Stock Project Finance

Semester Stock Project:Analysis & Valuation of Whole Foods

Market{WFM}

Duncan Alger & Lauren Bush

Report Date: October 1, 2015

As of Fiscal Year End: September 28th 2014

Table of Contents

Executive Summary......................................................................................................................................3

Company Overview Section..........................................................................................................................5Analyst Purpose Statement:.......................................................................................................................5

Company and Industry Research Section......................................................................................................6Summary #1: Operations Overview:.........................................................................................................6

Summary #2: Survey of the Industry and Competitors:............................................................................7Summary #3: Composition of Revenue:....................................................................................................8

Summary #4: Other Pertinent Information for Investors:..........................................................................9Historic Stock Performance Section............................................................................................................10

Historical Stock Performance Commentary:...........................................................................................10Short-Term Closing Price Graph – Daily Prices:....................................................................................10

Long-Term Closing Price Graph – Monthly Prices:................................................................................10Financial Analysis Section...........................................................................................................................11

Historical Trends in the Financial Ratios:...............................................................................................11Common-Size Statement Analysis:.........................................................................................................12

Summary of Research and Fundamental Analysis......................................................................................14Cost of Equity Analysis Section..................................................................................................................16

Cross Sectional Analysis of Beta:............................................................................................................16Cost Equity – Capital Asset Pricing Model (CAPM):.............................................................................16

Company’s Equity Valuation Section..........................................................................................................17Pro Forma Statement Construction:.........................................................................................................17

Investment Recommendation Section..........................................................................................................19

Analyst Stock Report as of September 28th 2014 Page 2

Executive Summary

As number 214 on the Fortune 500 list in 2015, Whole Foods Market functions as a retailer of natural

and organic foods. The market store offers produce, floral, grocery, meat, seafood, bakery, beverages,

vitamins & supplements, body care and lifestyle products. Some notable core values of WFM are:,

satisfying and nourishing their customers, supporting team member excellence, supporting local and

global communities, and practicing environmental stewardship. WFM has about 420 markets in the

USA, Canada, and the UK.

At the current moment, it would be a bad idea for investors to purchase stock in Whole Foods

Market for the following reasons:

WFM was blamed for mislabeled weights on packaged foods which created a large scandal.

Shareholders who purchases stock between August 8, 2013- July 2015 could potentially win a

lawsuit against WFM

Since January 1, 2015 stock prices have dropped a dramatic 40%

WFM executives announced they are cutting 1500 positions estimated to be costing them

between $15 and $22 million dollars. When this was announced, shares decreased 1.1%.

Large competition of health stores entering the market.

In this moment of time, it is in investor’s best interest to not invest in this stock. The

company has taken some dramatic falls, the stock prices have dramatically and dropped and

our analysis raises some notable flags: stock prices have been decrease, WFM has met some

stiff competition, sales and revenues have decreased, and WFM has been involved with ethical

issues which might deter potential investors.


Part One: Research and Fundamental Analysis


Company Overview Section

The company that this analysis is of is Whole Foods Market, which is traded on the NASDAQ. Whole

Foods became a publically traded company on January 23rd, 1992, with a ticker symbol of WFM.

Whole Foods Market Inc. functions as a retailer of natural and organic good as well as an in-store deli,

premade food and other grocery items. The market stores offer produce, floral, grocery, meat, seafood,

bakery, catering, coffee, tea, wine, beer, vitamins and supplements, body care and lifestyle products.

Whole Foods has a number of different competitors, their main competitors being; Sprouts, Trader

Joes, Costco Wholesale Corporation and Safeway Inc. Whole Foods Market was Founded on

September 20, 1980 in Austin, Texas by Mark Skiles, Renee Hardy, Craig Weller, and John Mackey.

The company’s headquarters are also located in Austin, Texas. This corporation promotes healthy

behavior and gives back to those in need, specifically organizations that provide to people in need.

Analysts noticed that the stock prices have been dropping recently, and as researchers we wanted to

figure out why this was the case. It has been an elite company for a number of years and continues to

do so, battling now with a number of very similar companies in the organic grocer industry.


Analyst Purpose Statement:The purpose of this analysis is to evaluate Whole Foods Market historical operating performance, and

to evaluate the company to form a buy/sell recommendation for interested investors.


