UNIVERSITY OF OREGON
INVESTMENT GROUP
April 8th, 2011
Consumer Goods
Whole Foods Market, Inc.
RECOMMENDATION: HOLD
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
Valuation (per share)
DCF Analysis
Comparables Analysis
Current Price
(as of 4/4/11)
Target Price
$33.96-66.87
WFMI / NASDAQ
1.01
174.48 Million
2.18 Million
$11.53 Billion
66.10
$0.10
0.61 %
$70.89 (70%)
$78.72 (30%)
$66.10
$73.24
Summary Financials
Revenue
Net Income
2010A
$9.005 Billion
$2.458 Million
BUSINESS OVERVIEW
Whole Foods Market, Inc. (Nasdaq: WFMI) was formed in 1980 and completed its initial public offering in January
1992. Whole Foods operates over 300 stores and is headquartered in Austin, Texas. The company is the world‟s
leading natural and organic foods supermarket and has had significant impact on the natural and organic foods
movement in the United States. In 2011, Fortune Magazine named Whole Foods the 24th best company to work for in
the United States and Whole Foods was also recognized as America‟s first national “Certified Organic” grocer. Whole
Foods operates primarily in the United States with additional supermarkets in Canada and the United Kingdom.
Covering Analysts: Ryan Janoff and Stephan Schneck
Email: rjanoff@uoregon.edu and sschneck@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG’s portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
The Whole Foods Story
In 1978 two college dropouts, John Mackey and Rene Lawson Hardy, borrowed $45,000 from family and friends to
open a small natural foods store called SaferWay. The name was a play on words of the large supermarket chain
Safeway, which also operated in Austin, Texas at the time. Mackey and Hardy were kicked out of their apartment for
storing food products and ended up living in the store until 1980 when they partnered with Craig Weller and Mark
Skiles to open the original Whole Foods in September 1980.
Less than a year later, on Memorial Day 1981, a devastating flood hit Austin and destroyed over $400,000 worth of
inventory and equipment. Whole Foods, which had no insurance at the time, was in dire need of help. The
community rallied around the store and stepped in
to help the staff clean and repair the damage. In
addition, Whole Foods‟ creditors, investors, and
suppliers all provided breathing room and the
store was able to re-open only 28 days after the
flood.
Since that day Whole Foods has rapidly expanded
its operations through a commitment to natural
and organic products and a strict adherence to
quality. Whole Foods has expanded by building
stores from the ground up as well as strategically
acquiring other natural foods chains.
Core Values
Whole Foods has identified seven core values that specifically express the purpose of its business and not only
provides profits, but creates value for its stakeholders:







Selling the highest quality natural and organic products available
Satisfying and delighting its customers
Supporting team member happiness and excellence
Creating wealth through profits and growth
Caring about its communities and environment
Creating ongoing win-win partnerships with its suppliers
Promoting the health of its stakeholders through healthy eating education
Products
Whole Foods offers a wide selection of natural and organic foods with a strong focus on perishable foods. The
company‟s product selection includes: produce, seafood, grocery, meat and poultry, bakery, prepared foods and
catering, specialty (beer, wine and cheese), coffee and tea, nutritional supplements, vitamins, body care and
educational products such as books, floral, pet products and household products. The breakdown of annual sales by
product category is shown below:
Product Category
Grocery
Prepared Foods
Other Perishables
Total Sales
2010
33.50%
18.80%
47.70%
100.00%
2009
33.80%
19.10%
47.10%
100.00%
2008
33.20%
19.30%
47.50%
100.00%
2
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Natural vs. Organic
Whole Foods offers both natural and organic products, but there is a distinction between the two classifications.
Natural foods are minimally processed, largely or completely free of artificial ingredients, preservatives and other nonnaturally occurring chemicals and as near to their whole, natural state as possible. On the other hand, organic foods
are grown utilizing methods that support and enhance the earth‟s natural balance. In 2002 the U.S. government
implemented the “U.S. Department of Agriculture (USDA) Organic Rule,” which stated that any product labeled as
“organic” must be certified by a USDA-accredited certifying agency. This law also stated that all retailers that handle,
store and sell organic products, including Whole Foods, must protect their organic integrity. Organic food products
are typically produced using:




