FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended January 17, 1999; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission File Number: 0-19797
WHOLE FOODS MARKET, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1989366
(State of (IRS employer
incorporation) identification no.)
601 N. Lamar
Suite 300
Austin, Texas 78703
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
512-477-4455
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
The number of shares of the registrant's common stock, no par value,
outstanding as of January 17, 1999 was 26,600,835 shares.
Page 1 of 12
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Whole Foods Market, Inc. And Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited) (In thousands) January 17, 1999 and September 27, 1998
1999 1998
-------------------
Assets
Current assets:
Cash and cash equivalents 28,418 36,674
Marketable securities 14,674 27,019
Merchandise inventories 91,331 85,628
Accounts receivable and other 38,034 34,772
------- -------
Total current assets 172,457 184,093
------- -------
Net property and equipment 319,957 291,478
Excess of cost over net assets acquired, net 35,439 35,802
Other assets 34,583 33,435
------- -------
562,436 544,808
======= =======
Liabilities And Shareholders' Equity
Current liabilities:
Current installments of long-term debt 290 343
Trade accounts payable 30,408 32,505
Accrued payroll, bonus and employee benefits 22,465 26,670
Accrued expenses and other 39,002 31,511
------- -------
Total current liabilities 92,165 91,029
------- -------
Long-term debt, less current installments 160,432 158,673
Other long-term liabilities 18,510 17,833
------- -------
Total liabilities 271,107 267,535
------- -------
Shareholders' equity:
Common stock, no par value, 100,000 shares authorized;
26,601 and 26,500 shares issued and outstanding 220,476 219,189
Accumulated other comprehensive income 24 211
Retained earnings 70,829 57,873
------- -------
Total shareholders' equity 291,329 277,273
------- -------
562,436 544,808
======= =======
See accompanying notes to condensed consolidated financial statements.
Page 2 of 12
<PAGE>
Whole Foods Market, Inc. And Subsidiaries
Condensed Consolidated Income Statements (Unaudited) (In thousands, except per
share data)
Sixteen weeks ended
January 17 January 18
1999 1998
-----------------------
Sales $ 456,239 407,788
Cost of goods sold and occupancy costs 303,029 272,036
----------------------
Gross profit 153,210 135,752
Selling, general and administrative expenses 130,305 111,904
Pre-opening and relocation costs -- 1,065
Merger expenses -- 1,699
----------------------
Income from operations 22,905 21,084
Interest expense (2,680) (1,998)
Investment and other income 1,013 6
----------------------
Income before income taxes 21,238 19,092
Income taxes 8,283 7,064
----------------------
Net income $ 12,955 12,028
======================
Basic earnings per share $ 0.49 0.46
======================
Diluted earnings per share $ 0.47 0.44
======================
See accompanying notes to condensed consolidated financial statements.
Page 3 of 12
<PAGE>
<TABLE>
<CAPTION>
Whole Foods Market, Inc. And Subsidiaries
Condensed Consolidated Statements Of Cash Flows (Unaudited) (In thousands)
Sixteen weeks ended
January 17 January 18
1999 1998
-----------------------
<S> <C> <C>
Net cash flow from operating activities $ 19,782 21,177
Cash flow from investing activities:
Acquisition of property and equipment (41,355) (24,648)
Acquisition of leasehold rights -- (2,555)
Proceeds from marketable securities available for sale 12,158 --
--------------------
Net cash flow used by investing activities (29,197) (27,203)
--------------------
Cash flow from financing activities:
Net proceeds from bank borrowings -- 9,000
Payments on long-term debt (128) (21,048)
Proceeds from issuance of common stock 1,287 9,194
Cash acquired in pooling-of-interests -- 54
--------------------
Net cash flow from (used in) financing activities 1,159 (2,800)
--------------------
Net decrease in cash and cash equivalents (8,256) (8,826)
Cash and cash equivalents at beginning of period 36,674 13,395
--------------------
Cash and cash equivalents at end of period $ 28,418 4,569
====================
Supplemental disclosure of cash flow information:
Interest and income taxes paid:
Interest $ 941 1,792
====================
Federal and state income taxes $ 2,414 6,345
====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 12
<PAGE>
Whole Foods Market, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements (Unaudited)
January 17, 1999
(1) Basis of Presentation
The accompanying unaudited condensed financial statements of Whole Foods Market,
Inc. and subsidiaries ("Company") have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Certain
information and footnote disclosure normally included in annual financial
statements prepared in conformity with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10K for the fiscal year ended September 27,
1998.
