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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended July 7, 2002; 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)
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 July 7, 2002 was 57,480,244 shares.
Page 1 of 14
Whole Foods Market, Inc.
Form 10-Q
Table of Contents
Page
Number
- ---------------------------------------------------------------------------------------------------------------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, July 7, 2002 (unaudited) and September 30, 2001 3
Condensed Consolidated Income Statements (unaudited), for the twelve and forty weeks
ended July 7, 2002 and July 1, 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited), for the forty weeks
ended July 7, 2002 and July 1, 2001 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
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Page 2 of 14
Part 1. Financial Information
Item 1. Financial Statements
Whole Foods Market, Inc.
Condensed Consolidated Balance Sheets
July 7, 2002 (Unaudited) and September 30, 2001
(In thousands)
Assets
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 16,207 1,843
Trade accounts receivable 30,429 24,859
Merchandise inventories 106,586 98,616
Prepaid expenses and other current assets 19,888 17,700
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 173,110 143,018
Property and equipment, net of accumulated depreciation and amortization 619,947 542,986
Long-term investments 4,691 4,706
Goodwill 80,675 67,258
Intangible assets, net of accumulated amortization 23,320 24,028
Other assets 28,615 28,800
Net assets of discontinued operations 3,000 18,375
- -------------------------------------------------------------------------------------------------------------------------
$ 933,358 829,171
- -------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 5,789 5,944
Trade accounts payable 77,240 50,468
Accrued payroll, bonus and employee benefits 58,013 41,265
Other accrued expenses 54,116 58,659
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 195,158 156,336
Long-term debt and capital lease obligations, less current installments 164,299 250,705
Other long-term liabilities 16,115 12,773
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 375,572 419,814
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, 150,000 and 100,000 shares
authorized, 57,842 and 55,114 shares issued, 57,480 and
54,770 shares outstanding in 2002 and 2001, respectively 331,951 251,679
Common stock in treasury, at cost - (5,369)
Accumulated other comprehensive income 310 (30)
Retained earnings 225,525 163,077
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 557,786 409,357
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------------------------------------------
$ 933,358 829,171
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3 of 14
Whole Foods Market, Inc. and Subsidiaries
Condensed Consolidated Income Statements (Unaudited)
(In thousands except per share amounts)
Twelve weeks ended Forty weeks ended
July 7, July 1, July 7, July 1,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Sales $ 648,763 535,584 2,052,351 1,695,679
Cost of goods sold and occupancy costs 422,618 347,867 1,343,385 1,106,923
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 226,145 187,717 708,966 588,756
Direct store expenses 161,409 134,868 512,854 429,247
- -------------------------------------------------------------------------------------------------------------------------
Store contribution 64,736 52,849 196,112 159,509
General and administrative expenses 22,919 21,473 74,080 63,984
Pre-opening and relocation costs 3,273 941 10,894 5,600
- -------------------------------------------------------------------------------------------------------------------------
Operating income 38,544 30,435 111,138 89,925
Other income (expense):
Interest expense (2,195) (3,926) (8,637) (14,224)
Investment and other income 451 357 1,579 1,314
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 36,800 26,866 104,080 77,015
Provision for income taxes 14,720 10,746 41,632 30,806
Equity in losses of unconsolidated affiliate - - - 126
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 22,080 16,120 62,448 46,083
Discontinued operations, net of income taxes - - - 12,304
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 22,080 16,120 62,448 58,387
- -------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income from continuing operations $ 0.39 0.30 1.11 0.86
Discontinued operations, net of income taxes - - - 0.23
- -------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.39 0.30 1.11 1.09
- -------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 57,113 53,750 56,022 53,423
- -------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income from continuing operations $ 0.36 0.29 1.04 0.83
Discontinued operations, net of income taxes - - - 0.22
- -------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.36 0.29 1.04 1.05
- -------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 64,213 59,396 63,113 55,773
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4 of 14
Whole Foods Market, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Forty weeks ended
July 7, July 1,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 62,448 46,083
Adjustment to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 65,634 59,143
