ACTG 4610
Annual Report Project
Whole Foods Market, Inc. vs. Safeway Inc.
Part I
The Executive Chefs
Valerie Baum, Ryan Hulme, Eric Kessler, Dan Munier
TABLE OF CONTENTS
1. INTRODUCTION....................................................................................................................................... 2
1.1 Overview of Subject Company: Whole Foods Market, Inc. ................................................................. 2
1.2 Overview of Competitor Company: Safeway Inc. ................................................................................ 2
2. BALANCE SHEET OVERVIEW .............................................................................................................. 2
2.1 Summary of Significant Accounting Policies ....................................................................................... 3
2.2 Review of Total Assets ......................................................................................................................... 3
2.3 Review of Current Assets ...................................................................................................................... 3
2.3.1 Note about Inventories ................................................................................................................... 4
2.3.2 Note about Investments .................................................................................................................. 4
2.4 Review of Long Term Assets ................................................................................................................ 4
2.4.1 Note about Goodwill and Intangible Assets ................................................................................... 5
2.5 Review of Total Liabilities .................................................................................................................... 5
2.6 Review of Current Liabilities ................................................................................................................ 5
2.6.1 Note about Deferred Income Taxes ................................................................................................ 5
2.7 Review of Non-Current Liabilities ........................................................................................................ 6
2.8 Review of Equity Assets ....................................................................................................................... 6
2.8.1 Note about Accumulated Other Comprehensive Income ............................................................... 6
3. INCOME STATEMENT OVERVIEW ...................................................................................................... 7
3.1 Revenues ............................................................................................................................................... 7
3.1.1 Sales ............................................................................................................................................... 7
3.1.2 Other Income .................................................................................................................................. 7
3.2 Expenses ................................................................................................................................................ 7
3.2.1 COGS Analysis .............................................................................................................................. 8
3.2.2 Other Expenses at Whole Foods .................................................................................................... 8
3.2.3 Depreciation Method ...................................................................................................................... 8
3.3 Gains/Losses ......................................................................................................................................... 9
3.4 Comparison of Margins ......................................................................................................................... 9
3.5 Discontinued Operations and Other Changes ........................................................................................ 9
4. CASH FLOW STATEMENT OVERVIEW ............................................................................................... 9
4.1 Review of Operating Cash Flow ......................................................................................................... 10
4.1.1 Direct Cash Flow for Operating Activities ................................................................................... 10
4.2 Review of Investment Cash Flow ....................................................................................................... 11
4.3 Review of Financing Cash Flow ......................................................................................................... 11
4.4 Major Sources of Net Cash Flow ........................................................................................................ 11
4.5 Free Cash Flow ................................................................................................................................... 11
4.6 Net Income and Net Operating Cash Flow .......................................................................................... 11
5. AUDIT AND MANAGEMENT’S REPORT OVERVIEW ..................................................................... 12
5.1 Auditor and Relationship to Company ................................................................................................ 12
5.2 Audit Opinion...................................................................................................................................... 12
5.2.1 Audit Opinion of Internal Controls .............................................................................................. 12
5.3 Auditors Notation of New Accounting Procedures ............................................................................. 12
5.4 Management’s Report ......................................................................................................................... 12
6. REVENUE RECOGNITION AND RECEIVABLES VALUATION ...................................................... 12
6.1 Types of Revenue Transactions .......................................................................................................... 12
6.2 Revenue Recognition Methods ........................................................................................................... 13
6.3 Practices of Expense Matching and Accruals ...................................................................................... 13
6.4 Derivative Instruments ........................................................................................................................ 13
6.5 Growth Rates for Revenue .................................................................................................................. 13
6.6 Receivable Turnover Comparisons ..................................................................................................... 13
6.7 Allowance for Doubtful Accounts ...................................................................................................... 14
7. RATIO ANALYSIS .................................................................................................................................. 14
8. APPENDIX ............................................................................................................................................... 14
9. REFERENCES .......................................................................................................................................... 14
1
1. INTRODUCTION
The objective of this project is to analyze the financial statements of Whole Foods Market, Inc. (NASDAQ – WFMI) by
comparing its statements with those of chosen competitor, Safeway Inc. (SWY). The balance sheet, income statement, and cash
flow statements will be used to assess the importance and relevance of its components, and how they affect the company for
potential future investment. Food retailing is a large, intensely competitive industry. Both Whole Foods and Safeway face
competition from traditional grocery retailers, specialty supermarkets, natural foods stores, warehouse membership clubs,
convenience stores and restaurants. Principal competitive factors include location, store ambiance, product selection, quality,
customer service, and price. Due to the decline in the United States economy, consumers are now more cautious. This has led
to reduced consumer spending, with consumers trading down to less expensive products and to discounters for grocery items.