Company and Industry Research Section

Summary #1: Operations Overview:Whole Foods Market is listed as number 214 on the Fortune 500 list as of 2015. The company also has

many core values: selling the highest quality natural and organic products, satisfying and nourishing

their customers, supporting team member excellence and happiness, creating wealth through profits

and growth, serve and support local and global communities, practicing environmental stewardship,

creating win-win partnership with suppliers, and promoting healthy eating education.

Company History

Whole Foods Market is an American supermarket chain that specializes in organic food and other

grocery items. It was founded on September 20, 1980 in Austin Texas by Mark Skiles, Renee Hardy,

Craig Weller, and John Mackey. It started expanding in major Texas cities such as Dallas, San Antonio

and Houston, eventually spreading the organization to approximately 420 markets in the US, Canada,

and the UK. Whole Foods Market was hoping to expand to various countries, although with the most

recent drop in stock prices these projects were pulled to a halt.

Current Company News

Whole Foods Market and organic farmers have had a long symbiotic relationship that is now fraying.

Whole Foods is facing increasing competition from mainstream grocery chains and organic farmers are

finding more outlets for their produce. Organic farmers who are supplying their produce are

complaining that the program Responsibly Grown can grant a farmer who isn’t meeting the

requirements for federal organic certification the same rating as an organic farmer. Conventional

growers can receive rankings from organic farmers such as establishing a recycling program, using

alternative energy, eliminating pesticides, etc. A farmer who has been an organic farmer for 40+ years

states, “the program is a subtle way of shifting the costs of a marketing program onto growers.

Spending between $5,000-$20,000 to comply with the program.” Farmers, investors, and stockholders


are concerned with competition because the stock trade for Whole Foods is at an all-time low. In 2015

the profit margin dipped below 36% which is considered a sign of damage. 2015 has brought some

tough times for WFM. With a scandal over mislabeled weights on packaged foods, flat-lining same

store sales, and most importantly the stock price has fallen 40% since January 1st. There is hope for a

turn-around with an upcoming unveiling of the new cheaper chain, named 365 by Whole Foods. They

are planning to open give smaller markets in 2016 with a selection of valued-price products. With the

scandal of mislabeled weights on packaged foods, shareholders who purchased entities between August

9, 2013 and July 30, 2014 could potentially win a lawsuit. The complaint is alleging that Whole Foods

is failing to adequately disclose important information that is misleading. The Wall Street Journal

reported that they are cutting 1500 positions, which is 1.6% of the workforce as a whole. This is

costing them between $15-$22 million. The cutting of these employees is part of their overall strategy,

which is keeping costs low for their customers. After this was announced, shares were decreased by

11%. WFM reputations have also taken a recent hit because of the new health stores increasing their

competition.

Products and Services

Whole Foods Market sells products that are completely natural as well as many USDA-certified

organic foods and products that are environmentally friendly and ecologically responsible. The market

stores offer produce, floral, grocery, meat, seafood, bakery, catering, coffee, tea, wine, beer, vitamins

and supplements, body care and lifestyle products as well as household products. Another amenity

Whole Foods provides is an in store deli serving fresh made to order items.

Leadership & Strategy

Whole Foods Market has three main disciplines: all work is teamwork, anything worth doing is worth

measuring, and be your own toughest competitor. WFM also prides themselves on donating at least 5%

of its yearly net profits to charitable causes. Whole Foods is best explained as a ‘green company’. In


1999 they joined the Marine Stewardship Council wish is a global non-profit that supports sustainable

fisheries and fishing practices. In 2005 Whole Foods created the Animal Compassion Foundation, a

nonprofit to help their producers raise animals naturally and humanely. In 2007, the EPA listed Whole

Foods Market as the second-highest purchaser of green power worldwide, with developing renewable

energy sources for the electricity generation. Although they have not ranked as high in recent years

they are still a leader in renewable energy sources. In 2008 Whole Foods was the first US market to

eliminate all disposable plastic grocery bags, since then many competitors have followed in their

footprints. They now offer a large colorful grocery bag made from recycles bottles. On July 29 th 2015

Whole Foods announced the first five leases for its streamlined, value-oriented 365 by Whole Foods

Market brand, with store openings scheduled to start in the later part of 2016 all the way through 2017.

This will pave the way for value-oriented health and organic grocery stores.