Net (gain) loss on disposal of fixed assets 2,452 (46)
Rent differential 622 467
Change in LIFO reserve 2,500 2,851
Interest accretion on long-term debt 5,395 5,296
Tax benefit related to exercise of employee stock options 21,549 4,797
Net change in current assets (12,166) (18,397)
Net change in current liabilities 38,108 13,522
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 186,542 113,716
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (39,035) (36,168)
Development costs of new store locations (77,412) (80,142)
Acquisition of intangible assets (1,241) (4,894)
Payments for purchase of acquired entities, net of cash acquired (36,105) -
Other investing activities (4,753) -
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (158,546) (121,204)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from long-term borrowings 32,000 25,000
Issuance of common stock 64,092 13,579
Payments on long-term debt and capital lease obligations (123,956) (43,574)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (27,864) (4,995)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from discontinued operations:
Net cash provided by discontinued operations 14,232 15,160
- -------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 14,364 2,677
Cash and cash equivalents at beginning of period 1,843 395
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,207 3,072
- -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 3,665 8,910
- -------------------------------------------------------------------------------------------------------------------------
Federal and state income taxes paid $ 18,537 20,077
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5 of 14
Whole Foods Market, Inc.
Notes To Condensed Consolidated Financial Statements (Unaudited)
July 7, 2002
(1) Basis of Presentation
The accompanying unaudited condensed consolidated 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
as well as the accounting change to adopt Statement of Financial Accounting
Standards (SFAS) 142, "Goodwill and Other Intangible Assets," considered
necessary for a fair presentation have been included. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. Examples include
accounting for depreciation and amortization, inventory, allowance for doubtful
accounts, long-term investments, team member benefit plans, team member health
insurance plans, asset impairment charges, store closure costs, goodwill
valuation, income taxes and contingencies. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for any
other interim period or for a full fiscal year. The information included in this
Form 10-Q should be read in conjunction with Management's Discussion and
Analysis and the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10K for the fiscal year ended September 30,
2001.
Our 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.
Where appropriate, we have reclassified prior year financial statements to
conform to current year presentation.
(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 and the assumed conversion of zero coupon convertible subordinated
debentures. A reconciliation of the numerators and denominators of the basic and
diluted earnings per share calculations follows (in thousands):
Twelve weeks ended Forty weeks ended
July 7, July 1, July 7, July 1,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Net income (numerator for basic earnings per share) $ 22,080 16,120 62,448 58,387
Interest on 5% zero coupon convertible subordinated
debentures, net of income taxes 983 933 3,250 -
- -------------------------------------------------------------------------------------------------------------------------
Adjusted net income (numerator for diluted earnings
per share) $ 23,063 17,053 65,698 58,387
- -------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (denominator
for basic earnings per share) 57,113 53,750 56,022 53,423
Potential common shares outstanding:
Assumed conversion of 5% zero coupon convertible
subordinated debentures 3,286 3,286 3,286 -
Assumed exercise of stock options 3,814 2,360 3,805 2,350
- -------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding and
potential additional common shares outstanding
(denominator for diluted earnings per share) 64,213 59,396 63,113 55,773
- -------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.39 0.30 1.11 1.09
- -------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.36 0.29 1.04 1.05
- -------------------------------------------------------------------------------------------------------------------------
Page 6 of 14
Options to purchase approximately 260,000 shares of common stock were not
included in the computation of diluted earnings per share for the forty week
period ended July 7, 2002 because their effect would have been antidilutive.
Options to purchase approximately 2,122,000 shares and 2,209,000 shares of
common stock were not included in the computation of diluted earnings per share
for the twelve and forty week periods ended July 1, 2001, respectively, because
their effect would have been antidilutive. The potential conversion of
approximately 3,286,000 shares of common stock related to the zero coupon
convertible subordinated debentures was not included in the computations of
diluted earnings per share for the forty week period ended July 1, 2001 because
their effect would have been antidilutive.