The Company's fiscal year ends on the last Sunday in September. The first fiscal
quarter is sixteen weeks, the second and third quarters each are twelve weeks
and the fourth quarter is twelve or thirteen weeks.
(2) Earnings Per Share
The computation of basic earnings per share is based on the number of weighted
average common shares outstanding during the period. The computation of diluted
earnings per share includes the dilutive effect of common stock equivalents
consisting of common shares deemed outstanding from the assumed exercise of
stock options. A reconciliation of the denominators of the basic and diluted
earnings per share calculations follows (in thousands):
Sixteen weeks ended
January 17 January 18
1999 1998
-----------------------
Denominator for basic earnings per
share: weighted average shares 26,552 25,913
Additional shares deemed outstanding from the
assumed exercise of stock options 1,142 1,610
-----------------------
Denominator for diluted earnings per
share: adjusted weighted average
shares and assumed conversions 27,694 27,523
=======================
The computation of diluted earnings per share does not include 1,643,000 shares
of common stock related to the zero coupon convertible subordinated debentures
as of January 17, 1999 and options to purchase approximately 1,532,000 shares
and 22,000 shares of common stock for the first quarter of 1999 and 1998,
respectively, because to do so would be antidilutive.
(3) Segments
Effective the beginning of the first quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for reporting information about operating segments in interim and annual
financial statements. The Company identifies its segments based on management
responsibility and the nature of products and services. The natural foods
supermarkets segment includes the Company's stores and supporting operations.
The direct marketing segment consists of Amrion. The " Other" category consists
of Allegro Coffee Company and start-up costs associated with the Company's
internet commerce subsidiary, wholefoods.com.
(continued)
Page 5 of 12
<PAGE>
Whole Foods Market, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements (Unaudited) (continued)
(3) Segments, continued
Sales by segment were as follows (in thousands):
Sixteen weeks ended
January 17 January 18
1999 1998
-------------------------
Natural foods supermarkets $ 429,858 381,918
Direct marketing 24,987 22,786
Other 4,363 4,699
-------------------------
459,208 409,403
Intersegment sales (2,969) (1,615)
-------------------------
Total sales $ 456,239 407,788
=========================
Income from operations and reconciliation to income before income taxes are as
follows (in thousands):
Sixteen weeks ended
January 17 January 18
1999 1998
-------------------------
Natural foods supermarkets $ 21,066 18,156
Direct marketing 2,195 2,662
Other (356) 266
-------------------------
Income from operations 22,905 21,084
Interest expense (2,680) (1,998)
Investment and other income 1,013 6
-------------------------
Income before income taxes $ 21,238 19,092
=========================
(4) Comprehensive Income
Effective the beginning of the first quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting comprehensive income and its
components in financial statements. Accumulated other comprehensive income
reported on the Company's consolidated balance sheets consists of unrealized
gains and losses, net of tax, on available-for-sale securities. Comprehensive
income, net of related tax effects, is as follows (in thousands):
Sixteen weeks ended
January 17 January 18
1999 1998
-------------------------
Net income $ 12,955 12,028
Unrealized gain (loss), net (187) 125
-------------------------
Comprehensive income $ 12,768 12,153
=========================
Page 6 of 12
<PAGE>
Whole Foods Market, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements (Unaudited) (continued)
(5) Recent Pronouncements
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" in March 1998. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998 and establishes criteria for
capitalizing certain internal use software costs. The Company plans to adopt SOP
98-1 in fiscal year 2000. The adoption of SOP 98-1 will not have a material
impact on the Company's financial statements.
The AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities" in
April 1998. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company plans to adopt SOP
98-5 in fiscal year 2000, with the initial application recognized as the
cumulative effect of a change in accounting principle. The Company currently
capitalizes pre-opening costs and expenses such amounts in the quarter of the
location opening. The Company does not expect the adoption of SOP 98-5 to have a
material effect on the Company's consolidated financial statements; however, the
ultimate effect of adoption will depend upon the level of capitalized
pre-opening costs at such date.
Page 7 of 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Sixteen weeks ended January 17, 1999 compared to the
same period of the prior year.
General
The Company reports its results of operations on a fifty-two or fifty-three week
fiscal year ending on the last Sunday in September. The first fiscal quarter is
sixteen weeks, the second and third quarters each are twelve weeks and the
fourth quarter is twelve or thirteen weeks. The following table sets forth the
Company's results of operations data expressed as a percentage of sales:
Sixteen weeks ended
January 17 January 18
1999 1998
----------------------------
Sales 100.0% 100.0%
Cost of goods sold and occupancy costs 66.4 66.7
----------------------------
Gross profit 33.6 33.3
Selling, general and administrative expenses 28.6 27.4
Pre-opening and relocation costs 0.0 0.3
Merger and reorganization expenses 0.0 0.4
----------------------------
Income from operations 5.0 5.2
Interest expense (0.6) (0.5)
Investment and other income 0.2 0.0
----------------------------
Income before income taxes 4.7 4.7
Income taxes 1.8 1.7
----------------------------
Net income 2.8% 3.0%
============================
Figures may not add due to rounding.
Sales
Sales increased 12% for the first fiscal quarter compared to the same period of
the prior fiscal year due to new stores opened and acquired since last year,
comparable store sales increases of approximately 6.2% for the quarter, and an
increase in net sales at Amrion. Comparable store sales increases generally
result from an increase in the number of customer transactions and slightly
higher average transaction amounts, reflecting an increase in market share as
the stores mature in a particular market. Sales increases at Amrion resulted
from on-going customer acquisition programs and expanded retail and mass market
distribution programs.
Gross Profit
Gross profit consists of sales less cost of goods sold and occupancy costs plus
contribution from non-retail distribution and food preparation operations. The
Company's consolidated gross profit as a percentage of sales was 33.6% for the
sixteen weeks ended January 17, 1999 compared to 33.3% for the same period of
the prior year. This increase reflects increased national buying and private
label initiatives which continue to lower the cost of product purchased on a
national basis, and continued improvement by new stores with respect to product
procurement, merchandising and controlling spoilage. Gross profit was also
positively affected by reductions in product cost as a percentage of sales at
Amrion.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
sixteen weeks ended January 17, 1999 was 28.6% compared to 27.4% for the same
period of the prior year. This increase reflects an increase in store labor
costs, an increase in the number of administrative and support personnel at the
regional and national levels to support current and planned growth and the
implementation of new management information systems, costs incurred to address
the Company's Year 2000 issues, and start-up costs associated with
wholefoods.com. Additionally, selling, general and administrative expenses as a
percentage of sales increased as a result of increased market development costs
and increased administrative staff at Amrion.
Page 8 of 12
<PAGE>
Pre-Opening and Relocation Costs
Pre-opening costs include hiring and training personnel, supplies and certain
occupancy and miscellaneous costs related to new store and facility openings and
are expensed in the quarter of the opening. Relocation costs consist of losses
on dispositions of fixed assets and inventories, remaining lease payments and
other costs of holding replaced facilities and other related expenses. For the
sixteen weeks ended January 17, 1999 there were no pre-opening and relocation
costs. In the prior year, costs associated with the opening of one new store and
the relocation of two stores totaled $1.1 million. Nine new store openings are
scheduled for the remainder of the current fiscal year.