Summary #2: Survey of the Industry and Competitors:

The primary industry that Whole Foods Market competes in is the natural and organic food industry,

they are also involved in the retail of other natural or organic items. They are involved in the retail and

grocery of natural and organic items. “This means any product they serve is free of pesticides,

preservatives, sweeteners, and cruelty.” The NAICS code for organic food retailers is 445299 and the

NAICS code for supermarkets and other grocery is 445110. This is a very competitive industry and

Whole Foods has many competitors due to the fact that numerous retailers are selling organic foods

and similar products, Whole Foods is now facing a large pool of competition. In the supermarket and

organic food retailers industry their biggest competitors include Safeway Inc., Costco Wholesale

Corporation, Sprouts Farmers Market and Trader Joes. This evidence is supported in the company’s’

most recent third quarter results and the cut to their annual forecast. Not only is Whole Foods taking a

hit from increased competition but also from self-inflicted variety. With overcharging customers and

mislabeling happening in stores across the country, their reputation has taken a plummet. To bolster

revenue, Whole Foods has to reconsider their overall mission statement, competitive landscape and

decide where they want to be positioned in the future. There has been many recent articles and news

stories about Whole Foods, and unfortunately they have been mostly negative involving situations such

as routinely overcharging customers and having mistaken pricing of their products. Other news

includes the slowing of growth for the company even after implementing price cuts and advertising. It

was stated in the New York Times that “Whole Foods Market is apologizing to its shoppers for

incorrect pricing, a week after an investigation by New York’s Department of Consumer Affairs found

that the grocer routinely overcharged for prepackaged foods.”


Summary #3: Composition of Revenue:

Whole Foods Market is one of the largest grossing markets in the USA. Hoovers D&B Company

states, “two-thirds of Whole Foods sales are accounted for by perishable and prepared products.” The

market offers 4,400 items in 4 different lines of private label products. WFM makes their biggest

portion of profit by selling organic and natural food as well as other grocery items in their

supermarkets across the country, Canada and The UK. They also have in store delis, bakeries and a

floral area. Whole Foods also have more than 2,600 natural and organic products under the Whole

Foods Market, 365 Everyday Value and Whole Catch brands. That is where Whole Foods differs from

other supermarkets and organic grocery stores by providing their own brand of product in their

delegated stores. The company also prepares a large amount of their food in store and on location; they

receive their seafood from sustainable fisheries which rehearse proper fishing practices. All food that is

sold at Whole Foods has to meet all the quality standards that the company sets. Most products are

grown locally and have to obtain all natural and organic ingredients. There are now approximately 420

stores located in three countries, those being the United States, Canada and the United Kingdom. They

were looking to expand to a number of different countries but the recent drop in stock prices and the

unpleasant news stories, these projects are being put on hold. As researchers stated previously there are

a massive amount of competitors in this market, however the main competitors with Whole Foods is

Sprouts and Trader Joes due to the emphasis on natural and organic products. They are also very

comparable when it comes to prices and items sold. After the recent bad press about overcharging

customers in stores in New York there has been a slash in prices for many particular products. As

stated before Whole Foods has had a number of bad reports in the press lately so in order to give back

to the customers and rebuild that bond with their clientele they are trying to take a number of initiatives

in order to give back to their customers. These are all factors which influence the overall revenue of the

company, most of them recently having a negative impact on Whole Foods total revenue.


Summary #4: Other Pertinent Information for Investors:

As a potential investor there would be a number of different factors that individuals should take into

consideration in order to make an educated financial decision on purchasing or selling WFM stock and

not all these factors come from the balance sheet, income statement or statement of cash flows. Some

come from news and media reports about the company. For example “Whole Foods has been working

for more than two years to cut prices and repair its reputation for high prices, but tactics like more

deals, better advertising and price slashes have yet to boost sales to the extent hoped.” Also with the

recent 40% decline in WFM stock many shareholders are becoming concerned about the future of the

company. “Some investors and analysts have stressed Whole Foods to lower prices more aggressively

to improve its image, while others worry that doing so will grind down its relatively high profit

margins.” Whole Foods announced in July of 2015 new plans for a sister chain of stores called 365 by

Whole Foods. The chain is planning to open sometime next year and will offer lower prices and target

younger shoppers. As stated previously Whole Foods image problems were intensified by accusations

from New York City officials that it had mislabeled weights of freshly packaged foods like vegetable

platters, leading to overcharging customers. Whole Foods apologized and said the mistakes, which

involved nine of its 425 locations, were unintentional. But the company said the episode hurt sales

nationwide, which in turn lowered the stock prices dramatically. “For the three months ended July 5,

Whole Foods sales at established stores rose 1.3%, its worst performance since the 2009 economic

downturn. By comparison, Whole Foods' annual sales growth at such stores had averaged 8% for the

past 15 years through the fiscal year of 2014, which ended a year ago.”