(3) Comprehensive Income
The Company's comprehensive income was comprised of net income, unrealized gains
and losses on available for sale securities and foreign currency translation
adjustment, net of income taxes. Comprehensive income, net of related tax
effects, was as follows (in thousands):
Twelve weeks ended Forty weeks ended
July 7, July 1, July 7, July 1,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 22,080 16,120 62,448 58,387
Unrealized gain (loss), net (178) - (15) -
Foreign currency translation adjustment, net 391 - 355 -
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 22,293 16,120 62,788 58,387
- -------------------------------------------------------------------------------------------------------------------------
(4) Business Combinations
On October 31, 2001, we completed the acquisition of certain assets of Harry's
Farmer's Markets, Inc., in exchange for approximately $36 million in cash plus
the assumption of certain liabilities. The assets acquired are all assets
relating to the three perishables superstores in Atlanta, Georgia, including but
not limited to real estate, the Harry's Farmers Market trade name, distribution
center and other support and office facilities. This transaction was accounted
for using the purchase method. Accordingly, the purchase price has been
allocated to tangible and identifiable intangible assets acquired based on their
estimated fair values at the date of acquisition. Total costs in excess of
tangible and intangible assets acquired of approximately $8.7 million have been
recorded as goodwill. Results of acquired operations are included in our
condensed consolidated income statements for the period beginning October 31,
2001 through July 7, 2002.
(5) Goodwill and Other Intangible Assets
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," effective the beginning of the first
quarter of fiscal year 2002. SFAS No. 142 provides that separable intangible
assets that have finite lives will continue to be amortized over their useful
lives and that goodwill and indefinite-lived intangible assets will no longer be
amortized but will be reviewed for impairment annually, or more frequently if
impairment indicators arise. There was no impairment of goodwill upon adoption
of SFAS 142. During the first quarter of fiscal year 2002, we acquired goodwill
totaling approximately $8.7 million in connection with the Harry's Farmers
Market acquisition.
Net income and earnings per share for the twelve and forty weeks ended July 1,
2001 adjusted to exclude amortization expense (net of income taxes) is as
follows (in thousands, except per share data):
Twelve Forty
weeks weeks
- -------------------------------------------------------------------------------
Reported net income $16,120 58,387
Add back goodwill amortization, net 519 1,347
- -------------------------------------------------------------------------------
Adjusted net income $16,639 59,734
- -------------------------------------------------------------------------------
Basic earnings per share:
Reported net income $0.30 1.09
Add back goodwill amortization, net 0.01 0.03
- -------------------------------------------------------------------------------
Adjusted net income $0.31 1.12
- -------------------------------------------------------------------------------
Diluted earnings per share:
Reported net income $0.29 1.05
Add back goodwill amortization, net 0.01 0.02
- -------------------------------------------------------------------------------
Adjusted net income $0.30 1.07
- -------------------------------------------------------------------------------
Page 7 of 14
All of the Company's acquired identifiable intangible assets are subject to
amortization. Amortization expense is recorded on a straight-line basis over the
life of the related agreement, currently one to twenty-six years for
contract-based intangible assets and one to five years for marketing-related and
other identifiable intangible assets. During the first quarter of fiscal year
2002, we acquired intangible assets totaling approximately $1.1 million in
connection with the Harry's Farmers Market acquisition. Amortization associated
with intangible assets totaled approximately $0.7 million and $2.8 million for
the twelve and forty weeks ended July 7, 2002, respectively, and approximately
$1.3 million and $4.4 million, respectively, for the same periods of the prior
fiscal year. The components of intangible assets were as follows (in thousands):
July 7, 2002 September 30, 2001
Gross carrying Accumulated Gross carrying Accumulated
amount amortization amount amortization
- ----------------------------------------------------------------------------------------------------------------------------
Contract-based $ 28,732 (7,825) 28,098 (6,151)
Marketing-related and other $ 4,235 (1,822) 4,144 (2,063)
- ----------------------------------------------------------------------------------------------------------------------------
Amortization associated with the net carrying amount of intangible assets at
July 7, 2002 is estimated to be $0.7 million for the remainder of fiscal year
2002, $2.6 million in fiscal year 2003, $2.3 million in fiscal year 2004, $2.3
million in fiscal year 2005 and $1.7 million in fiscal year 2006.