Agricultural management practices intended to promote and enhance ecosystem health
No genetically engineered seeds or crops, sewage sludge, long-lasting pesticides, herbicides or fungicides
Livestock management practices intended to promote healthy, humanely treated animals by providing
organically grown feed, fresh air and outdoor access while using no antibiotics or growth hormones
Food processing practices intended to protect the integrity of the organic product and disallow
irradiation, genetically modified organisms (GMOs) or synthetic preservatives
Store Brands
In addition to the products listed above, Whole Foods offers a
line of store brands led by its primary brands, 365 Everyday
Value and 365 Organic. Some of these products offer greater
margins than their national brand alternatives, but the primary
purpose of carrying these brands is to differentiate Whole
Foods from its competition. Whole Foods chooses to not carry
products such as Coca-Cola and Pepsi, but rather carries 365
Organic Cola. This alternative is in line with its organic brand
image and provides value to its customers. Whole Foods also
carries a variety of store-made and regionally made fresh items
sold under the Whole Foods Market label. Store-branded
products across all categories accounted for approximately 11%
of retail revenues in both 2010 and 2009.
Store Description
In an effort to transform food shopping from a tedious task to a dynamic experience, Whole Foods has designed each
store to align with the culture and community of its location and fit the size and configuration available. Unlike
traditional supermarkets, Whole Foods‟ retail stores are colorful, offer an exciting and constantly changing product
mix, and place an emphasis on a healthy lifestyle. In addition, Whole Foods caters to its customers needs by providing
a variety of samples, views into the open kitchens and a wide selection of prepared food stations. Most stores typically
include a sit-down eating area, equipped with customer comment boards, to encourage interaction, gathering and
learning. All these aspects were implemented by Whole Foods as a way to create a culture and positive atmosphere
around food shopping.
Store Operations
Similar to the culture Whole Foods attempts to create around the shopping experience for its customers, Whole
Foods is also dedicated to building a strong internal company culture. Whole Foods‟ approach to store operations is
more empowering than that of a traditional supermarket. Each store employs 45 to 650 team members, who comprise
3
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
13 self-managed teams, all lead by a team leader. Each team takes on a different operational role or product offering
responsibility in the store ranging from prepared foods to customer service to grocery. Whole Foods also believes in a
decentralized approach to management and many store level decisions are made by teams. As a result, effective team
leaders are critical to success. To ensure success, the team leaders work closely with assistant team leaders and
department managers to promote efficiency and profitability.
Along the lines of empowerment, team leaders are involved in all levels of Whole Foods‟ business. In an effort to
build a “shared fate,” Whole Foods attempts to align the interests of the employees and the shareholders. To achieve
united interests, Whole Foods has developed the “Gainsharing” program. Through the Gainsharing plan, each store
and team receives a labor budget expressed as a percentage of sales. If a team ends the year under budget either due to
reduced labor costs or increased sales, the surplus budget is divided between the team members partly as a bonus and
partly into a savings pool. However, if a team is over budget, their pay is not reduced, but the excess labor fees are
deducted from the savings pool. The Gainsharing program is an effective way for Whole Foods to inspire its
employees to act in the best interest of the company and its customers.
The Whole Foods Team
Whole Foods employees 58,300 team members, 45,300 of which are fulltime. As previously stated, Whole Foods believes in the empowerment of
its employees. Management has stated that they want to make Whole
Foods “not only a great place to shop, but a great place to build a career.”
The company‟s salary and benefits programs support its commitment to
fairness. Whole Foods‟ books are open to all team members, including an
annual individual compensation report. Additionally, Whole Foods has
implemented a policy that limits the annual cash compensation to any one
team member to 19 times the average annual wage of all team members.
Co-founder and co-CEO, John Mackey, has voluntarily set his annual
salary at $1 and receives no cash bonuses or stock option awards.
The manner in which Whole Foods treats its employees has been reflected
through its inclusion on Fortunes Magazine‟s “100 Best Companies to
Work for in America.” Whole Foods is one of only 13 companies to make
the “100 Best” list every year since inception.
Competition
The food retailing industry is large and intensely competitive. Whole Foods‟ competition includes local, regional,
national and international conventional and specialty supermarkets, natural foods stores, warehouse membership
clubs, smaller specialty stores, farmers‟ markets and restaurants. The basis of competition includes store ambiance and
experience, product selection, quality, customer service, price or a combination of these factors. Whole Foods
differentiates itself by maintaining a commitment to natural and organic products, high quality standards, emphasis on
perishable product sales, and highly dedicated and empowered employees who deliver exceptional customer service.
These differentiating factors have created a loyal customer base that values the Whole Foods experience.
4
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
WHY WHOLE FOODS?
We were inspired to do this report on Whole Foods after a recent finance class, taught by the CEO of Manzama
Capital, Ron Sauer. In the class, Ron laid out a simple, logical, straight-forward approach as to what distinguishes a
truly great company. Our first objective with this report was to choose a truly great company, since a great
investment always starts with a great company. As Warren Buffett puts it, “A great company at a fair price, is always a
better investment than a fair company at a great price.” To interpret whether or not Whole Foods is truly a great
company, we referenced Ron‟s criteria.
Attributes which distinguish high quality companies (and how Whole Foods meets this
criteria):

Dedicated and passionate employees – which leads to low employee turnover

„Brandable‟ products and services – Whole Foods is maybe the most prestigious
brand in the supermarket business

Products positioned to increase market share – Private label 365 organic brand has
been growing revenue rapidly

Expanding addressable market for products or services – Organic food is fastest
growing food market in the world

Pure growth companies are able to grow in all economic environments – WFMI
grew revenue throughout recession

Exposure to emerging markets – Little, but WFMI expects to grow its market
outside the U.S.

Significant insider ownership – CEO is paid $1 dollar per year, all compensation tied
to the stock, similar model for other executives as well