Historic Stock Performance Section

Historical Stock Performance Commentary:

As the short-term closing price graph shows, Whole Foods Market has had a steady decline in short-

term closing prices over the months recorded below due to a number of bad press releases recently and

the rise in the number of openings of competitors’ stores. It is estimated that the decline in closing

prices will continue into the next short term closing price graph and possibly continuing into the next

year. As for the long-term closing price graph, it shows more of a fluctuation. The Stock started low

and continued to rise over numerous months reaching its peak of 60 dollars a share in late 2013, then

plummeting to 40 dollars a share in mid-2014 due to the three months ending July 5, Whole Foods

sales at established stores rose only 1.3%, its worst performance since the 2009 economic downturn.

Another reason for the drop would be the release of bad press regarding routinely overcharging

customers and having mistaken pricing of their products on numerous occasions. After that decline in

stock prices, shares rose again at the start of 2015. The stock has since begun to decline steadily in the

current year. This has happened due to recent rise in competition of natural grocers such as Sprouts

Farmers Market and Trader Joes.


Short-Term Closing Price Graph – Daily Prices:

Long-Term Closing Price Graph – Monthly Prices:


Financial Analysis Section

Historical Trends in the Financial Ratios:

After researching and analyzing all the historical data and information from the income statement,

balance sheet and historical ratios it seems as though the historical trend of WFM stockholder shares

have varied over recent years. As shown below with the debt management ratios WFM debt has risen

over the past three years. However when looking at the profitability ratios ROA and ROE have

increased. WFM shares have increased by price slightly from 2012 to 2014 but with the recent decline

in WFM stock it looks as though the future will have a different outcome.

Liquidity Ratios

When it comes to the cash ratio there is a fairly large fluctuation in the numbers. The cash ratio started

somewhat low in 2012 then rising dramatically in 2013 and again decreasing in 2014. On the other

hand the quick ratio has steadily decreased over the past three years. The quick ratio is a measure of

how well a company can meet its short-term financial liabilities. As an analysis this suggests that

Whole Foods is over-leveraged, struggling to maintain or grow sales, paying bills too quickly or

collecting receivables too slowly. Current ratios are on a steady decline as well this raises cause for

concern that WFM is having some sort of liquidity issues or struggling with their financial strength.

This could cause even more problems in the future if it continues to decline. If the current ratio gets

below one, meaning the company would have a negative working capital then that means they would

definitely be having liquidity issues. After looking at NWC and NOWC it seems that the measurement

of the operating liquidity available for WFM to use in developing and growing its business is

decreasing at quite a large number. This could affect the company’s development and growth, which

could be a huge concern in the long run.


Liquidity Ratios 2012 2013 2014Cash Ratio 0.09 0.27 0.15Quick Ratio (Acid Test) 1.77 1.44 1.05Current Ratio 2.15 1.82 1.40Net Working Capital $1,126 $892 $499Net Operating Working Capital (NOWC) $1,126 $892 $499

Debt Management Ratios

After analyzing the debt management ratios, there were a couple aspects that really stood out to

analysts. The first being the rise in the debt ratio, which is implying that the company is more,

leveraged and has a greater financial risk. The next thing analysts noticed was the rise in debt-to-

equity, this simply indicates that Whole Foods Market may not be able to generate enough cash to

satisfy its debt obligations, which can cause worries for a shareholder. Although Whole Foods is in a

Capital-intensive industry the debt-to-equity seems to be increasing quite steadily. Next analysts

observed the equity multiplier which has also increased over the past three years. This is measuring the

extent to which Whole Foods finances its assets with debt, and is an important indicator of the financial

health WFM. In this particular case Whole Foods Market has more leverage in 2014 than the past two

years.