1.1 Overview of Subject Company: Whole Foods Market, Inc.
Formed in 1980 in Austin, Texas, Whole Foods Market is the world’s leading natural and organic foods supermarket and
America’s first national “Certified Organic” grocer. Whole Foods offers a broad product selection including perishable foods,
prepared foods, specialty products, nutritional supplements, household products, and educational products. Whole Food’s
company mission is to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome
foods available. Natural and organic food continues to be one of the fastest growing segments of food retailing today. As of
September 26, 2010 the company operated 299 stores in the United States, Canada, and the United Kingdom.
1.2 Overview of Competitor Company: Safeway Inc.
M.B. Skaggs purchased a small grocery store in 1915, merged with 322 Safeway stores in 1926, and went public in 1928
(Safeway). Today, Safeway Inc. is one of the largest food and drug retailers in North America, with 1,694 stores at year-end
2010. Safeway’s stores provide a full array of grocery items including food, general merchandise, and a variety of specialty
departments such as bakery, delicatessen, floral, pharmacy, and Starbucks shops and fuel centers in the majority of stores.
Safeway has continued to develop its premium line of Consumer Brand products, as well as a health and wellness portfolio
which features organic and natural products at affordable prices.
Table 1: Company Key Statistics
Key Statistics EOY 2010
Market
Symbol
Total Assets
Annual Revenue
Net Income
Market Capitalization
Shares Outstanding (MM)
Stores
Whole Foods
Safeway
NASDAQ
WFMI
$3,986.5
$9,005.8
$245.8
$6,376.0
172.0
299
NYSE
SWY
$15,148.1
$41,050.0
$590.6
$8,508.0
378.3
1694
All Figures in $ Millions
2. BALANCE SHEET OVERVIEW
Whole Foods Market and Safeway give detailed breakdowns of assets, liabilities, and equities on their Consolidated Balance
Sheets. Whole Food’s total assets increased 5.3 percent in 2010, principally due to increases in merchandise inventories, and
short term investments. Safeway’s total assets increased 1.2 percent in 2010, principally due to increases in cash and
equivalents, and merchandise inventories. Whole Food’s total liabilities decreased 7.4 percent in 2010, primarily due to
2
decreases in long-term debt and capital lease obligations. Safeway’s total liabilities increased 1.3 percent in 2010, primarily
due to increases in accounts payable, and pension benefit obligations. Whole Foods stock equity position increased 4.6 percent
in 2010 from the prior fiscal year. This increase was due to increased retained earnings and accumulated other comprehensive
income. Safeway’s stock equity position increased 1.03 percent in 2010 from the prior fiscal year. This increase was due to
increased retained earnings and accumulated other comprehensive income. Highlights for both companies are displayed in the
table below, as well as year-on-year change statistics in figure one.
Table 2: Balance Sheet Highlights
Balance Sheet Highlights
Whole Foods
Safeway
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Net Stockholder's Equity
$1,161.5
$3,986.5
$747.9
$1,613.2
$2,373.2
$4,233.0
$15,148.1
$4,314.2
$10,150.4
$4,997.7
All Figures in $ Millions
Figure 1: Balance Sheet Statistics Year-on-Year Change
Balance Sheet Statistics Year-on-Year Change
$16,000.0
$14,000.0
In Millions
$12,000.0
$10,000.0
Merchanidise Inventories
$8,000.0
Total Assets
$6,000.0
Total Liabilities
$4,000.0
$2,000.0
$0.0
2010
2009
2010
2009
Whole Foods
Whole Foods
Safeway
Safeway
2.1 Summary of Significant Accounting Policies
The preparation of Whole Foods Market’s financial statements and accounting policies are in conformity with Generally
Accepted Accounting Principles (GAAP). As a result, Whole Foods is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities.
2.2 Review of Total Assets
The following figures indicate the break-up of Total Assets for the subject company and its competitor.
Figure 2: Whole Foods Total Assets
2010 Whole Foods Total Assets
Figure 3: Safeway Total Assets
2010 Safeway Total Assets
Current Assets
29%
Long-term
Assets
71%
Current Assets
28%
Long-term
Assets
72%
3
2.3 Review of Current Assets
The following figures indicate the break-up of Current Assets for the subject company and its competitor.