Compelling economic value added model – The company is famous and successful
for its conscious capitalism and triple bottom line approach
Meeting nearly all the criteria, Whole Foods is clearly a high quality company and that is what originally inspired us to
conduct this report.
BUSINESS AND GROWTH STRATEGIES
Whole Foods got into trouble when the recession hit, as it was in the middle of aggressive expansion. The company
had to close down quite a few stores and adopt a more conservative organic growth approach. However, the
company did grow its revenue throughout the entire recession. Going forward the company expects to begin a more
aggressive growth strategy.
The Sky is the Limit!
At the end of Whole Foods‟ most recent fiscal year, this past September, the company had only 299 stores and only
11 of those stores were outside of the U.S. Located in just 38 U.S. states and in just two countries outside the U.S.,
there is great growth potential for this organic food market leader. Being the market leader in the fastest growing
food industry in the world, Whole Foods believes there is potential for at least 1000 stores – nearly four times the
current number of stores the company has.
5
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Going forward, the company expects to only grow organically and
not through acquisitions. The company has projected to open 17
stores in 2011, 20 stores in 2012, and management gave a
conservative estimate of 18 stores in 2013. Many analysts believe
Whole Foods will achieve even greater growth than the
projections outside of 2011.
With the possibility of hundreds of more stores, maybe even a
thousand more, there is clearly plenty of growth potential for
Whole Foods going forward.
Whole Foods believes
there is a potential for
at least 1000 stores,
currently it has 299.
MANAGEMENT AND EMPLOYEE RELATIONS
John Mackey – Co-CEO, Co-Founder
Mr. Mackey co-founded the organic food market that is now Whole Foods back in 1980.
He has since become one of the most prominent executives in the business world. Ernst
& Young named him the entrepreneur of the year back in 2003. Similar to Steve Jobs,
Mackey has received attention for his $1 dollar per year salary that he instituted back in
2006. As written by Mackey when he announced this news, “I am now 53 years old and
have reached a place in my life where I no longer want to work for money, but simply the
joy of the work itself and to better answer the call to service that I feel so clearly in my
own heart.” You can‟t get more skin-in-the-game than Mackey. He has also instituted caps
on executive pay at the company.
Mackey served as president from 2001 to 2004. He is also on the Board of Directors and served Chairman from
1979-2009. Recently, Dr. John B. Elstrott became the Chairman of the Board.
Walter Robb – Co-CEO
Robb joined Whole Foods in 1991. He operated a store in California until he became
President of the Northern Region in 1993. After serving as Executive Vice-President of
Operations in 2000, and Chief Operating Officer in 2001 and President in 2004, Robb is
now the co-CEO. He overseas six regions and is on several boards in addition to the
Whole Foods Board. Businessweek lists his annual salary at $402,620.
6
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
RECENT NEWS
Whole Foods to Open Bars! – March 28th, 2011
The company recently announced it will be rolling out bars that serve
craft beers and local wines in more than a dozen stores nationally. It
is expected that the company will begin a much wider roll-out if these
in-store additions are successful. Similar to how WFMI has had
success with its sushi bar, adding a real bar in stores might prove to
be just another way the store can differentiate it and grow its
revenue.
– USA Today
;
INDUSTRY – PORTER’S 5 FORCES
Supplier Power – Low and Remaining Constant
The supplier power within the organic specialty food stores industry is low as a result of a large number of suppliers
and low switching costs incurred by a company when switching from one supplier to the next. Suppliers that supply to
Whole Foods hold very little power in particular. Although Whole Foods doesn‟t abuse its power, it could essentially
name its price for products from its suppliers. As the market leader in the organic specialty food stores industry,
suppliers strive to have their products picked up by Whole Foods.
Buyer Power – Medium and Increasing
In the specialty food stores industry the buyer power is medium as a result of the growing number of substitute
products available. With many alternative products in the market buyers are price sensitive and search for the best
deal. The strength of buyer power is expected to increase as more specialty stores enter the market. The increase in
the number of store will decrease the differentiation between the existing stores and subsequently increase the number
of substitute products. Whole Foods has been able to weather the increasing buyer power by maintaining its strong
brand image as evident by its ability to increase revenues even throughout the recession.
Threat of Substitutes – Medium and Remaining Constant
Within the specialty food stores industry the threat of substitutes is medium as there are various stores throughout the
industry that directly compete. However, the nature of a specialty store indicates that the product offerings are
differentiated and finding multiple stores that compete across all product lines is unlikely. Whole Foods has enjoyed
being a market leader for some time in the organic food store industry, but as consumers continue to increase their
desire to maintain a healthy lifestyle through the purchase of organic foods, more organic specialty food stores are
projected to open. The development of new stores will increase the consumer‟s inclination to substitute.
Barriers to Entry – Low and Remaining Constant
It is relatively easy to enter the specialty food stores industry. This is evident within the growing organic food market
that has seen recent successes of companies such as Trader Joe‟s and Market of Choice. The access to inputs is easy
with such a large amount of organic farmers in the United States. The capital requirements are not significant and
there is little expected retaliation from major players in the market. Although the barriers to entry are low, Whole
Foods benefits from the fact that it has an established brand name and identity, which results in a loyal customer base.
7
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Degree of Rivalry – Medium and Remaining Constant
There is a medium degree of rivalry within the specialty food stores industry, which is expected to remain constant
moving forward. Organic specialty stores such as Whole Foods are at risk to suffer from an increased amount of
industry growth, which will create more rivalry and drive down revenues. Specialty stores are able to keep the degree
of rivalry relatively modest by developing and maintaining a strong brand image and differentiating their product
offerings from the competition.
S.W.O.T. ANALYSIS
STRENGTHS
 Brand image and loyalty – In the recent CNBC Originals episode, Supermarkets Inc., Whole Foods was
described as the benchmark for the entire supermarket industry. CNBC stated, “Nobody has mastered the
art and theatre of selling food as successfully as Whole Foods.” This tremendous success has been driven
from the brand reputation the company has created over the last two decades. Here are just a few of the
awards and recognitions the Whole Foods brand has garnered:
o
#2 most admired food and drug store on
Fortune‟s 2011 list, ahead of Kroger,
Walgreen, Safeway and CVS/Caremark.
“When it comes to the
supermarket industry,
Whole Foods is the
benchmark.” - CNBC
o
Whole Foods was rated ahead of all the
same companies mentioned above for the
2011 American Customer Satisfaction
Index.
o
Fortune ranked Whole Foods number 1 in
the supermarket industry for Innovation, Social Responsibility, and Quality of Products and Services.
This strong customer loyalty gives Whole Foods a tremendous amount of pricing power. Jim Cramer was
recently quoted claiming Whole Foods, along with Panera and Chipotle, to be among the best food
companies going forward since it is a differentiated brand that can pass along rising food costs to its
customers. Essentially, if food prices rise Whole Foods can simply raise its prices to share costs with
consumers and it will not see any significant decrease in its sales.

Employee talent and retention – Whole Foods has developed a reputation for elite employee management.
The company always appears near the top of Fortune‟s Best Company‟s to Work For list, and in 2009 Whole
Foods was ranked just after Goldman Sachs as the 24th best company to work for. In that CNBC special,
Supermarkets Inc., industry experts mentioned employees are among the most important resources in the
industry. Whole Foods‟ ability to attract and retain the best talent in the industry gives the company a
tremendous advantage over its competitors in executing great customer service.

Extensive product offerings – Whole Foods offers an array of differentiated products that appeal to both
organic and gourmet food shoppers. Beyond just traditional supermarket products Whole Foods offers
unique meats and fish, a sushi bar, catering services, and many other specialty foods that cannot be found in
traditional grocery stores. The abundance of products that Whole Foods offers allows the company to
market to many niche audiences and differentiate itself from the traditional supermarket competitors.
8
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
WEAKNESSES
 Little international presence – Whole Foods has a weak presence beyond the United States. The company
has just six stores in Canada and five stores in the United Kingdom. Going forward the company is looking
to expand its presence abroad and diversify its revenue stream from economies in addition to the United
States.

Increasing rental expenses – Whole Foods‟ rental expenses have been significantly increasing in recent
years. The company is committed to the rental of equipment and facilities under certain capital and operating
leases. These expenses increased over FY2006-FY2008 from $153.1 million to $257.5 million. This trend of
increasing expenses could put stress on the company‟s margins in what is already considered a “penny
industry.”
OPPORTUNITIES
 Growth Abroad – Whole Foods was on track to
expand its presence both in Europe and Canada
until the recession hit. As the economy recovers
and management can focus less on the domestic
economic issues, the company will have
opportunity to expand its presence well beyond
the United States.
Organic food is by far the
fastest growing food
industry in the world.
– U.S. Dept. of Agriculture

Strategic acquisitions and integrations – The
company recently acquired Wild Oats Markets and in turn increased its market share in the organic and
natural food markets. Management has expressed openness to acquisitions going forward and with new
companies sprouting up in this market; acquisitions will serve as a way for Whole Foods to increase its
market share.

Increasing health conscious society – According to Datamonitor, the global organic food market has been
growing at a compound annul rate of 15.8%. The market is expected to reach over $85 million by the end of
2013. With such strong growth in the organic market and increasing health conscious by consumers, Whole
Foods, as an organic food market leader, is poised to significantly grow its business coming out of the
recession.
9
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
THREATS
 Increasing Competition – Whole Foods pioneered the
organic food market, but now with many companies
following its lead, the company faces stiff competition.
One competitor specifically poses a great threat to Whole
Foods: Trader Joe‟s. Recently, Trader Joe‟s was named
the second most innovative company in the entire food
industry. In addition, consumers voted Trader Joe‟s
America‟s favorite specialty grocer, ahead of Whole
Foods. These recent rankings should set off alarms with
Whole Foods‟ management as the company was
comfortably sitting atop that list year after year. The
private company, Trader Joe‟s, brings in $8 billion in
annual revenue. Rather than carrying around 50,000
products like a typical grocer, Trader Joe‟s stocks just 4,000 different products. This efficient stocking system
has lead to the company selling $1,750 per square foot – twice as much as Whole Foods. Trader Joe‟s is
certainly a company poised to steal significant market share from Whole Foods in the future and the
company must be prepared to compete against it any competitors with similar strategies.