Debt Management (Leverage Ratios) 2012 2013 2014Debt Ratio 28.18% 29.97% 33.62%Debt-to-Equity 0.39 0.43 0.51Times Interest Earned 0.00 0.00 0.00Equity Multiplier 1.39 1.43 1.51


Asset Management Ratios

As analysts examined the asset management ratios, it was clear that there were a mix of positive and

negative outcomes over the past three years. Inventory turnover has increased which shows progress

for the company. DSO has decreased which also shows progress for the company, and means Whole

Foods is ultimately taking fewer days to collect their account receivables. The operating cycle has

decreased as well which means that investments that are locked up in production before turning into

cash are going through the cycle more quickly. The cash conversion cycle has also decreased. These

are all beneficial to the company and if continued could be important information for investors. The

fixed asset turnover and the total asset turnover caught the eyes of analysts because they were

abnormally low, this could be because of problems with excess production capacity, poor inventory

management, or lax collection methods.

Asset Management (Asset Utilization) 2012 2013 2014Inventory Turnover 20.17x 20.02x 20.75xInventory Conversion Period (ICP) 18.10 days 18.23 days 17.59 daysAccounts Receivable Turnover 59.39x 68.71x 71.69xDays Sales Outstanding (DSO) 6.15 days 5.31 days 5.09 daysAccounts Payable Turnover 30.54x 33.55x 33.15xPayables Deferral Period (PDP) 11.95 days 10.88 days 11.01 daysOperating Cycle 24.24 days 23.54 days 22.68 daysCash Conversion Cycle 12.29 days 12.67 days 11.67 daysFixed Asset Turnover 5.33x 5.32x 4.86xTotal Asset Turnover 2.21x 2.33x 2.47x


Profitability Ratios

The profitability ratios for Whole Foods are all progressive and optimistic. Every ratio has increased

from 2012 to 2014. This is a very positive sign for the company and its future, if it continues to follow

this pattern. The biggest increase noticed was BEP, ROA and ROE. This means that WFM is the front

runner and the lead in the industry.

Profitability Ratios 2012 2013 2014Gross Margin 35.52% 35.84% 35.54%Operating Profit Margin 6.36% 6.84% 6.58%Net Profit Margin 3.98% 4.27% 4.08%Return on Assets (ROA) 8.80% 9.95% 10.08%Basic Earning Power (BEP) 14.05% 15.94% 16.26%Return on Equity (ROE) 12.26% 14.21% 15.18%

Common-Size Statement Analysis:

The Common Size Income Statement and Balance Sheet show items as percentages from 2012-2014.

This type of analysis is used for time periods and to compare and contrast competitors. After using

research from a number of sources and analyzing the information from the balance sheet and the

income statement analysts a variation of fluctuation in the last three years on the income statement,

specifically in the gross profit, EBIT and tax expense. It is hard to see a specific trend over the past

years when there are variations in some categories. However some categories remain constant or have a

steady incline or decline. Some examples of those are other income expenses, and interest expense.


Common-Size: Income Statement

The notable information in the common size income statement is the steady decrease in EBIT from 2012-

2014. This is detrimental to the company and can ultimately decrease their total earnings. A decrease in

EBIT and decrease in operating expense can be because of a decrease in sales or because of an increase in

expenses.

Common-Size Income Statement 2012

Revenue 100 Cost of Goods Sold 64.5Gross Profit 35.5 Operating Expenses 29.2Earning Before Interest and Taxes (EBIT) 6.4 Other Income/(Expense) 0.1 Interest Expense 0Earning Before Taxes (EBT) 6.4 Tax Expense 2.4Net Income 4

Common-Size: Balance Sheet

From 2012-2014 numbers are fluctuating. In some areas they are increasing and in some others they

are decreasing. For example: Cash and cash equivalents increase from 2012 to 2013 then decrease in

2014. Whereas, net property, plan & equipment for Whole Foods Market increases each year from

2012-2014. Accounts receivable and inventory are appealingly steady, which means that sales are

steady.