(6) Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," in June 2001. SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs and is effective for financial statements issued for fiscal years
beginning after June 15, 2002, with early application encouraged. We will adopt
SFAS No. 143 in the first quarter of fiscal year 2003. We are evaluating the
impact of the adoption of SFAS No. 143 on our consolidated financial statements.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and other related accounting guidance. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, with early application
encouraged. The provisions of this Statement generally are to be applied
prospectively. We will adopt SFAS No. 144 in the first quarter of fiscal year
2003. We are evaluating the impact of the adoption of SFAS No. 144 on our
consolidated financial statements.
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," in May 2002. The
statement rescinds FASB No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that statement, FASB No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." As a result, gains and losses
from extinguishment of debt will no longer be aggregated and classified as an
extraordinary item, net of related income tax effect, on the statement of
earnings. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002, with earlier application encouraged. We will adopt SFAS No. 145 in the
first quarter of fiscal year 2003. The adoption of SFAS No. 145 will have no
impact on our consolidated financial statements
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", in July 2002. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity is recognized at fair value
when the liability is incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We are evaluating the impact of the adoption
of SFAS No. 146 on our consolidated financial statements.
Page 8 of 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Whole Foods Market opened its first store in Texas in 1980 and has expanded its
operations to 133 stores as of July 7, 2002. We operate in one reportable
segment, natural foods supermarkets. We have one store in Toronto, Canada. All
of our remaining operations are domestic. Our results of operations have been
and will continue to be materially affected by the timing and number of new
store openings. 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.
Critical Accounting Policies
The Company's discussion and analysis of financial condition and results of
operations is based upon our condensed consolidated financial statements. The
preparation of these condensed consolidated financial statements, in conformity
with generally accepted accounting principles, require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the period reported.
We use estimates when accounting for depreciation and amortization, allowance
for doubtful accounts, inventory, long-term investments, team member benefit
plans, team member health insurance plans, asset impairment charges, store
closing costs, goodwill valuation, income taxes, disposal of discontinued
operations and contingencies. Actual results may differ from these estimates. We
base our estimates on historical experience and on various other assumptions and
factors that we believe to be reasonable under the circumstances. On an ongoing
basis, we evaluate the continued appropriateness of our accounting policies and
resulting estimates to make adjustments we consider appropriate under the facts
and circumstances.
Results of Operations
The following table sets forth the Company's results of operations data
expressed as a percentage of sales:
Twelve weeks ended Forty weeks ended
July 7, July 1, July 7, July 1,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 65.1 65.0 65.5 65.3
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 34.9 35.1 34.5 34.7
Direct store expenses 24.9 25.2 25.0 25.3
- -------------------------------------------------------------------------------------------------------------------------
Store contribution 10.0 9.9 9.6 9.4
General and administrative expenses 3.5 4.0 3.6 3.8
Pre-opening and relocation costs 0.5 0.2 0.5 0.3
- -------------------------------------------------------------------------------------------------------------------------
Operating income 5.9 5.7 5.4 5.3
Other income (expense):
Interest expense (0.3) (0.7) (0.4) (0.8)
Investment and other income 0.1 0.1 0.1 0.1
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 5.7 5.0 5.1 4.5
Provision for income taxes 2.3 2.0 2.0 1.8
Equity in losses of unconsolidated affiliate - - - -
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3.4 3.0 3.0 2.7
Discontinued operations, net of income taxes - - - 0.7
- -------------------------------------------------------------------------------------------------------------------------
Net income 3.4% 3.0% 3.0% 3.4%
=========================================================================================================================
Figures may not add due to rounding.