Stringent regulations – Since Whole Foods operates in the organic food market, its products are subject to
an abundance of laws and regulations related to health that most supermarkets do not have to worry about.
The FDA, FTC, CPSC, USDA, and EPA all set critical standards ranging from manufacturing to advertising.
Any company marketing these products is subject to strict penalties if it does not company with all the
specific laws and regulations. These regulations have grown over the last decade, and in turn compliance cost
has grown for the company‟s affected by them.
10
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
COMPARABLES ANALYSIS
Conducting an accurate comparables analysis for Whole Foods was difficult, given that there are few organic
supermarkets that are publicly traded. Trader Joes is probably the most comparable company, but it is private. The
few suitable comparables we found in the organic food industry were obviously chosen. Outside of those companies,
companies were chosen because of similar customer bases and brand loyalty. Whole Foods is a differentiated food
brand, with great brand power and in turn pricing power. Wealthier consumers often shop at the supermarket and are
willing to pay a premium for the healthier meal. The two non-organic companies we found, Panera and Starbucks, we
believe are similar to Whole Foods because of similar brand power and pricing power as discretionary food
companies. When deciding the weightings for the comparable companies, in addition to looking at risk, growth, and
customer base, we compared several the companies to Whole Foods by various ratios.
Five companies were chosen for the comparables model and the multiples EV/Revenue, EV/Gross Profit,
EV/EBITDA, and EV/OCF were used to generate an implied price of $78.72, and undervaluation of 19.10%.
Company Description:
“The Fresh Market, Inc., incorporated in July 1981, is a specialty retailer.
As of April 30, 2010, the Company operated 95 stores in 19 states,
primarily in the Southeast, Midwest and Mid-Atlantic United States. The
Company focuses on perishable product categories, which include meat,
seafood, produce, deli, bakery, floral, sushi and prepared foods. Its nonperishable product categories consist of traditional grocery and dairy
products, as well as specialty foods, including bulk, coffee and candy, and
beer and wine.”
- Reuters
Why?
35%
The Fresh Market was chosen as a comparable because it expects similar
growth compared to Whole Foods in the organic food market and it is
exposed to similar risks in the organic food industry. In addition, being a
specialty food retailer the company shares much of the same customer
base as Whole Foods.
TFM‟s PEG ratio is 2.1, nearly identical to Whole Foods‟ 2.2. Its
inventory turnover is 19.7 (compared to WFMI‟s 17.8), and days of
inventory on hand is 18.6 (compared to WFMI‟s 20.6). TFM was most
similar, out of the comparable companies, to WFMI on all these ratios.
Given all these similarities, TFM was awarded the highest weighting in the
analysis at 35%.
11
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Company Description:
“The Hain Celestial Group, Inc., incorporated on May 19, 1993,
manufactures, markets, distributes and sells organic products under
brand names, which are sold as better-for-you products. The
Company operates in one segment, the manufacturing, distribution,
marketing and sale of natural and organic products. Its products are
sold to specialty and natural food distributors, supermarkets, natural
food stores, and other retail classes of trade, including mass-market
retailers, drug store chains, food service channels and club stores.”
- Reuters
Why?
20%
HAIN was chosen for the comparable analysis because of its
exposure to the organic food industry. There are not many publicly
traded pure-play competitors to Whole Foods, so we tried to find
other companies with similar to exposure to the organic industry.
HAIN is a supplier to organic food retailers, and also expects similar
growth, compared to Whole Foods, and is exposed to similar risk.
Since many of HAIN‟s products are purchased by end users at
supermarkets such as Whole Foods, both companies share a similar
customer base.
HAIN‟s PEG ratio is 2.8, somewhat similar to Whole Foods‟ 2.2.
Its inventory turnover is 5.1 (compared to WFMI‟s 17.8), and days
of inventory on hand is 72.3 (compared to WFMI‟s 20.6). HAIN
was not very similar to Whole Foods when comparing these ratios,
mainly due to HAIN not being a supermarket.
Since HAIN is not a supermarket, it was weighted less, but since it is
in the organic food industry and exposed to similar risks and growth
prospects as Whole Foods, it was weighted 3rd-highest in the
comparables analysis at 20%.
12
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Company Description:
“United Natural Foods, Inc. (United Natural) is a distributor of natural,
organic and specialty foods and non-food products in the United States
and Canada. The Company operates 28 distribution centers, representing
approximately 7.6 million square feet of warehouse space. United Natural
carries more than 60,000 natural, organic and specialty products,
consisting of national, regional and private label brands in six product
categories: grocery and general merchandise, produce, perishables and
frozen foods, nutritional supplements and sports nutrition, bulk and
foodservice products and personal care items. The Company serves more
than 23,000 customer locations primarily located across the United States
and Canada, which include independently owned natural products
retailers, which include buying clubs; supernatural chains, which consist
solely of Whole Foods Market, Inc. (Whole Foods Market); conventional
supermarkets and mass market chains, and other, which includes
foodservice and international customers outside of Canada.”
- Reuters
Why?
25%
As a distributor of organic foods, UNFI was chosen as a comparable