Figure 4: Whole Foods Current Assets
Figure 5: Safeway Current Assets
2010 Whole Foods Current Assets
Prepaid
Expense
5%
Deferred
Income Tax
9%
Cash and Cash
Equivalents
11%
Merchandise
Inventories
28%
Accounts
Receivable
12%
Short Term
Investments
28%
2010 Safeway Current Assets
Cash and Cash
Equivalents
18%
Prepaid Expense
7%
Accounts
Receivable
13%
Merchandise
Inventories
62%
Restricted Cash
7%
2.3.1 Note about Inventories
Whole Foods Market values its inventories at the lower of cost or market. Cost is determined using the last-in, first-out
(“LIFO”) method. Under the LIFO method, the cost assigned to items sold is based on the cost of the most recent items
purchased. Cost is determined using the item cost method and the retail method for inventories. Safeway values its inventories
at the lower of cost on a last-in, first-out (“LIFO”) basis or market value. All remaining inventory is valued at the lower of cost
on a first-in, first-out (“FIFO”) basis or market value. The FIFO cost of inventory approximates replacement or current
cost. The Company performs physical counts of perishable inventory in stores every four weeks and nonperishable inventory in
stores and all distribution centers twice a year. The Company uses a combination of the retail inventory method and cost
method to determine the cost of its inventory before any LIFO reserve is applied. The Company records an inventory shrink
adjustment upon physical counts and also provides for estimated inventory shrink adjustments for the period between the last
physical inventory and each balance sheet date.
2.3.2 Note about Investments
Whole Foods Market classifies as available-for-sale its cash equivalent investments, restricted cash investments, and its
investments in debt and equity securities that have readily determinable fair values. Available-for-sale investments are recorded
at fair value. Safeway’s cash and equivalents include short-term investments with original maturities of less than three months.
2.4 Review of Long Term Assets
The following figures indicate the break-up of Long Term Assets for the subject company and its competitor.
4
Figure 6: Whole Foods Long Term Assets
Figure 7: Safeway Long Term Assets
2010 Safeway Long Term Assets
2010 Whole Foods Long Term Assets
Long TermGoodwill
Investments 4%
2%
Other Assets
6%
Other Assets
3%
Goodwill
24%
PPE
67%
Long Term
Investments
3%
PPE
91%
2.4.1 Note about 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. For Whole Foods, goodwill is reviewed for impairment annually at the beginning of the
Company’s fourth fiscal quarter, or more frequently if impairment indicators arise. 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. Whole Foods amortizes definitelived intangible assets on a straight-line basis over the life of the related agreement. Safeway classifies goodwill as the excess
of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities
assumed in a business combination. Goodwill is not subject to amortization but must be evaluated for impairment.
2.5 Review of Total Liabilities
The following figures indicate the break-up of Total Liabilities for the subject company and its competitor.
Figure 8: Whole Foods Total Liabilities
2010 Whole Foods Total Liabilities
Non-Current
Liabilities
54%
Current
Liabilities
46%
Figure 9: Safeway Total Liabilities
2010 Safeway Total Liabilities
Non-Current
Liabilities
57%
Current
Liabilities
43%
2.6 Review of Current Liabilities
The following figures indicate the break-up of Current Liabilities for the subject company and its competitor.
5
Figure 10: Whole Foods Current Liabilities
Notes,
Capital
Leases
0%
Figure 11: Safeway Current Liabilities
2010 Whole Foods Current Liabilities
Other Current
Liabilities
39%
Other Current
Liabilities
16%
2010 Safeway Current Liabilities
Notes, Capital
Leases
12%
Deferred Taxes
2%
Accounts
Payable
28%
Accrued
Payroll
11%
Accounts
Payable
59%
Accrued Payroll
33%
2.6.1 Note about Deferred Income Taxes
Whole Foods recognizes deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet
date to differences between the book and tax basis. Their current deferred tax asset value is 101,464. This means their tax
provision has been lower than their tax expense the past several years. Safeway recognizes a $96.3 million deferred tax
liability, which implies that their tax expense has been much lower than their tax provisions. Due to the time value of money,
Whole Foods appears to be in a less desirable position then Safeway, as Safeway is able to use the capital in its operations.
2.7 Review of Non-Current Liabilities
The following figures indicate the break-up of Non-Current Liabilities for the subject company and its competitor.
Figure 12: Whole Foods Non-Current Liabilities
Figure 13: Safeway Non-Current Liabilities
2010 Whole Foods Non-Current Liabilities
2010 Safeway Non-Current Liabilities
Deferred Taxes
3%
Other Long
Term Liabilities
7%
Other Long
Term Liabilities
11%
Deferred Lease
Liabilities
34%
Long Term Debt
59%
Pensions and
Benefit
Obligations
12%
Long Term Debt
74%
2.8 Review of Equity Assets
The following figure compares equity assets for the subject company and its competitor.