Page 9 of 14
Sales
Sales increased 21.1% and 21.0% for the twelve and forty weeks ended July 7,
2002, respectively, compared to the same periods of the prior fiscal year. These
increases were driven by comparable store sales growth of approximately 10.5%
and 10.0%, respectively, and 17% year-over-year square footage growth. Sales of
a store are deemed to be comparable commencing in the fifty-third full week
after the store was opened or acquired. Sales in identical stores, which exclude
three relocated stores, increased for the twelve and forty weeks ended July 7,
2002 approximately 9.5% and 8.6%, respectively. Comparable and identical store
sales increases resulted largely from an increase in the number of customer
transactions, with basket size increasing slightly. We believe this was caused
by a combination of various factors, including but not limited to: an increase
in new customers who generally have a lower average basket size, more in-store
emphasis on our value image and private label line in some parts of the country
and changes in customers' buying habits who may be trading down to lower priced
items or perhaps shopping more often.
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 gross profit as a percentage of sales for the twelve and forty weeks
ended July 7, 2002 was approximately 34.9% and 34.5%, respectively, compared to
approximately 35.1% and 34.7%, respectively, for the same periods of the prior
fiscal year. Gross profit margins tend to be lower for new stores and increase
as stores mature, reflecting lower shrink as volumes increase, as well as
increasing experience levels and operational efficiencies of the store teams.
Gross profit margins for the twelve and forty weeks have been negatively
impacted by the first quarter acquisition of the three Harry's stores, which
have lower than average margins. Gross profit margins at comparable stores for
the twelve and forty weeks ended July 7, 2002 increased 33 and 23 basis points,
respectively, to approximately 35.7% and 35.4%, respectively. This increase was
due to various factors including increased national buying and private label
initiatives which continue to lower the cost of product purchased on a national
basis, and continued improvement in store execution with respect to product
procurement, merchandising and controlling spoilage.
Store Contribution
Store contribution consists of gross profit less direct store expenses. For all
stores, store contribution as a percentage of sales was approximately 10.0% and
9.6% for the twelve and forty weeks ended July 7, 2002, respectively, compared
to approximately 9.9% and 9.4%, respectively, for the same periods of the prior
fiscal year. For comparable stores, store contribution as a percentage of sales
was approximately 11.1 % and 10.5% for the twelve and forty weeks ended July 7,
2002, respectively, partially driven by a 73 and 55 basis point decrease in
direct store expenses, respectively. For all stores, direct store expenses as a
percentage of sales was approximately 24.9% and 25.0% for the twelve and forty
weeks ended July 7, 2002, respectively, compared to approximately 25.2% and
25.3%, respectively, for the same periods of the prior fiscal year. These
decreases reflect a greater focus on leveraging of labor and other direct
expenses. Higher operating expenses of new stores continue to have a partially
offsetting impact.
General and Administrative Expenses
General and administrative expenses as a percentage of sales were approximately
3.5% and 3.6% for the twelve and forty weeks ended July 7, 2002, respectively,
compared to approximately 4.0% and 3.8%, respectively, for the same periods of
the prior fiscal year. Current year general and administrative expenses reflect
lower amortization expense related to the adoption of SFAS No. 142 and the
expiration of certain assets related to non-compete agreements, which were
partially offset by the increased costs of infrastructure for the new South
region. Whole Foods Market has historically been able to expand without
significant increases in general and administrative costs.
Pre-opening and Relocation Costs
Pre-opening costs include costs associated with hiring and training personnel,
supplies and certain occupancy and miscellaneous costs related to new locations.