Interest Expense
Interest expense consists of costs related to the convertible subordinated
debentures and senior notes payable, net of capitalized interest associated with
new store development. Net interest expense for the first quarter was
approximately $2.7 million compared to approximately $2.0 million for the first
quarter of the prior year.
Investment and Other Income
Investment and other income consists primarily of interest income earned on a
short-term corporate bond portfolio and a prime money market portfolio. These
funds seek to provide high income while maintaining a high degree of stability
of principal. Investment and other income for the first quarter of fiscal 1999
was approximately $1.0 million as compared to approximately $6,000 for the same
period of the prior year.
Liquidity and Capital Resources and Changes in Financial Condition
During the first fiscal quarter, the Company purchased a 381,000 square foot
manufacturing, distribution, warehousing and administrative facility in
Thornton, Colorado for approximately $15 million. The Company expects to spend
an additional $15 million on improvements and equipment for the facility.
Subsequent to the end of the first quarter, the Company's Board of Directors
authorized a plan to repurchase up to $25 million in outstanding shares of
Company common stock.
Whole Foods Market's principal historical capital requirements have been the
funding of the development or acquisition of new stores, expansions and
improvements in existing stores and increases in overall working capital
requirements. The Company estimates that cash requirements to open a new store
will range from $5 million to $12 million (after giving effect to any landlord
construction allowance). This excludes new store inventory of approximately
$500,000, a substantial portion of which is financed by the vendors of Whole
Foods Market. Nine new store openings are scheduled for the remainder of the
current fiscal year. The Company has thirty-two stores currently under
development that are expected to open during the next three fiscal years. The
Company expects that cash on hand, cash generated from operations and cash
available under its line of credit will be sufficient to finance planned
expansion and other anticipated working capital and capital expenditure
requirements during the remainder of the current fiscal year.
Year 2000 Issues
During fiscal 1998, the Company established a project team to coordinate
existing Year 2000 activities and address remaining Year 2000 issues. The team's
efforts are focused in three areas: (1) information systems (IS) software and
hardware; (2) facilities and non-IS equipment with embedded systems; and (3)
third-party relationships.
The Company has adopted a Year 2000 plan consisting of five phases as follows:
Phase I - inventory and ranking of the Company's systems and components,
equipment, and suppliers that may be vulnerable to Year 2000 problems; Phase II
- - assessment of items identified in Phase I; Phase III - remediation or
replacement of non-compliant systems and components and determination of
solutions or alternatives for non-compliant suppliers; Phase IV - testing and
implementation of systems for which remediation or replacement is complete; and
Phase V - development of contingency plans to mitigate the potential adverse
effects on the Company's operations that have been determined to be most
reasonably likely based upon the results of Phases I through IV. The Company has
completed Phases I and II. Phases III and IV are currently in process and are
planned to be completed by June 30, 1999. Phase V is planned to be completed by
July 31, 1999.
Information Systems Software and Hardware. The Company has assessed its primary
information systems and remediation and testing are in process for those systems
that require remediation. The Company plans to complete all remediation,
testing, and implementation of its individual information systems by June 30,
1999.
Page 9 of 12
<PAGE>
Facilities and Non-IS Equipment with Embedded Systems. The Company has completed
an inventory and assessment of all equipment with non-IS embedded systems.
Certain devices such as time clocks, scales, fax machines, and HVAC controls
will be upgraded or replaced as part of the plan to address Year 2000 issues for
embedded systems. The Company plans to complete remediation, testing and
implementation for all non-IS embedded systems by June 30, 1999.
Third-party Relationships. The Company has identified significant third parties
upon which it relies and has sent written requests for representation of their
Year 2000 readiness. The Company is evaluating responses and other information
obtained concerning the Year 2000 readiness of significant vendors and
suppliers, and will conduct discussions and review their contingency plans as
necessary.
Costs to Address the Company's Year 2000 Issues. The Company estimates that the
expense associated with the Year 2000 Plan will be approximately $2 million, of
which approximately $260,000 has been incurred to date. Additionally, the
Company estimates that hardware and software purchases totaling approximately $2
million will be capitalized pursuant to the Year 2000 Plan, of which
approximately $200,000 has been capitalized to date.