Figure 14: Comparison of Stockholder’s Equity
Comparison of Stockholder's Equity
(In $ millions)
Whole Foods Sep 26, 2010
Safeway
Jan 1, 2011
$6,820
$4,363
$2,373
$1,774
$6
$4,998
$0
Common stock Treasury Stock
$1 $88
Other
Accumulated
Comprehensive
Income
$599
Retained
Earnings
$0
Additional
Total
Paid-In Capital Shareholder's
Equity
-$6,284
6
2.8.1 Note about Accumulated Other Comprehensive Income
Accumulated other comprehensive income measures gains and losses of the company that have yet to be realized. Whole
Foods Market has accumulated other comprehensive income, and it is listed under Shareholders’ Equity on the balance sheet.
In 2009, Whole Foods suffered a major loss and in 2010, they had a slight gain. Safeway also has accumulated other
comprehensive income listed under Shareholders’ Equity on the balance sheet. At 2010 year-end, Safeway had accumulated
other comprehensive income of 88.0 (in millions), which rose from a loss of (13.8) at year-end 2009.
3. INCOME STATEMENT OVERVIEW
Whole Foods Market recognized total sales revenue of $9,006 million and a net income of $245.8 million in 2010. The income
statements for both companies contain the major items that would be expected for companies in this industry. The income
statement is important because it reports the revenues, related expenses, and net income or loss during a specific period of time.
3.1 Revenues
Major sources of revenue for Whole Foods were perishables and non-perishables. These differ from Safeway’s major sources
of revenue, which include pharmacy and fuel sales. Of interest is the fact that Whole Foods sells twice as many perishables as
non-perishables, whereas Safeway sells more non-perishables than perishables. This is most likely explained by Whole Foods’
focus on organic and natural foods, which have fewer preservatives and are more often classified as perishables. The following
figures below display the distribution of net revenues.
Figure 15: Whole Foods Net Revenues
Figure 16: Safeway Net Revenues
2010 Safeway Net Revenues Distribution
2010 Whole Foods Net Revenues Distribution
Fuel
8%
Nonperishables(1),
33.5%
Pharmacy
9%
Perishables(2),
66.5%
Other(3)
3%
Nonperishables(1)
42%
Perishables(2)
38%
(1) Consists primarily of grocery, drinks, frozen foods, and snacks.
(2) Consists primarily of produce, meat, dairy, bakery, deli, floral, and seafood.
(3) Consists of wholesales and other revenue.
3.1.1 Sales
Sales for Whole Foods have increased steadily with an average annual increase of more than 10% over the last few years. This
consistently positive growth reflects well on the company’s management and marketing positioning.
3.1.2 Other Income
Whole Food’s other income includes investment gains and losses, interest income, rental income and other income, which
decreased by half in 2009, but increased in 2010. This is best explained by the fact that a federal judge ordered the divesture of
Wild Oats Market as well as one of Whole Foods existing stores in March of 2009 (Whole Foods).
7
3.2 Expenses
Major expense items for Whole Foods were costs of goods sold, direct store expenses, general and administrative expenses,
pre-opening expenses, relocation, store closure, and lease termination costs, and interest expense. Although Whole Foods
identifies a large portion of its SG&A expenses as direct store costs, the cost of goods sold accounts for approximately the
same portion of total expenses at Whole Foods as it does at Safeway, as is evidenced in figures 17 and 18.
Figure 17: Whole Foods Breakdown of Expenses Figure 18: Safeway Breakdown of Expenses
2010 Whole Foods Breakdown of Expenses
Direct Store
Expense
27.71%
SG&A
3.18%
Store Opening, Interest
Expense
Relocation,
Closure Expense 0.39%
0.26%
2010 Safeway Breakdown of Expenses
SG&A
26%
Cost of Goods
Sold
68.47%
Interest
Expense
1%
Cost of Goods
Sold
73%
3.2.1 COGS Analysis
The cost of goods sold includes cost of inventory sold during the period, net of discounts and allowances, distribution and food
preparation costs, and shipping and handling costs. Occupancy costs include store rental costs, property taxes, utility costs,
repair and maintenance costs, and property insurance. The cost of goods sold and occupancy costs for Whole Foods have held
steady around $5.5 billion over the last few years and have consistently represented approximately 65.5% of total sales.