Relocation costs consist of moving costs, remaining lease payments, accelerated
depreciation costs and other costs associated with replaced facilities and other
related expenses. Pre-opening costs for the twelve and forty weeks ended July 7,
2002 consist primarily of costs associated with the opening of one new store
during the first fiscal quarter, three new stores during the second fiscal
quarter and four new stores and a non-retail facility during the third quarter.
Relocation costs for the twelve and forty weeks ended July 7, 2002 consist
primarily of costs associated with the relocation of one store during the first
fiscal quarter, one store and two non-retail facilities during the second fiscal
quarter, and one non-retail facility during the third fiscal quarter. In the
prior year, pre-opening and relocation costs for the twelve and forty weeks
consisted primarily of costs associated with our openings of three new stores
during the first fiscal quarter, two new stores and one relocated store during
the second fiscal quarter and two new stores during the third fiscal quarter.
Page 10 of 14
Interest Expense
Interest expense consists of costs related to the convertible subordinated
debentures, senior notes payable and bank line of credit, net of capitalized
interest associated with new store development. Net interest expense for the
twelve and forty weeks ended July 7, 2002 totaled approximately $2.2 million and
$8.6 million, respectively, compared to approximately $3.9 million and $14.2
million, respectively, for the same periods of the prior fiscal year. These
decreases are primarily due to lower interest rates and lower amounts
outstanding under the Company's bank line of credit in fiscal 2002. Capitalized
interest for the twelve and forty weeks ended July 7, 2002 totaled approximately
$0.3 million and $1.1 million, respectively, compared to approximately $0.4
million and $1.7 million, respectively, for the same periods of the prior fiscal
year.
Investment and Other Income
Investment and other income consists primarily of interest, rental and other
income. Investment and other income for the twelve and forty weeks ended July 7,
2002 totaled approximately $0.5 million and $1.6 million, respectively, compared
to approximately $0.4 million and $1.3 million, respectively, for the same
periods of the prior fiscal year.
Discontinued Operations
Pursuant to a formal plan adopted in fiscal year 2000, the NatureSmart
nutritional supplements business has been segregated from continuing operations
and reported as discontinued operations in the accompanying condensed
consolidated financial statements. Discontinued operations had no impact on the
accompanying condensed consolidated income statements for the twelve and forty
weeks ended July 7, 2002. In the second quarter of the prior fiscal year, we
recorded an adjustment to discontinued operations of approximately $12.3
million, net of income taxes of approximately $1.8 million, as a result of the
sale of our interest in NatureSmart. Cash flows from discontinued operations in
the accompanying condensed consolidated statement of cash flows for the forty
weeks ended July 7, 2002 include net proceeds totaling approximately $15 million
from the sale during the first quarter of the facility in Thornton, Colorado
that was used by NatureSmart.
Liquidity and Capital Resources and Changes in Financial Condition
We generated cash from operating activities of approximately $186.5 million and
$113.7 million for the forty weeks ended July 7, 2002 and July 1, 2001,
respectively. Cash flows from operating activities resulted primarily from our
net income plus non-cash expenses and changes in operating working capital.
The Company has a $220 million revolving line of credit available through July
14, 2003. The credit agreement contains certain restrictive covenants, including
the prohibition of the payment of dividends on common stock, and certain
affirmative covenants including maintenance of certain financial ratios as
defined in the agreement. All outstanding amounts borrowed under this agreement
bear interest at our option of either a defined base rate or the LIBOR rate plus
a premium. Commitment fees ranging from 0.20% to 0.30% of the undrawn amount are
payable under this agreement. At July 7, 2002, approximately $4 million was
drawn and approximately $212 million was available under the agreement.