because the company is exposed to similar risk and should expect similar
growth to Whole Foods. UNFI actually distributes to Whole Foods.
UNFI‟s PEG ratio is 1.8, slightly lower than Whole Foods‟ 2.2. Its
inventory turnover is 7.7 (compared to WFMI‟s 17.8), and days of
inventory on hand is 47.4 (compared to WFMI‟s 20.6). While UNFI does
not appear that similar to WFMI across these ratios, it was 3rd most
similar after TFM.
Given that UNFI is involved in the organic food industry and supply‟s
Whole Foods, UNFI was awarded the 2nd-highest weighting in the
analysis at 25%.
13
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Company Description:
“Panera Bread Company (Panera Bread) along with its subsidiaries is a
national bakery-cafe concept with 1,380 Company-owned and
franchise-operated bakery-cafe locations in 40 states and in Ontario,
Canada. The Company operates under the Panera Bread, Saint Louis
Bread Co. and Paradise Bakery & Café trademark names. The
Company operates in three business segments: Company bakery-cafe
operations, franchise operations and fresh dough operations.”
- Reuters
Why?
10%
Thanks to UOIG up-and-coming analyst, Ryan Bennett, we were
turned on to Panera as a potential comparable to Whole Foods.
PNRA is often mentioned in the same breath as WFMI by analysts
when describing growth discretionary food companies that have
pricing power. As a differentiated brand that sells healthier foods at a
premium, like WFMI, PNRA can share costs with its customers and
has been able to grow even throughout this tough economic
environment. In many ways, PNRA is similar to Whole Foods both
in terms of risk and growth because it is a differentiated, healthy
specialty food company.
PNRA‟s PEG ratio is 2.0, very similar to Whole Foods‟ 2.2. Its
inventory turnover is 90.8 (compared to WFMI‟s 17.8), and days of
inventory on hand is 4.0 (compared to WFMI‟s 20.6). PNRA was
most different, out of the comparable companies, to WFMI on these
ratios.
Though PNRA is similar to WFMI, it is a restaurant and bakery so it
is not that similar, evidence by the major difference among inventory
ratios. So, PNRA was awarded a low weighting of 10%.
14
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Company Description:
“Starbucks Corporation (Starbucks) is the roaster and retailer of
specialty coffee in the world, operating in more than 50 countries.
Starbucks purchases and roasts whole bean coffees and sells them,
along with handcrafted coffee and tea beverages and a variety of
fresh food items, through Company-operated retail stores. It also
sells coffee and tea products and license its trademarks through other
channels, such as licensed retail stores and, through certain of its
licensees and equity investees, the Company produces and sells a
variety of ready-to-drink beverages. In addition to its flagship
Starbucks brand, its portfolio includes brands, such as Tazo Tea,
Seattle‟s Best Coffee, and Starbucks VIA Ready Brew. Starbucks has
three operating segments: United States (US), International, and
Global Consumer Products Group (CPG).”
- Reuters
Why?
10%
Starbucks was included for similar reasons as PNRA in the
comparables analysis: it is a specialty food store and a differentiated
brand that can charge premiums and share costs with its customers.
The ability to share costs SBUX shares with WFMI. In a way, the
companies are exposed to similar risks because of this ability. Also,
Starbucks recently announced it will start offering organic, healthy
food products, inspired by the success WFMI has had in the organic,
healthy food industry.
TFM‟s PEG ratio is 1.7, lower than Whole Foods‟ 2.2. Its inventory
turnover is 7.1 (compared to WFMI‟s 17.8), and days of inventory on
hand is 51.7 (compared to WFMI‟s 20.6). SBUS was quite different
when compared to WFMI on all these ratios.
Because of the difference across ratios, TFM was awarded a low
weighting in the analysis at 10%.
15
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Outliers
Throughout the multiples in this comparables analysis, four outliers were found. Outliers are colored in light blue
with black text to stand out.
2.02 x
6.15 x
26.51 x
34.15 x
1.85 x
6.68 x
18.10 x
29.44 x
0.66 x
3.59 x
17.78 x
12.71 x
2.59 x
11.13 x
15.76 x
22.14 x
3.32 x
6.91 x
13.71 x
14.78 x
When an outlier occurred, the total percentage weighting of that comparable was distributed evenly throughout the
remaining multiples for that respective average.
DISCOUNTED CASH FLOW ANALYSIS
Throughout our discounted cash flow analysis, the percent of revenue method was used and each line item has been
projected out to the year 2015. Our projections were based upon qualitative and quantitative factors, including
company guidance, industry outlook, and analysts‟ opinions. The DCF model suggests an implied price of $70.89, and
undervaluation of 7.24%.
Beta
To calculate Whole Foods‟ beta we ran a five-year monthly and a two-year weekly regression of Whole Foods‟ returns
against the total returns of the S&P 500. The regressions yielded a beta of 1.11 and 1.25, respectively. To ensure that
our beta was an accurate measure of Whole Foods‟ risk rather than just volatility, we elected to run a Hamada beta as
well, which yielded a beta of 0.77. We felt the Hamada beta was too low, yet the 2-yr weekly was too high, so we
computed a weighted average of the two, which came out to be 1.01. We believe this beta is the most accurate
representation of Whole Foods‟ business risk moving forward and chose to use if for our analysis.
Exit Multiple
To calculate the terminal value in this 5-year DCF, an EV/EBITDA exit multiple was used rather than a terminal
growth rate. The EV/EBITDA exit multiple was generated based on an average that WFMI historically trades at in
the market. Annual EV/EBITDA multiples were obtained from FactSet for the last 8 years. Two of those data
points were clearly outliers, an extremely low multiple in the heart of the recent recession, and an extremely high