3.2.2 Other Expenses at Whole Foods
Direct Store Expenses
Direct store expenses have been slowly, but steadily, increasing over the past few years, over which time they have held steady
at approximately 26.5% of total sales. This increase in expenses is due mainly to the increased number of stores.
General and Administrative Expenses
General and administrative expenses dropped by $40 million in 2009, but returned to their 2008 total in 2010. The decrease in
expenses observed in 2009 was primarily due to cost-containment measures implemented at the Company’s global and regional
offices beginning in the fourth quarter of fiscal year 2008 (10-K, p. 20).
Pre-opening Expenses, Relocation, Store Closure and Lease Termination Costs
These expenses have been falling over the last few years. This decrease is due to the company’s consistently having relocated
or closed fewer stores annually from 2008 to 2010.
Interest Expense
Interest expense, net of amounts capitalized, has decreased by a small amount in the last few years. Interest expense for these
years consists principally of interest expense on the term loan entered into on August 28, 2007 to finance the acquisition of
Wild Oats Markets. The reduction in net interest expense in 2010 is primarily due to the repayment during the third quarter of
the $210 million portion of the term loan that was not subject to an interest rate swap agreement (10-K, p. 20).
8
3.2.3 Depreciation Method
For Whole Foods, property and equipment is stated at cost, net of accumulated depreciation and amortization. They provide
depreciation of equipment over the estimated useful lives (generally 3 to 15 years) and the depreciation of buildings over the
estimated useful lives (generally 20 to 30 years) using the straight-line method. Safeway property is stated at cost, and
depreciation of equipment over the estimated useful lives (3 to 15 years) and the depreciation for stores and other buildings
over the estimated useful lives (7 to 40 years) using the straight-line method. Both companies provide amortization of
leasehold improvements and property under capital leases on a straight-line basis over the shorter of the estimated useful lives
or the terms of the related leases.
3.3 Gains/Losses
The only gains or losses reported on the financial statements of Whole Foods are the gain or loss on the disposition (disposal)
of fixed assets. 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. No further explanation is provided on the financial statements for
the two consecutive gains of over $3 million in 2008 and 2009 and the loss of $170 thousand in 2010.
3.4 Comparison of Margins
Gross profit margins for Whole Foods and Safeway have held steady for the last five years, but while Safeway has realized a
much larger gross profit, Whole Foods has seen noticeably higher gross profit margins. Net profit margins for Whole Foods
decreased for two years before showing steady improvement for two years. After searching financial statements from several
years, it can reasonably be concluded that the decreases in net income were due to the purchase of Wild Oats Markets in 2007
and working through acquiring and paying loans for such purchase. Net profit margins for Safeway held steady for the last five
years, with the exception of a significant loss in 2009. This loss in 2009 is explained by a non-cash goodwill impairment
charge of $1,974.2 million ($1,818.2 million, net of tax). According to management, “the impairment was due primarily to
Safeway’s reduced market capitalization and a weak economy” (Safeway 10-K, p. 21). Of significance is the fact that Whole
Foods realized a greater net profit margin for four of the last five years. Safeway is a much larger company, but the
percentages for both profit margins are much more attractive at Whole Foods, which is consistently turning a better profit.
Figure 19: Gross Profit Margin Analysis
Figure 20: Net Profit Margin Analysis
Net Profit Margin Analysis
Gross Profit Margin Analysis
Whole Foods Gross Profit Margin
Whole Foods Net Profit Margin
Safeway Gross Profit Margin
Safeway Net Profit Margin
4.0%
36%
3.5%
35%
3.0%
34%
2.5%
33%
2.0%
32%
1.5%
1.0%
31%
0.5%
30%
0.0%
29%
-0.5%
28%
-1.0%
-1.5%
27%
-2.0%
26%
-2.5%
25%
-3.0%
2010
2009
2008
2007
2006
2010
2009
2008
2007
2006
3.5 Discontinued Operations and Other Changes
Neither company reported any discontinued operations, restructuring charges, or significant or non-recurring items in 2010.
9
4. CASH FLOW STATEMENT OVERVIEW
The Cash Flow Statement presents cash inflows and outflows in a company over a period of time, and is a vital part of financial
analysis. The figure below displays Whole Foods’ cash flow distribution for the year 2010.