Common-Size Balance Sheet 2012 2013 2014

Cash & Cash Equivalents 1.7% 5.2% 3.3% Accounts Receivable 3.7% 3.4% 3.4% Inventory 7.1% 7.5% 7.7% Other Current Assets 1.9% 2.0% 1.9%Total Current Assets 39.7% 35.8% 30.6% Gross Property, Plant & Equipment 76.5% 81.5% 92.4%


Accumulated Depreciation -35.1% -37.6% -41.5% Net Property, Plant & Equipment 41.4% 43.8% 50.9% Other Long-Term Assets 0.2% 0.2% 0.4%Total Assets 100.0% 100.0% 100.0%

Liabilities and Equity 2012 2013 2014 Accounts Payable 4.7% 4.5% 4.8% Short-Term Notes Payable 0.0% 0.0% 0.0% Other Current Liabilities 8.0% 8.5% 10.4%Total Current Liabilities 18.5% 19.6% 21.9% Long-Term Debt 0.0% 0.0% 0.0% Other Long-Term Liabilities 9.3% 9.9% 10.7%Total Liabilities 28.2% 30.0% 33.6% Retained Earnings 23.3% 22.8% 29.0% Other Equity 0.1% 0.0% -0.1%Total Equity 71.8% 70.0% 66.4%Total Liabilities & Equity 100.0% 100.0% 100.0%

Summary of Research and Fundamental Analysis

Whole Foods Market has been an exceptional company providing a very specific and

achievable product for its customers since 1980. The previous data shows that there are indeed

some major risks when investing in this company. The recent decline in stock prices has

caused a detrimental hit to Whole Foods Market image and reputation. Another triumph that

was difficult for Whole Foods were the accusations from NYC officials regarding the

mislabeled weights of freshly packaged foods, leading to overcharging customers. The

company did release a statement stating that this episode did hurt sales nationwide, which in

turn lowered the stock prices dramatically. Over the last years, there has been a large number

of competitors entering this type of market. Whole Foods Market largest competitors are

Sprouts Farmers Market and Trader Joes. On the other end of the spectrum there are also pros

to investing in this company. With Whole Foods Market planning on introducing their small


chain, 365 by Whole Foods in 2016 this can bring in a whole new target market and market

share which can increase overall profits and earnings and hopefully raise stock prices. A

second reason to invest in this company is because we think that because stock prices have

been steadily declining, they will soon increase. Third, millennials are hoping on the healthy

food bandwagon. This means that there is a long time frame, for millennials, and much

opportunity exists. In 2014, organic food sales increase 11%, which generated $39 billion

(Organic Trade Association). By opening 365 by Whole foods, the business is catering to

millennials by providing to their budgets.


Part Two: Company Valuation and Analyst Recommendation


Cost of Equity Analysis Section

Cross Sectional Analysis of Beta:Whole Foods Market beta is 0.99. Sprouts beta is very high at 4.35 due to its recent large number of store

opening across the U.S. and increase in stock. Costco has a beta of (0.79) and is a major competitor in this

market, however Whole Foods Market does have a higher beta. Safeway Inc. has a beta of (0.89) and is

also a major competitor in this market as well. They also have a lower beta than WFM but have been

increasing over the years and could possibly overtake Whole Foods in the next five years. These betas

differ for many reasons. First, the target market for each of these 4 companies differs in some minor and

extreme ways, depending on the company. Whole Foods Market and Sprouts Farmers market is the new

age, healthy, “go green” shoppers. Whereas, Costco and Safeway Inc., are more of neighborhood grocery

markets.

Whole Foods Market

Cross Sectional Analysis of Beta

Risk-Free Rate (rf) 2.87%Historical Return on Market (rm) 8.37%Beta (β) 0.99 Cost of Equity (rs) 8.32%

Sprouts Farmers MarketBeta 4.35

Costco Wholesale CorporationBeta 0.79

Safeway IncBeta 0.89

Cost Equity – Capital Asset Pricing Model (CAPM):A shown below, analysts figured out the cost of equity by taking the risk free rate, adding the


beta of WFM multiplying the historical return on market, then subtracting the risk free rate

again. This will give you the relative cost of equity for Whole Food Market.

Whole Foods Market

Cost of Equity (Capital Asset Pricing Model)

Risk-Free Rate (rf) 2.87%Historical Return on Market (rm) 8.37%Beta (β) 0.99 Cost of Equity (rs) 2.87+(0.99*(8.37-2.87)= 8.32%

Company’s Equity Valuation Section

Pro Forma Statement Construction:The future growth of this particular industry is very strong, the health food market and natural grocers

industry is a rising business with nothing but growth coming in the future. Analysts indicate the

primary industry of the Health foods market with companies such as Trader Joes, Sprouts Farmers

Market and Whole Food Market will grow and show improvement, however with the opening of new

stores and a more competitive market there will be struggles for some companies. Researchers show

that Whole Foods Market specifically will continue to grow but with recent news released and the

current negative image of the company it might have a collapse in upcoming years but overall show

growth long-term.