multiple at the peak of the bull market before the recession hit. Those two multiples were omitted and an average of
the remaining six data points generated an average of 14.05. This average was used as the exit multiple in the DCF to
calculate terminal value. Terminal value was calculated by taking EBITDA in the terminal year of the DCF, and
multiplying it by 14.05.
Revenue Model
In order to project Whole Foods‟ revenues for the next five years we created a revenue model that forecasted
revenues based upon store growth and average revenue per store. Management has clearly stated their expectations
for store growth so we felt this would be the most accurate method to project revenues.
Whole Foods historically increased the number of stores steadily and logically until 2007 when management
uncharacteristically pursued an extremely aggressive expansion plan by adding 90 new stores. As a result of the
recession the stock price got hit hard and dropped to $7.04, as investors believed Whole Foods would not be able to
recover from its rapid expansion. However, even during the rough economic times Whole Foods was able to
consistently grow revenues. Moving forward management has indicated that they will not pursue such an aggressive
16
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
store expansion plan, but rather modestly grow the number of locations. Karen Short of BMO Capital Markets has
predicted that Whole Foods can realistically grow to over 1000 stores worldwide in the future.
Our revenue model is backdated to 2001 showing the historical number of stores at the beginning of each fiscal year.
Next, we listed annual revenues to derive the average revenue per store line item. Moving forward we have projected
the number of new stores to grow from 17 in 2011 to 20 in 2012, then trend downward to 19 in 2015. We arrived at
these projections based upon management guidance and what we determined to be a realistic growth plans.
We have also projected average revenue per store to grow at 8.00% annually throughout the revenue model. We
believe this is an acceptable growth rate moving forward based up historical trends. From 2002 to 2006 average per
store revenue was growing between 9.00% and 13.00%, when the market was growing quite rapidly. Recently, that
growth slowed and Whole Foods saw revenue growth per store around 6.00%. This number should pick up as we are
entering a stronger economy. We believe Whole Foods will see greater growth for revenue per store but not as high
as it was five years ago, and thus projected growth of 8.00% moving forward.
Cost of Revenue
Whole Foods has done a good job of keeping its gross margin consistent historically. Over the past four years the cost
of revenue has ranged from 65.16% of revenue to 65.97% of revenue. Cost of revenue slightly increases and decreases
due to the sales mix offered at new stores, but moving forward it is expected that Whole Foods will keep its margins
in line with historical trends. Throughout the DCF we have projected cost of revenue at 65.43% of revenue, an
average of the past two years.
Direct Store Expenses
Direct store expenses have remained relatively flat over the past four years ranging from 25.96% to 26.72% of
revenues. Direct store expenses tend to be higher for new stores and decrease as the stores mature, which is indicative
of the increased productivity of store teams. Since Whole Foods is pursuing a modest growth strategy this expense is
expected to stay in line with historical trends. For this reason we have chosen to project direct store expenses at
26.39%, an average of the last four years.
General and Administrative Expenses
For the past four years the general and administrative expense has experienced little volatility, ranging from 3.03% to
3.40% of revenue. Management has stated that this expense is expected to remain within this range moving forward
so we elected to use the 3.17% average as the projected expense moving forward.
Relocation, Store Closure, and Lease Termination Expense
The relocation, store closure, and lease termination expense has historically been a fraction of a percent of revenue.
Moving forward there is no indication that this will change so we have projected the expense at 0.26% of revenue, an
average of the previous two years.
Depreciation and Amortization
Over the past three fiscal years depreciation and amortization has accounted for 3.13%, 3.32%, and 3.06% of revenue.
Moving forward we expect the depreciation and amortization expense to remain within this range so we have
projected this line item at 3.17% of revenue moving forward, the average of the three previous years.
17
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
Acquisitions
In the past Whole Foods pursued an active inorganic growth strategy by constantly sourcing acquisitions that fit with
the overall brand image. Moving forward management has indicated that they do not plan on acquiring any more
businesses in the near future. To account for the off chance that Whole Foods does encounter a company that it
deems can add value to its brand we have projected acquisitions as 0.10% of revenue throughout the DCF after 2012.
Net Working Capital
For calculating the Current Assets, the percent of revenue method was used to forecast projects. Over the next two
years, Whole Foods expects Currents Assets to rise as it plans a more aggressive growth strategy. Current Assets are
projected as 13.73% of revenue for 2011 and 2012. For the remainder of the DCF, this line item is projected as
12.87% of revenue as the company‟s growth levels out vs. the industry growth rate. These numbers are in line with
recent historical averages.
For Current Liabilities, this line item was also forecasted using the percent of revenue method. The most important
thing to note for the projections of Current Liabilities is that the company will be settling all its long-term debt by the
end of 2012, as it will then become debt-free. This is the reason for the spike in Current Liabilities in 2012. Other