Figure 21: 2010 Whole Foods Cash Flow Distribution
2010 Whole Foods Cash Flow Distribution
1000
778.8
800
600
585.3
471.5
400
200
0
-200
Beginning cash
balance:
Operating Cash
Flow:
Investing Cash
Flow:
Financing Cash
Flow:
Ending cash
balance:
-168.9
-400
-600
-800
-715.4
4.1 Review of Operating Cash Flow
Cash flows from operating activities at Whole Foods saw a significant increase from 2008 to 2009 and held steady from 2009
to 2010. Cash flows from operating activities resulted primarily from net income plus non-cash expenses and changes in
operating working capital. As the cash flows from operating activities focus on the cash inflows and outflows from a
company’s main business activities, it reflects well on Whole Foods that they have been able to realize increasing positive cash
flows from operating activities. This is a good indicator that the company is managing its main activities well.
4.1.1 Direct Cash Flow for Operating Activities
The direct method shows the actual cash flows in the business’s major accounts. The indirect method, used for accrual based
businesses, arrives at operating cash flow by reconciling net income with changes in balance sheet accounts. The following
table displays the direct cash flow statement for Whole Foods.
Table 3: 2010 Whole Foods Direct Cash Flow Statement
2010 Whole Foods Direct Cash Flow Statement
Cash Flows from Operating Activity
2010
Sales
(Increase)/Decrease In A/R
Reciepts From Customers
$ 9,005,794
$ (28,615)
$ 8,977,179
Cost of Goods Sold
Increase/(Decrease) in Inventory
(Increase)/Decrease in A/P
Payments for Merchandise
$ 5,870,393
$
12,885
$ (23,615)
$ 5,859,663
Operating Expenses
Interest Expense
Income Tax Expense
Increase/(Decrease) in Pre-Paid Expenses
(Increase)/Decrease in Accrued Liability
Payments for Expenses
$ 2,419,600
$
33,048
$ 165,948
$
3,549
$ (90,302)
$ 2,531,843
Other
$
(388)
Net Cash Provided from Operating Activities
$
585,285
10
4.2 Review of Investment Cash Flow
In 2010, almost 60% of the net cash used resulted from investing in available-for-sale securities, and almost 36% resulted from
capital expenditures; 67% of which was for new store development and the other 33% of which was for remodels and other
property and equipment expenditures. In 2010, Whole Foods used 104% more money in investing activity than it did in 2008.
This illustrates management’s agenda to rapidly expand the company.
4.3 Review of Financing Cash Flow
In 2010, Whole Foods showed a cash outflow in financing activities for the first time in three years. The net outflow was the
result of large payments on long term debt and capital lease obligations. This shows that Whole Foods is a very solvent
operation. It also reflects solid management decision making. Management’s decision not to pay dividends in 2010 or 2009
reflects their agenda to reinvest excess cash to expand operations.
4.4 Major Sources of Net Cash Flow
Whole Foods decreased its cash and cash equivalents balance between 2009 and 2010 by almost $300 million. This is best
explained by a purchase of available-for-sale securities of over $1 billion (which was partially offset by the sale of availablefor-sale securities of almost $650 million) and a complete lack of proceeds from issuance of redeemable preferred stock or
from long-term borrowing, which proceeds accounted for more than the total net cash inflow in 2009.
4.5 Free Cash Flow
Whole Foods and Safeway both had free cash flows amounts (calculated by subtracting capital expenditures from net cash
flows from operating activities) that represented more than half of the total cash inflows from operating activities in 2010 and
2009, so they are estimated as adequate for making funds available for distribution to creditors and shareholders.
4.6 Net Income and Net Operating Cash Flow
Whole Foods has similar trends in net income and operating cash flows. They have both been increasing over the last few
years, as is evidenced below. Since the cash from operating activities is consistently greater than the net income, this indicates
that the reported net income is turning into cash, and the company’s net income can be judged to be of high quality.
Figure 22: Whole Foods Net Income vs. Operating Cash Flow
Net Income vs Operating Cash Flow
Net Income
Net Cash Flow Operating Activities
700
600
500
400
300
200
100
0
2010
2009
2008
11
5. AUDIT AND MANAGEMENT’S REPORT OVERVIEW
5.1 Auditor and Relationship to Company
The auditor of Whole Foods Market’s books is Ernst & Young LLP, one of the largest professional services firms in the world.
Ernst & Young LLP audited the corporation’s financial statements as of September 26, 2010.
5.2 Audit Opinion
The importance of the Auditor’s Report is to offer third-party assurance to external users that the company has been audited
and is presenting accurate and reliable information. Ernst & Young LLP provides an unqualified statement that the financial
statements of Whole Foods Market “present fairly, in all material respects, the consolidated financial position of Whole Foods
Market, Inc. at September 26, 2010 and September 27, 2009, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended September 26, 2010, in conformity with U.S. generally accepted
accounting principles” (10-K, p. 30). An unqualified opinion is issued when the financial statements are free of errors and are
in conformity with GAAP. It is the best report to receive from an auditor, and our investing opinion would be negatively
skewed had Whole Foods’ not received a clean, certified opinion.