Pro Forma: Income Statement

As shown below, the pro forma income statement shows the steady increase in the revenue

growth of WFM over the past three years, as well as the steady profit increase showed by the

increasing COGS. The operating expense show the increase in costs and expenses for the

company and other income expenses also show the increase in total expenses for Whole Foods.

In most of the income statement there shows a steady increase in growth, however there are

fluctuations and movement in some areas such as interest and shares outstanding. The dividend

payout ratio shows an increase over the past three years and researchers show it will continue

that trend in upcoming years.

Whole Foods Market(in millions of dollars, Expect of Share Price, EPS, and DPS)

Pro Forma Income Statement Assumptions

Actual

Projection

Projection

Projection

Projection

Projection

3Year Avg 2015 2016 2017 2018 2019

Revenue Growth Rate

10.15% 12.0% 12.0% 14.0% 15.0% 16.0%

A steady 1 to 2% increase in rev growth over the past 3 years

COGS/Revenue

6440.0% 60.0% 62.0% 64.0% 64.0% 64.0%

Due to a steady profit over the past 3 years

Operating Expenses/Revenue

2906.7% 29.4% 29.6% 30.0% 30.1% 30.3%

Steady increase in costs or expenses over the past 3 years

Other Income (Expenses)/Revenue

10.0% 13.0% 14.0% 16.0% 18.0% 20.0%

Steady increase in other income from past years

Interest Expense/(ST

0.0% 0.0% 0.0% 2.0% 4.0% 0.0% Fluctuation in interest


Debt + LT Debt)(t-1)

expense over the past years

Tax Rate38.4% 38.4% 38.4% 38.4% 38.4% 38.4%

Average tax rate over the past years

Dividend Payout Ratio (Latest Year)

29.5% 31.5% 33.5% 35.5% 37.5% 39.5%

Continuous increase in dividend payout ratio used from the latest year

Latest Year Shares Outstanding 371 377 373 379 375 381

Continuous fluctuation in shares outstanding

Pro Forma: Balance Sheet

The Whole Foods Market balance sheet provides important information about the company, their growth,

areas that they are struggling in and what the future could possibly hold. Areas that analysists showed

interest in were their negative accumulated depreciation net PP&E, as well as their long-term debt. This

could be an issue in the future for the growth of the company and their expenses. Other important

information contains their growth in cash and cash equivalent, accounts receivable and assets. For the

most part he balance sheet shows improvement of WFM’s growth as a company and some variations over

the years in some categories.

Pro Forma Balance Sheet Assumptions Actual Projection Projection Projection

3-Year Avg 2015 2016 2017Average Cash Ratio 0.17 0.17 0.17 0.17Average Days Sales Outstanding 5.5 5.2 5.1 5.0Average Days of Inventory 18.0 17.9 17.6 17.4Other Current Assets/Revenue 0.8% 0.8% 0.8% 0.8%Fixed Asset Turnover 5.2 5.1 4.9 4.8∆Accum. Depr. /Gross PPE t-1 (Latest Year) -6.7% -6.9% -7.2% -7.4%Other Long-Term Assets/Revenue 0.1% 0.1% 0.1% 0.1%Average Days Payable 11.3 11.3 11.3 11.3


Latest Year Notes Payable $0 $0 $0 $0Average Other Current Liabilities/Revenue 3.9% 3.9% 3.9% 3.9%Average Other Current Liabilities/Revenue 4.3% 4.3% 4.3% 4.3%

Pro Forma Balance Sheet Actual Projection Projection Projection

Assets 2014 2015 2016 2017 Cash & Cash Equivalents 190 154 174 201 Accounts Receivable 198 227 248 278 Inventory 441 468 532 619 Other Current Assets 109 132 148 169 Total Current Assets $1,756 $981 $1,103 $1,267 Gross Property, Plant & Equipment 5,309 1,105 1,726 2,416 Accumulated Depreciation (2,386) (2,020) (1,940) (1,812) Net Property, Plant & Equipment 2,923 3,124 3,667 4,229 Other Long-Term Assets 24 18 21 24 Total Assets $5,744 $4,124 $4,790 $5,519