than 2012, Current Assets were projected as 8.39% of revenue – a number computed by looking at the last three
year‟s Current Liabilities net of current portion of long-term debt. See chart below.
Total Current Liabilities
Current portion LTD
Net current LTD
% revenue
2007
784,516
24781
759,735
11.53%
AVG 08-10
2008
666,177
380
665,797
8.37%
2009
684,024
389
683,635
8.51%
2010
747,872
410
747,462
8.30%
8.39%
18
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
RECOMMENDATION
There is no doubt that Whole Foods is a great company, and if the price were right it would make a great investment.
In addition, there is clearly tremendous growth potential for the company. With fewer than 300 stores currently, and
a possibility for more than 1000 in the U.S. and internationally, the potential for Whole Foods appears to be huge.
However, the price just recently hit its 52-week high and the stock is up nearly 100% this year. It might be a little late
to jump on the Whole Foods band wagon.
The majority of the undervaluation found between both analyses, was in the comparables analysis. Since the
comparables analysis had to include companies outside the organic food market industry, as pure-play competitors
were not publicly traded, and many multiples were thrown out, this valuation gives us less confidence. We are much
more confident in the DCF, which implies only a slight under valuation. Therefore, we have weighted the DCF 70%
and the comparables analysis 30%.
Analysis
Comparables Price
DCF Price
Target Price
Current Price
Under Valued
Weighting
30.00%
70.00%
$
$
$
$
Price
78.72
70.89
73.24
66.10
10.80%
With this weighting, the implied price of the valuation is $73.24, and undervaluation of only 10.80%.
Furthermore, both our beta sensitivity analysis and exit multiple analysis shows that a slight tweak to either factor may
easily produce a fair or over valuation.
Given that the UOIG is currently overweight in consumer goods, and the implied price shows just a 10.80%
undervaluation that is very sensitive to both beta and the exit multiple, the under valuation for Whole Foods does not
look attractive.
While Whole Foods is still a great company, we are recommending a HOLD on valuation for all portfolios.
19
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
APPENDIX 1 – COMPARABLES ANALYSIS
The University of Oregon Investment Group
($ in millions, except per share data)
Stock Characteristics
Current Price
50 Day Moving Avg.
200 Day Moving Avg.
Beta
Size
ST Debt
LT Debt
Cash and Cash Equiv.
Diluted Share Count
Market Cap
Enterprise Value
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Debt/Equity (MRQ)
Debt/EBITDA (LTM)
Operating Results
Revenue (LTM)
Gross Profit (LTM)
EBITDA (LTM)
OCF (LTM)
Valuation
EV/Revenue
EV/Gross Profit
EV/EBITDA
EV/OCF
Whole Foods
WFMI
35.00%
Fresh Market
TFM
20.00%
Hain
HAIN
25.00%
United Natural Foods
UNFI
10.00%
Panera
PNRA
10.00%
Starbucks
SBUX
Avg.
55.43
52.07
44.84
0.85
Median
45.47
42.79
38.41
0.85
66.10
60.27
49.04
1.01
37.96
40.49
38.41
0.81
32.51
30.23
27.12
0.85
45.47
42.79
38.18
0.59
128.67
118.92
101.99
0.58
36.73
34.62
31.30
1.18
1,399.95
1,088.10
356.39
206.55
7,915.16
10,046.82
482.02
240.09
162.28
48.54
3,978.73
4,000.17
822.15
407.88
162.28
174.48
11,533.13
12,600.88
66.44
81.85
7.87
48.06
1,824.32
1,964.74
181.87
240.09
26.31
44.33
1,441.30
1,836.94
482.02
45.91
17.28
48.54
2,207.02
2,717.67
211.52
39.22
229.30
30.92
3,978.73
4,000.17
1,956.40
549.40
1,792.00
766.70
28,160.89
28,874.69
0.34
0.10
0.13
0.06
0.33
0.08
0.10
0.03
34.80%
5.16%
8.13%
2.98%
32.77%
4.20%
7.61%
2.35%
27.64%
8.08%
10.20%
3.49%
18.27%
2.93%
3.69%
4.32%
23.31%
12.00%
16.45%
7.23%
48.07%
18.05%
24.24%
12.09%
0.11
1.05
0.04
0.54
0.04
0.54
0.04
1.10
0.17
2.37
0.02
0.30
0.01
0.15
0.02
0.26
12,304.27
3,024.40
867.06
481.98
1,542.49
756.69
253.74
197.22
AVG.
1.68 x
5.66 x
16.73 x
19.68 x
9,370.29
3,267.42
761.86
572.88
974.21
319.23
74.11
57.53
994.73
274.97
101.50
62.40
4,141.57
756.69
152.87
213.76
1,542.49
359.52
253.74
180.69
8,692.10
4,178.40
2,106.60
1,953.10
1.34 x
3.86 x
16.54 x
22.00 x
2.02 x
6.15 x
26.51 x
34.15 x
1.85 x
6.68 x
18.10 x
29.44 x
0.66 x
3.59 x
17.78 x
12.71 x
2.59 x
11.13 x
15.76 x
22.14 x
3.32 x
6.91 x
13.71 x
14.78 x
Metric
EV/Revenue
EV/Gross Profit
EV/EBITDA
EV/OCF
Price Target
Current Price
Undervalued
$
$
$
$
Implied Price
88.62
104.63
71.64
63.20
Weight
25.00%
15.00%
35.00%
25.00%
$
$
78.72
66.10
19.10%
20
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
The University of Oregon Investment Group
($ in thousands, except per share data)
Revenue
% Y/Y Growth
Cost of Revenue
% Revenue
Gross Profit
Gross Margin
Operating Expenses
Direct Store Expenses
% Revenue
General and Administrative Expenses
% Revenue
Pre-Opening Expenses
% Revenue
Relocation, Store-Closure and Lease Termination
% Revenue
Total Operating Expenses
% Revenue
EBIT
% Revenue
EBITDA
% Revenue
Interest Expense (Income)
% Revenue
Investment and Other Income
% Revenue
Pre Tax Income
% Revenue
Provision for Income Taxes
Tax Rate
Net Income
Net Margin
Add Back Depreciation & Amortization
% Revenue
Add Back: (1-Tr)*Interest Expense
% Revenue
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
Change in Net Working Capital
Capital Expenditures
% Revenue
Acquisitions
% Revenue
Unlevered Free Cash Flows
Discounted Unlevered Free Cash Flows
2007 A
6,591,773
4,295,170
65.16%
2,296,603
34.84%
1,711,229
25.96%
217,743
3.30%
70,180
1.06%
*See notes
1,999,152
30.33%
297,451
4.51%
483,841
7.34%
(4,208)
0.06%
11,324
0.17%
304,567
4.62%
121,827
40.00%
182,740
2.77%
186,390
2.83%
2,525
0.04%
371,655
5.64%
667,986
10.13%
784,516
11.90%
(116,530)
-1.77%
529,682
8.04%
596,236
9.05%
Notes
1) Relocation expense included in pre-opening expenses for 2007
2008 A
7,953,912
20.66%
5,247,207
65.97%
2,706,705
34.03%
2009 A
8,031,620
0.98%
5,277,310
65.71%
2,754,310
34.29%
2010 A
9,005,794
12.13%
5,870,393
65.18%
3,135,401
34.82%
2011 Q1 A
3,003,655
2011 Q2-4 E
7,275,600
2011 A+E
10,279,255