5.2.1 Audit Opinion of Internal Controls
Ernst & Young LLP provides that Whole Foods has maintained, in all material respects, “effective internal control over
financial reporting as of September 26, 2010, based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria)” (10-K, p. 31). There were
no changes in Whole Foods’ internal control over financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting (10-K, p. 56).
5.3 Auditors Notation of New Accounting Procedures
Effective September 28, 2009, Whole Foods adopted new guidance within the Financial Accounting Standards Board’s
Statement No. 141(R), “Business Combinations”, which applied to all transactions or events in which an entity obtains control
of one or more businesses (10-K, p. 38). This adoption did not have any impact on Whole Foods’ financial statements, nor do
we expect it to make considerable impact in the future. Notations are made to disclose and explain changes for readers of
financial statements.
5.4 Management’s Report
Whole Foods’ management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (10-K, p. 56). The Company’s
management, with the participation of the Company’s Co-Chief Executive Officers and Chief Financial Officer, evaluated the
effectiveness of its internal control over financial reporting and concluded that its internal control over financial reporting was
effective as of September 26, 2010.
6. REVENUE RECOGNITION AND RECEIVABLES VALUATION
6.1 Types of Revenue Transactions
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Whole Foods Market’s primary business is natural and organic foods products. Revenue transactions are done in various ways,
including cash customers and credit customers. Both types of revenue transactions are in line with expectations of the industry.
With the current economic climate, it is appropriate that cash amounts have decreased, while credit amounts increased.
Revenue is not concentrated from any one customer.
6.2 Revenue Recognition Methods
Whole Foods Market recognizes revenue for sales of its products at the point of sale. Discounts provided to customers at the
point of sale are recognized as a reduction in sales as the products are sold. Sales taxes are not included in revenue. Whole
Foods does not have any Internet sales. Safeway recognizes revenue for retail sales at the point of sale. Discounts provided to
customers in connection with loyalty cards are accounted for as a reduction of sales. Sales tax is excluded from revenue.
Internet sales are recognized when the merchandise is delivered to the customer.
6.3 Practices of Expense Matching and Accruals
Whole Foods Market does not recognize any deferred revenue; however, Safeway records a deferred revenue liability when it
sells Safeway gift cards, which are recorded as a sale when the customer redeems the gift card. Breakage, a term which
indicates gift cards that have been sold but never redeemed, is utilized after two years by reducing the liability and increasing
revenue for the unused portion of the gift card. Safeway’s breakage amounts have been steadily increasing over the past three
years, from $7.9 million in 2008 to $9.2 million in 2010. This is most likely a result in gift card sales as opposed to an increase
in breakage rates.
6.4 Derivative Instruments
Both companies utilize derivative financial instruments, but we have not yet covered this topic in the course.
6.5 Growth Rates for Revenue
Whole Foods Market’s sales totaled approximately $9.01 billion, $8.03 billion and $7.95 billion in fiscal years 2010, 2009 and
2008. Sales for all fiscal years shown reflect increases due to identical store sales growth and new stores opened or acquired.
The Company has also worked hard to improve its value image and believe its success in that regard played a large role in the
sales momentum seen. Customers are still seeking value as demonstrated by continued strong sales growth in promotional and
store-branded items; however, national-branded product sales growth is outpacing store-branded sales growth, and customers
are selectively trading up to higher-priced items in certain areas. Comparable store sales increased approximately 7.1% in
2010, and identical store sales increased approximately 6.5% in 2010. Safeway’s sales totaled approximately $41.1 billion,
$40.9 billion and $44.1 billion in fiscal years, 2010, 2009 and 2008. Sales had a 7.4% decrease in 2009, and regained a slight
increase of 0.5% in 2010. As a result of economic conditions, investments in price, and deflation, identical store sales declined
in both 2010 and 2009. Due to the current economic environment, consumers have become more cautious. This has resulted in
decreased transaction sizes and customer counts, all of which have impacted Safeway’s sales.