Risks and Contingency Plans. The aforementioned costs and completion dates are
based on plans for work to be performed and management's best estimates, which
have been derived from assumptions about future events including the
availability of certain resources and other factors, and may be updated as
additional information becomes available. The Company believes that the Year
2000 Plan will address its Year 2000 concerns and mitigate the risk of a
material adverse impact on the Company's results of operations. However, if the
Company is unsuccessful in completing remediation of non-compliant systems, if
the costs to remediate the Company's Year 2000 issues significantly exceed
current estimates, or if significant third parties upon whom the Company relies
cannot resolve their Year 2000 issues, there could be a material adverse effect
on the Company's business, financial condition, and results of operations.
Therefore, the Company plans to develop contingency plans by July 31, 1999 to
address risks that have been determined to be most reasonably likely based upon
the results of Phases I through IV of the Year 2000 Plan.
Risk Factors
The Company wishes to caution readers that inherent risks and uncertainties
including those listed in the Company's Annual Report on Form 10-K for the year
ended September 27, 1998, among others, could cause the actual results of Whole
Foods Market to differ materially from those indicated by forward-looking
statements made in this Quarterly Report on Form 10-Q and other written
communications, as well as oral forward-looking statements made from time to
time by representatives of the Company. Except for historical information, the
matters discussed in such oral and written communications are forward looking
statements that involve risks and uncertainties, including but not limited to
general business conditions, the timely and successful development and opening
of new or relocated stores, the impact of competition and other factors which
are often beyond the control of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates, which may
affect its financial position, results of operations and cash flows. In seeking
to minimize the risks from interest rate fluctuations, the Company manages
exposures through its regular operating and financing activities. The Company
does not use financial instruments for trading or other speculative purposes.
The Company's exposure to interest rate risk currently consists of its
investment portfolio, senior notes and subordinated convertible debentures. The
Company's investment portfolio, in the amount of approximately $29 million as of
January 17, 1999, had an average interest rate of approximately 5.45% during the
first quarter of fiscal 1999. Because of the short-term maturities of the
investment portfolio, the carrying value approximates fair market value. The
senior notes bear interest at a fixed rate of 7.29%, with a current outstanding
balance of $40.0 million. As of January 17, 1999, the estimated fair value of
the Senior notes exceeded the carrying amount by approximately $2.3 million. The
zero coupon subordinated convertible debentures have a fixed rate of interest of
5%, with a current outstanding balance of $120.2 million. As of January 17, 1999
the estimated fair value of the convertible debentures is approximately $105.6
million. Should interest rates increase or decrease, the estimated fair values
of the senior notes and the zero coupon subordinated debentures would increase
or decrease accordingly.
Page 10 of 12
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed with this report
Exhibit 27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the fiscal quarter
ended January 17, 1999.
Page 11 of 12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Whole Foods Market, Inc.
Registrant
Date: February 26, 1999 By: /s/ Glenda Flanagan
----------------------
Glenda Flanagan
Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE WHOLE FOODS MARKET 1999 FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000865436
<NAME> Whole Foods Market, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-END> JAN-17-1999
<EXCHANGE-RATE> 1
<CASH> 28,418
<SECURITIES> 14,674
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 91,331
<CURRENT-ASSETS> 172,457
<PP&E> 319,957
<DEPRECIATION> 0
<TOTAL-ASSETS> 562,436
<CURRENT-LIABILITIES> 92,165
<BONDS> 120,179
0
0
<COMMON> 220,476
<OTHER-SE> 70,853
<TOTAL-LIABILITY-AND-EQUITY> 562,436
<SALES> 456,239
<TOTAL-REVENUES> 456,239
<CGS> 303,029
<TOTAL-COSTS> 303,029
<OTHER-EXPENSES> 129,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,680
<INCOME-PRETAX> 21,238
<INCOME-TAX> 8,283
<INCOME-CONTINUING> 12,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,955
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.47
</TABLE>