14.14%
6,726,143
65.43%
3,553,112
34.57%
2012 E
11,804,229
14.84%
7,723,996
65.43%
4,080,232
34.57%
2013 E
13,507,410
14.43%
8,838,458
65.43%
4,668,952
34.57%
2014 E
15,366,576
13.76%
10,054,988
65.43%
5,311,588
34.57%
2015 E
17,436,761
13.47%
11,409,596
65.43%
6,027,165
34.57%
1,965,416
57.00%
1,038,239
34.57%
4,760,727
65.43%
2,514,873
34.57%
2,107,940
26.50%
270,428
3.40%
55,554
0.70%
36,545
0.46%
2,470,467
31.06%
236,238
2.97%
485,451
6.10%
(36,416)
-0.46%
6,697
0.08%
206,519
2.60%
91,995
44.55%
114,524
1.44%
249,213
3.13%
20,194
0.25%
383,931
4.83%
622,606
7.83%
666,177
8.38%
(43,571)
-0.55%
72,959
529,472
6.66%
5,480
0.07%
(223,980)
2,145,809
26.72%
243,749
3.03%
49,218
0.61%
31,185
0.39%
2,469,961
30.75%
284,349
3.54%
551,044
6.86%
(36,856)
-0.46%
3,449
0.04%
250,942
3.12%
104,138
41.50%
146,804
1.83%
266,695
3.32%
21,561
0.27%
435,060
5.42%
1,055,380
13.14%
684,024
8.52%
371,356
4.62%
414,927
314,615
3.92%
0
0.00%
(294,482)
2,375,716
26.38%
272,449
3.03%
38,044
0.42%
11,217
0.12%
2,697,426
29.95%
437,975
4.86%
713,564
7.92%
(33,048)
-0.37%
6,854
0.08%
411,781
4.57%
165,948
40.30%
245,833
2.73%
275,589
3.06%
19,730
0.22%
541,152
6.01%
1,161,519
12.90%
747,872
8.30%
413,647
4.59%
42,291
256,793
2.85%
14,470
0.16%
227,598
790,383
14.50%
88,511
2.95%
8,640
0.29%
3,146
0.10%
890,680
29.65%
147,559
4.91%
234,250
7.80%
(2,333)
-0.08%
2,652
0.09%
147,878
4.92%
59,148
40.00%
88,730
2.95%
86,691
2.89%
1,922,313
26.42%
239,397
3.29%
49,952
0.69%
23,066
0.32%
2,234,728
30.72%
280,146
3.85%
519,307
7.14%
3,115,136
26.39%
376,555
3.19%
67,284
0.57%
30,101
0.26%
3,589,076
30.41%
491,157
4.16%
865,351
7.33%
3,564,606
26.39%
430,886
3.19%
76,992
0.57%
34,444
0.26%
4,106,928
30.41%
562,024
4.16%
990,209
7.33%
4,055,239
26.39%
490,194
3.19%
87,589
0.57%
39,185
0.26%
4,672,207
30.41%
639,381
4.16%
1,126,501
7.33%
4,601,561
26.39%
556,233
3.19%
99,390
0.57%
44,464
0.26%
5,301,647
30.41%
725,518
4.16%
1,278,263
7.33%
0
2,712,696
26.39%
327,908
3.19%
58,592
0.57%
26,212
0.26%
3,125,408
30.41%
427,705
4.16%
753,557
7.33%
(2,333)
-0.02%
0
0
0
0
0
277,494
3.81%
111,001
40.00%
166,493
2.29%
239,161
3.29%
425,372
4.14%
170,149
40.00%
255,223
2.48%
325,852
3.17%
491,157
4.16%
196,463
40.00%
294,694
2.50%
374,194
3.17%
562,024
4.16%
224,809
40.00%
337,214
2.50%
428,185
3.17%
639,381
4.16%
255,752
40.00%
383,628
2.50%
487,120
3.17%
725,518
4.16%
290,207
40.00%
435,311
2.50%
552,745
3.17%
175,421
5.84%
1,300,580
405,654
5.58%
1,410,828
822,153
862,430
478,427
15.93%
64,780
91,049
2.43%
0
548,398
7.54%
177,042
257,418
2.43%
0
581,075
5.65%
1,410,828
13.73%
862,430
8.39%
548,398
5.34%
0
348,467
3.39%
0
19,592
(28,806)
(27,028)
0.75
668,888
5.67%
1,620,130
13.73%
1,398,252
11.85%
221,878
1.88%
(326,520)
400,163
3.39%
11,804
0.10%
583,440
502,848
1.75
765,399
5.67%
1,738,404
12.87%
1,133,272
8.39%
605,132
4.48%
383,254
457,901
3.39%
13,507
0.10%
(89,263)
(70,668)
2.75
870,749
5.67%
1,977,678
12.87%
1,289,256
8.39%
688,423
4.48%
83,291
520,927
3.39%
15,367
0.10%
251,165
182,648
3.75
988,056
5.67%
2,244,111
12.87%
1,462,944
8.39%
781,167
4.48%
92,744
591,106
3.39%
17,437
0.10%
286,769
191,557
4.75
232,609
21
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
APPENDIX 3 – REVENUE MODEL
Stores
% Y/Y Growth
New Stores
Revenue
% Y/Y Growth
Avg. Revenue/Store
% Y/Y Growth
2000
117
2001
126
7.69%
9
2,272,231
18,034
2002
135
7.14%
9
2,690,475
18.41%
19,929
10.51%
2003
145
7.41%
10
3,148,593
17.03%
21,714
8.96%
2004
163
12.41%
18
3,864,950
22.75%
23,711
9.20%
2005
175
7.36%
12
4,701,289
21.64%
26,865
13.30%
2006
186
6.29%
11
5,607,376
19.27%
30,147
12.22%
2007
276
48.39%
90
6,591,773
17.56%
23,883
-20.78%
2008
275
-0.36%
-1
7,953,912
20.66%
28,923
21.10%
2009
284
3.27%
9
8,031,620
0.98%
28,280
-2.22%
2010
299
5.28%
15
9,005,794
12.13%
30,120
6.50%
2011
316
5.69%
17
10,279,255
14.14%
32,529
8.00%
2012
336
6.33%
20
11,804,229
14.84%
35,132
8.00%
2013
356
5.95%
20
13,507,410
14.43%
37,942
8.00%
2014
375
5.34%
19
15,366,576
13.76%
40,978
8.00%
2015
394
5.07%
19
17,436,761
13.47%
44,256
8.00%
APPENDIX 4 – DCF ASSUMPTIONS
Tax Rate
Risk-Free Rate
Beta
Market Risk Premium
% Equity
% Debt
Cost of Debt
CAPM
WACC
Assumptions for Discounted Free Cash Flows Model
40.00% Exit Multiple (EV/EBITDA)
2.20% Terminal Value
1.01 PV of Terminal Value
7.00% Sum of PV Free Cash Flows
91.53% Firm Value
8.47% LT Debt
4.71% Cash
9.26% Equity Value
8.87% Diluted Share Count
Implied Price
Current Price
Undervalued
$
$
$
$
$
$
$
$
$
14.05
17,959,602.09
11,996,720.40
779,357.92
12,776,078.32
407,877.00
162,280.00
12,368,201.32
174,482.00
70.89
66.10
7.24%
Analysis
Comparables Price
DCF Price
Target Price
Current Price
Under Valued
Weighting
30.00%
70.00%
Price
$ 78.72
$ 70.89
$
$
73.24
66.10
10.80%
22
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
APPENDIX 5 – WORKING CAPITAL MODEL
2007
784,516
24781
759,735
11.53%
Total Current Liabilities
Current portion LTD
Net current LTD
% Revenue
AVG 08-10
2008
666,177
380
665,797
8.37%
2009
684,024
389
683,635
8.51%
2010
747,872
410
747,462
8.30%
8.39%
APPENDIX 6 –BETA
Company
WFMI
TFM
HAIN
UNFI
PNRA
SBUX
Hamada Beta
Beta 2yr Wkly
1.25
0.81
0.85
0.59
0.58
1.18
Mean
0.78
Pure Business Beta
Sample D/E
Unlevered Business Beta
WFMI D/E
WFMI Beta
0.78
0.06
0.75
0.04
0.77
WFMI Hamada/2yr Wkly
1.01
D/E
0.04
0.04
0.17
0.02
0.01
0.02
0.06
Weight
35%
20%
25%
10%
10%
2 Yr Wkly Beta 5 Yr Month Beta
1.25
1.11
23
Whole Foods Market, Inc.
university of oregon investment group
http://uoinvestmentgroup.org
APPENDIX 6 – SENSITIVITY ANALYSIS
Beta
1.31
1.21
1.11
1.01
0.91
0.81
0.71
Implied Price
65.16
66.99
68.89
70.89
72.89
74.99
77.16
Under (Over) Valued
-1.43%
1.35%
4.23%
7.24%
10.27%
13.45%
16.74%
Exit Multiple Implied Price
17.05
85.57
16.05
80.67
15.05
75.78
14.05
70.89
13.05
65.99
12.05
61.1
11.05
56.2
Under (Over) Valued
29.45%
22.05%
14.64%
7.24%
-0.16%
-7.57%
-14.97%
APPENDIX 7 – SOURCES










WFMI 10-K and 10-Q
Sec.gov
IBIS World
Google Finance
Yahoo Finance
Fortune Magazine
CNBC
USA Today
StockSpy
FactSet
24