6.6 Receivable Turnover Comparisons
The receivable turnover comparison is used to quantify a firm’s effectiveness in extending credit as well as collecting debts,
measuring how efficiently a firm uses its assets (Investopedia). The Whole Foods Market receivable turnover ratio for 2010 is
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67.5, and 76.7 for 2009. The Safeway receivable turnover ratio for 2010 is 73.6, and 78.2 for 2009. Both companies present
high ratios, which imply that each company’s extension of credit and collection of accounts receivable is efficient. However,
both company’s ratios declined in 2010, which means they aren’t collecting their cash as quickly. The decrease in ratios could
be a reflection of the economy.
6.7 Allowance for Doubtful Accounts
Neither Whole Foods or Safeway present an allowance for doubtful accounts. This could be due to the large customer base, and
individuals who default on their receivables are not deemed significant.
7. RATIO ANALYSIS
Profit Margin Analysis
Calculation
Whole Foods Safeway
Net Profit Margin
2.73%
1.44%
Analysis
Whole Foods' NPM nearly doubles that of Safeway, implying that they
maintian a higher mark-up and manage their costs more effectively.
Liquidity Analysis
Calculation
Whole Foods Safeway
Current Ratio
1.55
Quick Ratio
1.05
Analysis
Safeway's sub 1 current ratio implies that it has no working capital, is not
"liquid", and may have trouble paying its obligations in the near future.
0.98
Whole Foods' ratio suggests that the company is liquid enough to meet
its upcoming obligations.
A 1.05 quick ratio for Whole Foods suggests that they are in no danger of
0.31 defaulting on their current liabilities. Safeway's 0.31 ratio suggests that
the company may indeed have difficulty paying off theirs.
Income Statement Ratio Analysis
Calculation
Whole Foods Safeway
Earnings Per Share (Basic)
$
Earnings Per Share (Diluted)
$
Price-Earnings Ratio
Gross Profit Margin
Return on Assets
Dividend Yield
Dividend Payout
N/A
N/A
Analysis
Although Safeway's EPS was significantly higher than Whole Foods' EPS
1.45 $ 1.56 in 2010, this statistic can be misleading. Whole Food's EPS has grown
nearly 77% since 2008 while Safeway's has declined 30%.
The difference between Basic and Diluted Earnings for both company's is
1.43 $ 1.55 less than 3%, which indicates the risk of dilution is low for both
companies.
Whole Foods' P/E Ratio is more than double that of Safeway. This
44.63
18.49 indicates that investors are willing to pay much more for Whole Foods'
stock than they are for stock in Safeway.
Whole Foods' GPM is 7% higher than Safeway's, which means they
35%
28%
maintain a higher mark-up percentage.
Whole Food's ROA is 2.3% higher than its competitor, indicating they are
6.2%
3.9%
using their assets more efficiently to generate revenue.
4.60%
74%
8. APPENDIX
Ratio Analysis Calculations
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Net Sales
$
9,005,794 $
Preferred Dividends
$
5,478
Average Assets
$
3,884,964 $
Dividends
$
-
Current Assets
41,050
15,056
$
$
1,161,519 $
1
4,233
Current Liabilities
$
747,872 $
4,314
Inventory
$
Pre-Paid Expenses
$
323,487 $
54,686 $
2,623
273
EPS (Basic)
$
1.45 $
EPS (Diluted)
$
1.43 $
Price/Earnings
44.76
1.56 (NI-Pref. Dividends) / WACSO (Basic)
1.55 (NI-Pref. Dividends) / WACSO (Diluted)
GPM
35%
28% Gross Profit/Net Sales
ROA
6.2%
3.9% (NI-Pref. Dividends)/Average Assets
DY
0%
DP
0%
WFMI p.33 SWY p. 34
18.47 Common Share Price/EPS
4% Common Dividends/Common Share Price
74% Common Dividends/EPS
Current Ratio
1.55
Quick Ratio
1.05
0.98 Current Assets/Current Liabilities
0.31 (Current Assets-(Inventory + PrePaids))/ Current Liabilities
NPM
2.7%
1.4% NI/Net Sales
9. REFERENCES
1. Financial Data Resources retrieved from: http://www.investopedia.com
2. Investor Relations Information Regarding Annual 10-K Filings for Safeway Inc. retrieved from:
http://www.nxtbook.com/nxtbooks/cc/safeway_2010annualreport/#/16
3. Investor Relations Information Regarding Annual 10-K Filings for Whole Foods Market, Inc. retrieved from:
http://www.wholefoodsmarket.com/company/pdfs/2010_10k.pdf
4. Safeway Company History retrieved from: http://www.safeway.com/IFL/Grocery/Our-Story
5. Whole Foods Market Company History retrieved from: http://www.wholefoodsmarket.com/company/history.php#18
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