Subsequent to the end of the third fiscal quarter, we paid down an additional $4
million. At September 30, 2001, approximately $90 million was drawn and
approximately $126 million was available under the agreement. The average
interest rate on amounts outstanding under this agreement at July 7, 2002 was
approximately 2.88%. The Company has zero coupon convertible subordinated
debentures outstanding with a carrying value of approximately $143.5 million at
July 7, 2002. The debentures have an effective yield to maturity of 5 percent
and a principal amount at maturity on March 2, 2018 of approximately $309
million. The debentures are convertible at the option of the holder, at any time
on or prior to maturity, unless previously redeemed or otherwise purchased.
Debentures may be redeemed at the option of the holder on March 2, 2003, March
2, 2008 or March 2, 2013 for a purchase price equal to issue price plus accrued
original issue discount totaling approximately $148 million, $190 million and
$244 million, respectively. The Company, at its option, may elect to pay any
such purchase price in cash or in shares of common stock, or any combination
thereof. We also have outstanding at July 7, 2002 approximately $22.9 million of
senior unsecured notes that bear interest at 7.29% payable quarterly. Principal
on the senior notes is payable in annual installments of approximately $5.7
million through May 16, 2006. Net cash used in financing activities was
approximately $27.9 million and $5.0 million for the forty weeks ended July 7,
2002 and July 1, 2001, respectively.
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Whole Foods Market's principal capital requirements have been the funding of the
development or acquisition of new stores and to lesser extent, the resultant
increase in working capital requirements. We estimate that cash requirements to
open a new store will range from $2 million to $16 million, after giving effect
to any landlord construction allowance. This excludes new store inventory of
approximately $750,000, a portion of which is financed by our vendors. We have
signed leases for 22 new stores averaging approximately 38,000 square feet in
size. We expect to open or acquire approximately 15 to 20 new stores per year,
including relocations of existing stores, in each of the next two fiscal years.
We will incur additional capital expenditures in the current fiscal year in
connection with ongoing equipment upgrades and resets at existing stores and
continued development of management information systems. During the first
quarter the Company completed the acquisition of three Harry's Farmer's Market
perishables superstores in Atlanta, Georgia in exchange for approximately $36
million in cash plus the assumption of certain liabilities. Net cash used in
investing activities was approximately $158.5 million and $121.2 million for the
forty weeks ended July 7, 2002 and July 1, 2001, respectively. We expect that
cash generated from operations, stock option exercises and long-term debt will
fund planned expansion and other anticipated working capital and capital
expenditure requirements. We continually evaluate the need to establish other
sources of working capital and will seek those considered appropriate based upon
the Company's needs and market conditions.
Risk Factors
We wish to caution you that there are risks and uncertainties that could cause
our actual results to be materially different from those indicated by
forward-looking statements that we make from time to time in filings with the
Securities and Exchange Commission, news releases, reports, proxy statements,
registration statements and other written communications, as well as oral
forward-looking statements made from time to time by representatives of our
Company. These risks and uncertainties include, but are not limited to, those
listed in the Company's Annual Report on Form 10-K for the year ended September
30, 2001. These risks and uncertainties and additional risks and uncertainties
not presently known to us or that we currently deem immaterial may cause our
business, financial condition, operating results and cash flows to be materially
adversely affected. Except for the historical information contained herein, the
matters discussed in this analysis are forward looking statements that involve
risks and uncertainties, including but not limited to general business
conditions, the timely development and opening of new stores, the impact of
competition, and other factors which are often beyond the control of the
Company. The Company does not undertake any obligation to update forward-looking
statements except as required by law.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk exposures from
those reported in our Annual Report on Form 10-K for the year ended September
30, 2001.
Part II. Other Information
Item 6(a). Exhibits
Exhibit 99.1 - Certification by Chief Executive Officer Pursuant to Section 906
of the Sarbanes - Oxley Act of 2002
Exhibit 99.2 - Certification by Chief Financial Officer Pursuant to Section 906
of the Sarbanes - Oxley Act of 2002
Item 6(b). Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter ended
July 7, 2002.
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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: August 16, 2002 By: /s/ Glenda Flanagan
---------------- -------------------------
Glenda Flanagan
Executive Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
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