occupancy costs. The Company receives
various rebates from third party vendors in the form of quantity discounts and payments under cooperative advertising
agreements. Quantity discounts and cooperative advertising discounts in excess of identifiable advertising costs are
recognized as a reduction of cost of goods sold when the related merchandise is sold.
Advertising
Advertising and marketing expense for fiscal years 2007, 2006 and 2005 was approximately $33.0 million, $24.0 million and
$20.1 million, respectively. These amounts are shown net of vendor allowances received for cooperative advertising of
approximately $1.2 million in fiscal years 2006 and 2005. Advertising costs are charged to expense as incurred and are
included in the “Direct store expenses” line item in the Consolidated Statements of Operations.
Pre-opening and Relocation Costs
Pre-opening costs include rent expense incurred during construction of new stores and costs related to new store openings
including costs associated with hiring and training personnel, smallwares, supplies and other miscellaneous costs. Rent
expense is generally incurred approximately nine months prior to a store’s opening date. Other pre-opening costs are
incurred primarily in the 30 days prior to a new store opening. Pre-opening costs are expensed as incurred. Relocation costs,
which consist of moving costs, remaining lease payments, accelerated depreciation costs, asset impairment costs, other costs
associated with replaced facilities and other related expenses, are expensed as incurred.
Share-Based Payments
The Company maintains several share-based incentive plans. We historically granted options 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. Under both plans, options are granted at an option
price equal to the market value of the stock at the grant date and are generally exercisable ratably over a four-year period
beginning one year from grant date and have a five-year term. The grant date is established once the Company’s Board of
Directors approves the grant and all key terms have been determined. The exercise prices of our stock option grants are the
closing 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 plan to all full-time team members with a minimum of 400 hours of
service. Participating team members may purchase our common stock through payroll deductions. At our 2006 annual
meeting, shareholders approved a new Team Member Stock Purchase Plan (“TMSPP”) which became effective on April 1,
2007. The TMSPP replaces all previous stock purchase plans and provides for a 5% discount on the shares purchase date
market value which meets the “Safe Harbor” provisions of Statement of Financial Accounting Standards (“SFAS”) No.
123R, “Share-Based Payment” and therefore is non-compensatory. Under the previous plans, participating team members
could elect to purchase unrestricted shares at 100% of market value or restricted shares at 85% of market value on the
purchase date.
Prior to the effective date of revised SFAS No. 123R, the Company applied Accounting Principles Board Opinion No. 25
(“APB No. 25”), “Accounting for Stock Issued to Employees” and related interpretations for our stock option grants. APB
No. 25 provides that the compensation expense relative to our team member stock options is measured based on the intrinsic
value of the stock option at date of grant.
Effective the beginning of the first quarter of fiscal year 2006, the Company adopted the provisions of SFAS No. 123R using
the modified prospective transition method. Under this method, prior periods were not restated. The Company uses the
Black-Scholes multiple option pricing model which requires extensive use of accounting judgment and financial estimates,
including estimates of the expected term team members will retain their vested stock options before exercising them, the
estimated volatility of the Company’s common stock price over the expected term, and the number of options that will be
forfeited prior to the completion of their vesting requirements. The related share-based payments expense is recognized on a
straight-line basis over the vesting period. Application of alternative assumptions could produce significantly different
estimates of the fair value of share-based payments and consequently, the related amounts recognized in the Consolidated
Statements of Operations. The provisions of SFAS No. 123R apply to new stock options and stock options outstanding, but
not yet vested, on the effective date.
SFAS No. 123R requires the Company to value unvested stock options granted prior to its adoption of SFAS No. 123 under
the fair value method and expense these amounts in the income statement over the stock option’s remaining vesting period.