Liabilities and Equity 2014 2015 2016 2017 Accounts Payable 276 295 341 401 Short-Term Notes Payable 0 0 0 0 Other Current Liabilities 600 612 686 782 Total Current Liabilities $1,257 $907 $1,027 $1,183 Long-Term Debt 0 (704) (1,873) (3,181) Other Long-Term Liabilities 614 676 757 863 Total Liabilities $1,931 $879 -$88 -$1,134 Retained Earnings 1,668 3,251 4,885 6,660 Other Equity (7) ($7) ($7) ($7)Total Equity $3,813 $3,244 $4,878 $6,653Total Liabilities & Equity $5,744 $4,124 $4,790 $5,519

Company Equity Valuation

Analysts used a two-stage model in configuring the terminal value estimate for Whole Foods Market. Analysts

used a two-stage model for its simplicity and precise projections. This was calculated by using the risk-free rate,


historical return on market and the company’s beta. Then translated into PP dividends and calculated into the

terminal value over the next five years. Analysts assumed that the PP dividends would rise over the next five years

at a steady pace and the terminal value at the end of the five years would be approximately $89.64 using estimated

projections.

2015 2016 2017 2018 2019PP Dividends

$ 1.93

$ 2.21

$ 2.58

$ 3.44

$ 4.44

Terminal Value

$ 89.64

$ 1.93

$ 2.21

$ 2.58

$ 3.44

$ 4.44

$ 1.78

$ 1.88

$ 2.03

$ 2.50

$ 2.98

P- Hat $ 11.16

Constant Growth Rate (Assume) 3.2%


Investment Recommendation Section

The closing price of $11.16 was found by using the two stage model. With stock prices falling at

a dramatic 40% in 2015, this reflects the low closing price. It would be in investor’s best interest

to sell this stock. Although stock has plummeted recently, analysts advise investors to be

optimistic in future their investments due to the rise in the health food and grocery market. It is

assumed that Whole Foods Market will rise and grow in the long-term future. Research has

shown that WFM is at the top of their industry currently, although declining in recent years.

Analysts recommend to sell any stockholder shares in WFM. If long-term investments are made

analysts would counsel investors to purchase stock of WFM in future years when the price is low

and sell in the long-term future when the price will rise along with the market. Although WFM

is an industry leader, Costco and other competitors are on the rise as shown by the companies’

beta and other information.


Work Cited

Fishman, Charles. "Whole Foods Is All Teams." Fast Company. N.p., 30 Apr. 1996. Web. 13 Nov. 2015. <http://www.fastcompany.com/26671/whole-foods-all-teams>."Friday, November 13, 2015." Morningstar – Independent Investment Research. N.p., n.d. Web. 1 Nov. 2015.

"Investopedia - Educating the World about Finance." Investopedia. N.p., n.d. Web. 1 Nov. 2015. <http://www.investopedia.com/>. Kennon, Joshua. "The New Investor's Guide to Current Ratio." About.com Money. N.p., n.d. Web. 26 Oct. 2015. <http://beginnersinvest.about.com/od/analyzingabalancesheet/a/current-ratio.htm>.

"MarketWatch - Stock Market Quotes, Business News, Financial News." MarketWatch - Stock Market Quotes, Business News, Financial News. N.p., n.d. Web. 1 Nov. 2015. <http://www.marketwatch.com/> "Quick Ratio." Definition & Example. N.p., n.d. Web. 20 Oct. 2015. <http://www.investinganswers.com/financial-dictionary/ratio-analysis/quick-ratio-924>. "Sales Leads | Company Info | Industry Analysis | Hoovers." Sales Leads | Company Info | Industry Analysis | Hoovers. N.p., n.d. Web. Oct.-Nov. 2015.

"Value Line - The Most Trusted Name in Investment Research." Value Line - The Most Trusted Name in Investment Research. N.p., n.d. Web. 1 Nov. 2015. <http://www.valueline.com/>. "Whole Foods Market." Whole Foods Market. N.p., n.d. Web. 13 Nov. 2015. <http://www.wholefoodsmarket.com/>. "Yahoo Finance." Yahoo Finance. N.p., n.d. Web. 20 Oct. 2015.


Documents

Stock Project Finance