Whole Foods Firm Analysis

Whole Foods Market is the world’s leading natural and organic foods supermarket. The Company operates in one reportable segment, natural and organic foods supermarkets. According to their 2007 10K report, natural foods are defined as foods that undergo a minimal amount of processing and are, largely, free of artificial ingredients or preservatives. Natural foods are generally regarded as foods that are in as close to their natural state as possible. The common definition of organic foods are food products which have not been grown from genetically engineered seeds or crops and utilize food processing practices intended to protect the genetic integrity of the organic product. All organic foods must be produced via healthy and humane livestock management practices, with all crops absent of any long-lasting pesticides, herbicides, and fungicides. In general, all practices must promote the overall health of the ecosystem. The firm’s SIC (Standard Industrial Classification) code is 5411, which gives them a “Grocery Store” classification. The company’s NAIC (North American Industrial Classification) code is 445299, which classifies them under “All Other Specialty Food Stores”. The major products and services offered by Whole Foods consist of organically grown food and natural products to include: food and beverages, dietary supplements, personal care products, household goods, organic cotton clothing, and related educational products.

The Whole Foods Market strategy is built upon the fundamental differentiation of their stores from conventional supermarkets. The company’s focus is on the sale of perishable products which affords them the ability to reach a broader range of customers. With perishable products accounting for over 67% of their sales and the store’s unique product mix, Whole Foods must continuously strive to increase their Inventory Turnover Ratio and keep their Cost of Goods Sold (low). An integral part of the Whole Foods Market operations strategy is expansion and acquisition. Although almost 32% of their current square footage came via acquisitions, the size of the company’s new stores range from 45,000 to 60,000 square feet. The strategy of opening larger stores supports Whole Foods’ strategy of creating higher barriers of entry for their potential competitors. The company continues to look into expanding into new and existing areas, to include the international markets. Though, Whole Foods still looks to expand via the acquisition of smaller chains, those acquisitions are not expected to significantly impact the company’s financial statements or future growth. As the firm focuses on the expansion and continued growth of its current facilities, key financial ratios such as ROA (Return on Assets) and Fixed Asset Turnover could give strong indications of performance. With their growth strategy, some of Whole Foods’ newer stores may experience lower gross and profit margins and higher operating expenses than some of their more mature stores; thus, a holistic ROA calculation can help the store determine whether their overall expansion strategy is effective, however, a breakdown of ROA by region and individual store will give management a greater indication of efficacy. Further derivation of ROA will also give the company a telling

measure of its Total Asset Turnover and profit margin. Though profit margin is important for almost all companies, the Total Asset Turnover is especially important considering Whole Foods’ growth strategy. Recently, Whole Foods’ financing strategy has given them more control, as the company recently approved a stock repurchase program of up to $200M over four years. In August of 2007, Whole Foods Market completed the acquisition of Wild Oats Markets, Inc., for approximately $565M and the additional assumption of approximately $148M in existing debt. The funding of the acquisition was enabled by a five-year $700M senior term loan agreement and a five year $250M revolving credit agreement; the latter of which replaced a $200M line of credit. The firm’s Long Run Debt Ratio, Cash Flow from Operations to Total Liabilities Ratio, as well as a discrete measurement of the firm’s long term debt will give a good indication of the firm’s long term risk. Additionally, considering the firm’s inventory relationships with their suppliers, the degree of the firm’s Accounts Payable will also be an important measure of their ability to maintain their Working Capital cycle.